Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Women, even professional women with careers as lawyers, CPA, bankers, etc., have been encouraged to give their "man" a little deference when it comes to things like our income tax return.  And we do, even in circumstances where we might tell a client they should be more alert.  But what happens if your spouse (and typically it IS the husband) decides to take a few shortcuts and be a little "aggressive" in his -- and YOUR - tax reporting to Uncle Sam?  A recent Sixth Circuit Court of Appeals decision should give us all pause.  

WAKE UP!!!   Totally apart from any moral or ethical obligations, what you sign off on with respect to your joint tax return CAN come back to haunt you BIG TIME!!!  So, calling all spouses, male or female, you really do need to pay attention and understand that tax return.

Recently, in Greer v. Commissioner of Internal Revenue Service, Case No. 09-1420, the United States Sixth Circuit addressed the "innocent spouse" doctrine whereby a spouse can escape liability for the wrongdoing of his or her spouse (traditionally the husband) if they essentially  had no knowledge of what that spouse was up to and no reason to be suspicious.  

In Greer, the case involved a high school music teacher wife who sought to evade liability for a failure to report tax liability associated with investments made by her husband.  The case concerned the Greers 1982 tax return and alleged understatement of income through erroneous deductions- at that time the Greers had been married for 15 years.  In part because the tax benefits exceeded the amount invested, the Tax Court had denied "innocent spouse" relief because it believed Mrs. Greer "should have at least made further inquiry."  The Sixth Circuit affirmed that decision.  The case dealt with erroneous deductions rather than omitted income and left the "knowledge of the transaction" test in place for omitted income cases.

The "innocent spouse" defense is based on section 6015 of the Internal Revenue Code which requires that the spose seeking to avoid liability must establish:

• they did not know and had no reason to know that there was an understatement of income.
• "taking into account all the facts and circumstances, it is inequitable" to hold that individual liable for the deficiency.

The Sixth Circuit began by determining "what test should be used in determining whether a taxpayer had a reason to know of an understatement, or to suspect a possible understatement, resulting from disallowed deductions or credits."  The Court ultimately adopted the "duty of inquiry" test laid out by the Ninth Circuit Court of Appeals in Price v. Comm'r, 897 F.2d 959 (1989) for erroneous deduction cases:

Even if a spouse is not aware of sufficient facts to give her reason to know of the substantial understatement, she nevertheless may know enough facts to put her on notice that such an understatement exists.  Such notice is provided if the spouse knows sufficient facts such that a reasonably taxpayer in her position would be led to question the legitimacy of the deduction.  In such a scenario, a duty of inquiry arises, which, if not satisfied by the spouse, may result in constructive knowledge of the understatement being imputed to her.

To determine whether a "duty of inquiry' has been triggered with respect to cases involving an erroneous deduction, the Court foud four factors relevant:

• Spouse's education
• Spouse's involvement in the family's financial affairs
• Presence of unusual or lavish expenditures beyond the family's norm
• Other spouse's evasiveness or deceitfulness concerning the family's finances

In some respects, this seems like a close case.  Indeed, the Sixth Circuit said as much, observing "[w]ere this de novo review, we might view the matter differently."  On the one hand, Mrs. Greer, while obviously well-educated, did not possess a financial education and there was no substantial change in the family's lifestyle.  However, although the Court also acknowledged that Mrs. Greer in fact had no actual knowledge of the erroneousness of the deductions taken and had no more involvement in the family finances than many spouses afforded the "innocent spouse" defense, it ultimately found that "Mrs. Greer was probably familiar enough with basic budgeting and accounting to understand representations made on a tax return, even if the ultimate legitimacy of sheltering income was beyond her experience. " Seems like this factor could have gone either way.  As far as evasiveness of her husband, the Court was unwilling to overturn the Tax Court'ds finding weighing this factor against Mrs. Greer because it thought the presence of the deduction on the return was enough.

The crux of Mrs. Greer's argument was that she left the family's financial matters to her husband.  Sound familiar?  Here the Court pointed out that several courts have held "being a homemaker cannot alone relieve a spouse of joint and several tax liability on a joint return and... one spouse cannot bury his or her head in the sand or turn a blind eye to the other's accounting." 

Takeaways?  Leaving the responsibility for filing your taxes to your spouse, while certainly convenient, may have really bad consequences.  So either file separately or be prepared to actually go over the return and ask questions before you sign.  Just because you didn't know what your spouse was doing does not let you offf the hook.

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Ever think there's got to be a better way than wasting time wrangling with another party with which you're doing business when there's a dispute over the amount really owed?  I’ve warned before about the risks of accepting checks intended as FINAL payment on a disputed obligation on my Fun with “Payment in Full” Checks post.  Now a couple of Ohio appellate decisions illustrate the “right” and “wrong” way to go about using a “payment in full” check to resolve a dispute and/or bring finality to the transaction. 

Two situationa in particular are addressed:

• When a landlord makes deductions from a security deposit, sending the balance to the former tenant, it assumes the relationship is now over.  So what happens if the former tenant cashes the check sent by the landlord, but then sues the landlord for the balance of its security deposit?
•  
• A customer complains to its vendor/supplier about the quality of the goods shipped to it and believes it is entitled to some sort of discount as a result.  If the vendor/supplier does not agree, what can a customer do?

Whichever side of the table you’re on, it’s important to understand the practical side of the legal concept of “accord and satisfaction” and how it can affect the ability of the tenant to get the rest of the security deposit back or of the supplier to receive full payment after cashing a partial payment check from the customer.   

Tourville v.Terzuoli, 2009–Ohio-2743 (Montgomery Cty) illustrates an ineffective use of "accord and satisfaction".  After the tenant moved out, the landlord sent the tenant a check for a refund of a portion of the security deposit originally made by the tenant, together with an itemization of the deductions made from the security deposit.  The tenant immediately called the landlord to discuss the itemized deductions and then cashed the check.  A few weeks later, the tenant sued the landlord for a refund of the remainder of the security deposit withheld.   

The trial court held that the tenant was barred from recovering the rest of the security deposit by the doctrine of “accord and satisfaction” because they cashed the check for a lesser amount.  The Court of Appeals reversed and said the tenant should have been allowed to present evidence showing it was entitled to the balance of the security deposit.

The Court explained the “accord and satisfaction” concept this way:

First the defendant must show that the parties went through a process of offer and acceptance – an accord.  Second. the accord must have been carried out – a satisfaction.  Third, if there was an accord and satisfaction, it must have been supported by consideration.

The Court further explained that when a check cashing is involved, there must have been reasonable advance notice that the check was intended to be in full satisfaction of the outstanding debt.  Because “there was no evidence that the check was the product of a negotiation between [the landlord and the tenant] regarding the amount of the security deposit that should be refunded,” the Court held no accord and satisfaction occurred.  In other words, merely cashing a check for a lesser amount did not preclude the tenant from getting the full security deposit back.

By contrast, the case of Barmar Enterprises, L.L.C. v. Benco Industries, Inc., 2009–Ohio-366 (8^th App. Dist. Cuyahoga Cty) is an example of an effective use of the accord and satisfaction doctrine to prevent recovery of the larger amount.  Here, a steel brokerage delivered product to a distributor.  Because the distributor’s end users rejected shipments on the basis of poor quality, the distributor issued itself six debit memos against the steel brokerage’s invoices.  The distributor eventually sent the steel brokerage a reconciliation showing the debit memos accompanied with the following statement:

Enclosed please find our reconciliation of your account.  In a show of good faith we have drafted a check in the amount of $30,892.96 representing  full and final payment to [the steel brokerage of invoices totaling more than $100,000] thus clearing our account to a zero (0) balance.  Upon your acceptance, [the distributor] will release your 44,860 lbs of steel [product in the possession of the distributor]. *** Please sign and fax back your acceptance of this accord and satisfaction in order to conclude this matter immediately.

The steel brokerage signed the document, the distributor sent the steel brokerage the specified check, and the check was cashed.  Later the steel brokerage sued the distributor for the difference, alleging it sustained damages when it resold the rejected steel to a third party at a reduced cost.  The Court said no dice and barred the steel brokerage from any recovery.

What these two cases illustrate is that putting a little thought into handling a dispute over an obligation can pay off – literally.  Had the landlord accompanied the check for a partial refund of the security deposit with a statement indicating that it was intended as full and final payment of all amounts due from the landlord, it might have gotten the same result as the distributor did, i.e. by cashing the check when it had notice that it was intended to resolve the entire issue of the amount of the refund, the tenant would be barred from any further recovery of the amount withheld. 

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Is the law and determinations in individual cases of corporate veil piercing an “unprincipled hodgepodge of seemingly ad hoc and unpredictable results”?  Often it may seem so.  Now, however, Political Science professor Christina Boyd and Law professor David Hoffman have teamed up to take a look at actual cases to learn how these sort of cases actually work in practice.  As someone who has always thought that theory and practice are equally important in understanding and applying legal concepts, I was thrilled and excited to come across this study which will be forthcoming in Northwestern Law Review in an article entitled Disputing Limited Liability.

The study involves investigation of six years of data of federal district court cases from 2000 to 2005 involving corporate veil piercing litigation.  It looks to actual results in these cases as measured by outcomes in motion practice during discovery, at summary judgment, during trial, and in post-trial practice to arrive  at “a set of observations which speak to the life of veil piercing law, rather than the gauzy rationalizations presented by judges’ written responses.” Boyd and Hoffman conclude

Plaintiffs do win far more often during litigation than popular accounts of the doctrine’s rare nature would have us expect, but their ultimate chance of obtaining relief on the merits is obscured by settlement. which disposes two of three veil piercing cases filed in federal court….  To owners of the smallest of businesses, the message coming from this data is unfortunately both clear and unsatisfying: neither reliance on legal formalities not pat expectations about the pro-business orientation of conservative judges will protect your firm from the need to dispute its veil in court.  

The abstract summarizes their discoveries:

Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing than corporations; undercapitalization is strongly associated with success while conclusory grounds like “facade” and “sham” are not; and defendants’ legal speculation is predictive of plaintiff failure.  Extra-legal factors play a more striking and counterintuitive role.  Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than companies employing many workers.  

Hoffman has also summarized key findings of the study in a series of blog posts on Concurring Opinions:

• The Content of Veil Piercing Complaints
• Who Gets Sued in Veil Piercing Cases?
• What Does Veil Piercing Success Mean Anyway?
• What Factors Correlate with Veil Piercing Success?

Among other interesting findings, Hoffman points out that while 78% of the cases “resulted in plaintiffs realizing some value from their veil piercing claims”, often through settlement, judicial determinations of veil piercing happened in only about 6% of the cases.

Now, from down here in the trenches, the findings and conclusions of this study mostly seem to match what I would have expected based on the case law and lawsuits I’ve seen in my own law practice.  In particular, the study supports my viewpoint that one of the reasons LLCs are better for closely held businesses is that it’s just harder to get in trouble than with corporations which require more record-keeping.  It also doesn’t surprise me much that if you can show undercapitalization, you’re likely to have a winner from a plaintiff’s standpoint.  Still it’s always interesting to see how these issues play out in general.   

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So here I am over the Memorial Day weekend, having already played a super round of golf, looking over the course materials for the Business Law I class I  am teaching undergraduates at Capital University's School of Management later this Summer.  And I realize that in addition to Contracts. Property, and Torts -- which I do sorta know, or at least remember -- I'm probably going to need to teach them a little about the concepts of principal and agent.  Which, if recollection serves me correctly, we spent all of about 15 minutes on when I was in law school.

One of the pitfalls of giving yourself a break from your blog (and all that Chrysler /GM bankruptcy nonsense) over a holiday weekend is that you're not exactly sure what to write about next.  So guess what?  Today we're going to explore the law of agency.

We've all heard about big-time "agents" representing superstar athletes in one sport or another with respect to negotiating their multi-million dollar contracts.  But as it turns out, ordinary mortals in the business world are constantly dealing with agency relationships of one kind or another as well.

Agency is primarily a contractual relationship in which the agent has agreed to represent the interests of another person -- known as the principal -- with respect to third parties.  It does not require, although it often does include, compensation of the agent for his efforts.  Agents owe a fiduciary duty to their principal  to exercise ordinary care and keep the principal in the loop on important issues. 

Officers and directors are agents of a corporation.  Professionals such as attorneys and CPAs  typically act as agents in providing their services to clients.  In addition, particular empoyees and even independent contractors can be or become agents.  Implied authority allows these individuals to undertake particular actions needed to carry out their dutes such as signing a particular document.

In addition, however, there can also be such a thing as implied agency.  This typically arises in connection with the conduct of, or relationship between, the two parties deemed to be principal and agent.  Here what is important is how third parties are reasonably likely to view the relationship.

With respect to contracts, a principal will be liable for anything to which the agent agreed so long as it is within the agent's actual or apparent authority.  In addition, if the principal accepts the benefits of the agreement the agent made, he or she will be said to have 'ratified" the contract.  On the flip side, the agent will not be held liable on these agreements as long as he acted within the scope of his authority. The key for the princiipal is to make clear where the authority of the agent ends, esepcially if it is not immediately obvious.

When it comes to crimes or harm cause by negligent acts (called "torts" in the law biz), the agent is always liable for his own personal wrongdoing.  However, in many instances a principal may also find themselves held liable for the actions of the agent.  Perhaps most familar is the "vicarious liability" that employers have for activities of their employees while acting in the scope of their employment; this might include such commonplace things as a car accident injuring another person not employed by the company.  In addition the principal can be held directly liable, even when there is no employer-employee relationship, if it did not exercise proper care iin supervising the agent.

To me, the concepts of principal and agent, and the respective levels of liability we place on eachseem relatively intutive.  If the other side knows or should know a person is acting as an agent for someone else, then it makes sense to only hold the principal liable for any resulting contract. Of course when that part gets a little sticky to determine, the cases get a lot harder.  So this may be one of those easy to lear, hard to master concepts.

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Recently the Ohio Supreme Court issued yet another opinion regarding "piercing the corporate veil".  According to the Ohio Supreme Court's syllabus in Minno v. Pro-Far, Inc., 2009-Ohio-1247:

A corporation's veil may not be pierced in order to hold a second corporation liable for the corporate misdeeds of the first when the two corporations have common individual shareholders but neither corporation has any ownership in the other.

Well, duh.  As long-time followers of this blog know, I have something of a fascination with corporate veil piercing cases so this post on the Ohio Supreme Court's latest puttering with this legal concept should come as no surprise.

When last we considered the issue, the Ohio Supreme Court had just muddied the waters of the standard for determing if veil piercing was appropriate in a particular case by ruling in Dombroski v. Wellpoint, Inc., 2008-Ohio-4827, that the second prong of the famous test enunciated in  Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Co., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075 included not just illegal acts, but also "similarly unlawful" acts, but did not encompass merely unjust or inequitable acts.  The Court found that insurance bad faith was not sufficent.  For more detailed analysis of Dombroski, visit my previous post "Potato, Potahto, Illegal, Unllawful - Dombroski and New Rules for Piercing the Corporate Veil".

While Dombroski involved a parent-subsidiary corporate relationship (and refused to allow veil piercing), Minno involved two small privately held companies owned by the same set of shareholders.  When Minno fell 19 feet while at a work site, he sued his employer See-Ann for failing to provide a safe working environment.  He also sued Pro-Fab, Inc., an affilated corporation, owned by the same shareholders as See-Ann, alleging that it was in control of the work site and was the alter ego of See-Ann.

Although the two companies had different incorporation dates, they shared common owners and officers, had identical business addresses, and engaged in similar lines of work.  See-Ann, Minno's employer, did not have any general liability insurance; Pro-Fab, Inc. did.  The trial court nevertheless granted summary judgment in favor of Pro-Fab, refusing to permit veil piercing.  The Court of Appeals reversed.   

The Supreme Court began by reciting the Belvedere test, as modified (?) by Dombroski.  It then upheld the trial court's determination that veil piercing was not appropriate, saying:

In contrast to a shareholder's ownership of a corporation or a parent corporation's ownership of another corporation, the common shareholder ownership of sister corporations does not provide one sister corporation the inherent ability to exercise control over the other.  Any wrongful act committed by one sister corporation might have been instigated by the corporation's owners, but it could not have been instigated by the corporation's sister....

Despite the element of common shareholder identity, sister corporations are separate corporations and are unable to exercise control over each other in the manner that a controlling shareholder can.  This lack of ability of one corporation to control the conduct of its sister corporation precludes application of the piercing-the-corporate-veil doctrine.  

I am pleased to see a trend by the Ohio Supreme Court of respecting well established principles of corporate law concerning the relationship between, and separateness of, affiliated companies.  At the same time, however, veil piercing is supposed to be an equitable remedy and if ever there was a case justifying treating two corporations as one, this might have been it.  Corporations can only act through their officers, directors and shareholders, and if those are few and identical, it stands to reason that the true decisionmakers really are the same. 

it is also interesting that there is no discussion about whether bank accounts and finances were comingled, something i've always thought was key to a determination of whether to permit veil piercing.  Nor is their any discussion of the extent to which the two companies followed corporate governance rules by hainv shareholder and director meetings, something else that has been important in prior veil piercing decisions. 

Does this signal a more conservative formalistic approach to veil piercing cases?  Maybe.  We'll have to wait and see.

The decision is relatively short, but for those with a very short atttention span, there is the usual excellent synopisis of the case prepared by the Ohio Supreme Court Office of Public Information.

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In catching up on my CLE (continuing legal education for the nonlawyers out there) reading the other day I came across a case in which a businessperson actually HAD listened to their lawyer, but took the lesson a step too far.  One of the things I always try to impress on folks for whom I have just formed a corporation or limited liability company is the importance of respecting the event of formation and acting accordingly.  Specifically, I explain that it is important to sign all legal documents for the new company in a way that clearly shows the intent to sign in a representative capacity.  This protects the signer from unintentional personal liability.

So if the name of the company is Raztigger Enterprises, Inc., the signature line should look like this:

Raztigger Enterprises, Inc,

By__________________________

     Teri G. Rasmussen, President

If we're talking a limited liability company, then it would look like this:

Raztigger Enterprises, LLC

By__________________________

     Teri G. Rasmussen, Member

If we're dealing with a form and there's not enough space for a proper signature block, at least remember to put your title after your name:

Teri Rasmussen, Member.

In Westgate Village Shopping Center v. Parker, 2008-Ohio-2571 (6th App. Dist.), Patricia Parker got just a little bit  too smart with respect to signing a shopping center lease.  As is often the case, the landlord presented Ms. Parker with both a lease and a lease guaranty with respect to premises to be leased to her company, Horizons Computer Traning and Employability Center, LLC.  The guaranty agreement indicated that "the undersigned"  guaranteed the payment or f rent and other charges under the lease.  Ms. Parker signed the lease guaranty as "Patricia Parker" and then wrote the words "Executive Director" immediately beneath her signature. 

When the company defaulted on the lease and the landlord sued Ms. Parker, she contended that she had signed the guaranty as a representative of the company and not in her personal capacity.   Pretty smart, huh?  Well, the trial court thought so and sided with Ms. Parker.

The Court of Appeals reversed and held Ms. Parker personally liable, basically on common sense grounds that there's no point to guaranteeing your own debt.    The Court of Appeals referenced an earlier case involving a similar fact pattern and adopted its holding to the effect:

"the general rule of interpretation governing this kind of signature is that such words as "president" are merely descriptive of the character or capacity of the person signing the document" and do not allow the individual signing the guaranty to "deny the personal liability imposed by the clear and unambiguous language of that guaranty",

While certainly an interesting defense, the appeals court got it right.  While Ms. Parker may have taken the point a little far, it doesn't change the importance of remembering in most cases to indicate your representative capacity and respect the separateness of the company you have formed.  Here's a letter I often send to clients concerning importantt things to remember about acting in ways that do just that.

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In  a little more than FOUR short (well really, probably long) weeks the Columbus Clippers, the local AAA baseball team, will begin their new affiliation with the Cleveland Indians in their BRAND NEW Huntington Park  stadium!!  And I have season tickets!!  As longtime readers of this blog know, when Spring at long last begins to make its presence known or at least whispers LOUDLY that it really is on the way, I rejoice because

• I HATE WINTER!!!
• It means that I can once again ignore my complete lack of athletic ability and strive to break 100 in my golf game while thoroughly enjoying the attendant socializing with my foursome companions along the way
• Baseball's BACK, well almost - hey Spring training is underway, anyway

So today I thought I'd post about that quintessentially All-American game - BASEBALL - and how it rates an exemption from federal antitrust laws when other professional sports do not.  Lest you doubt baseball's unique place in America, I offer you this recent post by Andy Kessler about why Mark Cuban's explanation of why he wasn't a finalist for the purchase of my beloved Cubbies illustrates what is truly wrong with the American economy today.

Antitrust laws are designed to encourage competition and prevent a business or select few businesses from monopolizing a particular market.  The idea is that this will result in lower prices for consumers and result in overall better quality products being brought to the marketplace.

Baseball's exemption from antitrust laws can really only be explained as a historical accident that no one has the motivation to change. For anyone wanting to really delve into Baseball's special place in American law, I recommend Mitchell Nathanson's lengthy but informative article entitled The Sovereign Nation of Baseball: Why Federal Law Does Not Apply to 'America's Game' and How It Got That Way, which will be forthcoming in the Villanova Sports and Entertainment Law Journal.  As explained in the abstract of his article, his thesis is:

Although its antitrust exemption is well-known, [Major League baseball] MLB has, in practice, not been subject to the forces of federal law in many other contexts as well, setting it apart from most other corporations and organizations - even other professional sports leagues such as the NFL, NHL. and NBA.  As a result of the wide berth provided to MLB by the federal courts and legislature, MLB has been free to govern itself pursuant to its own definition of what is in "the best interest of baseball" - denying its players even the most basic and fundamental due process rights, arbitrarily punishing those it has labelled "rogue" owners, and willfully violating federal law that has applied to it for decades in theory but not in practice, in the process.  From its inception in 1876 to the present, MLB has been, in effect, an extra judicial entity, a society unto itself, answerable to no one in all but the most extreme circumstances. 

From the beginning, courts have view baseball as a "special" situation and treated it differently.   Click here for a historical perspective of the beginnings of baseball's  antitrust exemption which began with the case of Fed. Baseball Club of Baltimore, Inc. v. Nat'l League of Professional Baseball Clubs, 259 U.S. 200 (1922).  In this case, the Court chose not to view baseball as a business at all.  Time and again since, the U.S. Supreme Court has passed the buck to the United States Congress, saying that if there is to be any change in baseball's "special status", it must come from the legislative branch of government... which has steadfastly refused to act.  See Toolson   v. New York  Yankees, 346 U.S. 356 (1950); Flood v. Kuhn (1972).  It has explained:

‘Baseball has been the national pastime for over one hundred years and enjoys a unique place in our American heritage. Major league professional baseball is avidly followed by millions of fans, looked upon with fervor and pride and provides a special source of inspiration and competitive team spirit especially for the young.
 

 

Baseball's status in the life of the nation is so pervasive that it would not strain credulity to say the Court can take judicial notice that baseball is everybody's business. To put it mildly and with restraint, it would be unfortunate indeed if a fine sport and profession, which brings surcease from daily travail and an escape from the ordinary to most inhabitants of this land, were to suffer in the least because of undue concentration by any one or any group on commercial and profit considerations. The game is on higher ground; it behooves every one to keep it there.

For another summary of the interplay between baseball and federal antirust law,click here.

What would happen if we all stopped pretending ythat baseball is somehow "different"?    A post on Baseball Prospectus blog argues that the most important change would be greater mobility of teams.

For my part, I actually do think baseball is special in the sense that no other game so clearly reflects the American culture.  Baseball, like many other games, emphsizes teamwork, especially when it comes to fielding the ball.  However, it also emphasizes the importance of the individual by requiring every player (except the pitcher in that American League abomination of  Designated Hitter) to face the pitcher alone.  To me, that combination of the importance of team and individual is uniquely American.  Does that make baseball special enough to deserve an exemption from antitrust laws?  No, but we are where we are and somehow imposing antitrust law on baseball, however logical that probably is, would be an admission of a failure of some kind.

UPDATE;  This Courtoon explains it all

PREVIOUS POSTS ABOUT BASEBALL AND THE LAW ON THIS BLOG:

Spring Has Sprung - Baseball's Back!!!! Watch for Zooming Balls discusses the "assumption of risk" of possibly being hit by a foul ball or broken bat entailed just by entering the stadium.

Cubs Cursed by the "Business Judgment Rule"?  tells the story of how the "business judgment rule" delayed installation of lights at Wrigley Field and asks if this is the REAL Cubbie curse. 

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I'm enough of a geek (well, actually, I'm probably mostly always a geek when any sentence starts out this way) to think that it's always somehow at least a little bit "cool" when real life "LAW" intersects - in a nonthreatening way, mind you - with my everyday life.  Which is WHY I simply HAD to write this blog post about the recent change in name of one of my favorite Dublin, Ohio (and now that I know about the larger Worthington location, even more favorite) Central Ohio restaurants.

My Jason's Restaurant & Bar began life in a smallish location on Dublin's main drag that had previously been home to a Bruegger's Bagels or some such enterprise.  It quickly became one of my favorites as a lawyer working in Dublin beause of its eclectic menu featuring both Asian cuisines and more traditional American fare, terrific decor, and reasonable prices.  Parking was sometimes an issue, but hey you can't have everything and the Worthington location may solve some of those issues. 

Unfortunately for Jason's, a competitor was eyeing the territory and decided to move in.  Jason's Deli has a federal trademark and thus was able to force Jason's Restaurant & Bar to change its name.  Click here for the local newspaper account of the predicament the owner of my Jason's found himself in. 

GUEST POST BY CHERYL SCOTNEY

So how can this be?  How can an already established local eatery be forced to give up the name it has worked hard to establish in the community to an outsider?  For answers, I went to my friend Cheryl Scotney, a Registered Patent Attorney with Standley Law Group LLP.  At my request, she agreed to pen the following guest post addressing the general issue this sort of thing raises  - although she cautions that she can only surmise the actual sequence of events and actions taken (or not taken) in the particular Jason's incident.

 >>>>>>>>>> and now.....

                                                  A GUEST POST BY CHERYL SCOTNEY >>>>>>>>>>>>>>>>>>>   

The story is an old one…  a central Ohio restaurant opens with its chosen name but the name is not protected by trademark registration.  Some years later, after the restaurant is successful and has acquired goodwill in the restaurant name, it is required to change its name.  Another restaurant is entering the area with a confusingly similar name.  The new restaurant entering the market has obtained federal trademark rights in its name -- many years before the central Ohio restaurant opened.  The new restaurant demands a name change by the existing central Ohio restaurant.

This scenario can happen with restaurants or any other new business venture. That is why it is extremely important for small business owners to adequately protect their new business name. 

In some recent cases, the small business owner did not perform a federal trademark search or file for federal trademark protection before opening their business.  The small business owner may be able to go on for several years with no problem.  However, a trademark issue may then arise when the small business owner becomes successful and is thrust into the public eye and/or when a new business with a pre-existing federal trademark registration for a confusingly similar trademark comes to town.  

The small business owner (who may no longer be all that small at this point) may be required to change its name or pay legal fees to fight for their business name.  A defense to any trademark infringement claim may be that the small business owner was using the mark in Ohio prior to the federally registered entity coming to town.  Unfortunately, the defense would not be successful as federal trademark rights that were secured prior to the opening of the Ohio restaurant supersede any trademark rights acquired by the Ohio restaurant.  The cost of changing signs, menus, advertising, uniforms and other printed and online advertising is significant.  But the most costly is the loss of goodwill that is associated with the business name. 

Several recent Ohio cases point to the fact that it is not a good idea to pick your personal name as the trademark or service mark for your company.  This only becomes an issue when your small business becomes successful and another company acquires your company through a sale.  The sale will most likely include assignment of all trademarks associated with the company.  The seller will then be in the position that he/she can no longer do business using his/her own name. 

It is also important to file a trademark application in the correct party’s name.  Whatever entity is going to be using the mark with the sale of the goods or services is the correct entity to list as applicant.  If a person is in the process of filing paperwork to incorporate or set up an LLC, then filing a trademark application should wait until that business paperwork is filed and accepted.  This is done to avoid issues of fraud and liability. 

Securing Ohio trademark or service mark rights in your company’s name may be of little value in today’s advertising environment.  A federal trademark registration is the best means of protection.  Unbeknownst to most, an Ohio trademark/service mark registration application requires an applicant to verify that “no other person has a registration of the same or of a confusingly similar trade mark/service mark in the United States Patent Office for the same or similar goods” (Line 10) and that the applicant is the “owner of a concurrent registration in the United States Patent Office of this trade mark/service mark covering an area including this State” (Line 11).    Verification of these statements implies that a comprehensive federal trademark search was performed prior to filing the Ohio trademark/service mark application.  

A typical comprehensive trademark search performed by a competent trademark attorney costs about $300/mark or if searched through an outside search service, such as CorSearch, the cost is about $600/mark.   A trademark search should include a federal search on the exact mark, alternate spellings or similar marks, a search of all 50 states trademark and service mark databases, a search of domain names and a common law trademark search (usually performed on the Internet or in business listing databases).

     Cheryl S. Scotney is a Registered Patent Attorney at Standley Law Group LLP located in Dublin, Ohio.  She  has a degree in Chemistry and focuses her practice on  the preparation and prosecution of domestic and foreign patent and trademark registration applications, in the filing of opposition and cancellation trademark proceedings, and in the preparation and prosecution of copyright registration applications.  She can be reached at cscotney@standleyllp.com or by phone at (614) 792-5555.

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We've all been taught that American business is built on the concept of competition and free enterprise.  At the same time, we all have a deep-rooted metaphysical sense of "fairness" which sets the outermost limits on where we are willing to let "pure" competition go.  Where that line goes is what "tortious interference" with business or contract is all about.  In essence a "tortious interference" claim is about saying that a competitor in the marketplace misused information or otherwise just went  "over the line"  when it came to the tactics used to solicit clients, obtain business that the complaining plaintiff believes should rightfully have been his, cause customers to stop patronizing another's business, or otherwise adversely affect the competitor's business and/or financial prospects.

The tort of "tortious interference", whether with "contract" or with "a business relationship", is one of the most common claims made in business disputes.  It is often seen in tandem with allegations of misappropriation of trade secrets, breach of confidentiality or non-compete provisions, or defamation claims.  The difference between the two flavors of tortious interference is that "tortious interference with CONTRACT" requires the wrongdoer to have impermissibly adversely affected an ACTUAL formal contract in place between the complaining plaintiff and another entity; "tortious interference with BUSINESS or BUSINESS RELATIONSHIP" is broader and includes intentional interference by the wrongdoer with business dealing of the complaining plaintiff with another entity which may not yet have resulted in a contractual relationship.

Tortious Interference with Contract.  In Ohio, the Ohio Supreme Court recognized the existence of a claim of tortious interference with contract in Kenty v. Transamerica Premium Ins. Co., 72 Ohio St.3d 415 (1995).  It joined a number of other states in adopting the definition set forth in the Restatement of the Law 2d, Torts:

One who intentionally and improperly intereres with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract is subject to liability to the other for pecuniary loss resulting to the other from the failure of the third person to perform the contract.

To prevail on a claim alleging tortious interference with contract, you must show all of the following:

• the existence of a contract
• defendant's  knowledge that contract existed
• defendant wrongdoer's intentional interference and procurement of breach of contract
• defendant wrongdoer's lack of justification for his actions
• damages resulting from contract breach

 The contract interfered with can be express or implied.  It does not have to be a written agreement.

Tortious Interference with Business Relationship.  Ohio  law also recognizes claims for tortious interference with a business relatinship applicable when there may not have been a specific contractual relationship.  A&B-Abell Elevator Co. v. Columbus/Cent. Ohio Bldg. & Constr. Trades Council, 73 Ohio St.3d 1 (1995).  Here, one must show:

• existence of a business relationship
• defendant's knowledge of the business relationship
• defendant wrongdoer's intentional interference causing a breach or termination of the relationship
• damages resulting from wrongdoer's actions

In both cases, the wrongdoer must have acted intentionally and the interference must have been without justification.  To determine whether the defendant acted improperly, the Ohio Supreme Court set down the following factors in Fred Siegal Co,, L.P.A. v. Arter & Hadden, 85 Ohio St.3d 171 (1999):

• nature of the defendant's conduct
• defendant's motive
• business interests of the complaining plaintiff which were interfered with
• interests sought to be advanced by the defendant
• weighing of the social interests in protecting the defendant's freedom of action versus protecting the plaintiff's business and contractual interests
• proximity of defendant's actions to the alleged damages caused
• relations between the parties.

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The Ohio Real Estate Blog recently offered negotiating tips for commercial tenants entitled "40 Ways to Reduce Occupancy Cost/Risk in 2009" (with a hat tip to Greg Schenk of the The Schenk Company, Inc.).  While some of the suggestions (such as limiting guarantees in some respect) seem to fall in the category of "great, if you could get it", most are more realistic.  In general, the tips fall in the following areas:

• Exit Strategies.  Negotiate "kick-out" clauses  which allow early termination by the tenant at least under certain triggering events; more lenient assignment provisions, use shorter lease terms and more renewal options/ as many longer options as possible.

• Negotiation of CAM (Common Area Mantenance) terms.  Base on total rent without offset for vacancies or anchor tenants; eliminate or reduce inclusion of administrative fee; cap management fee (4%-6% is typical); make sure you have right to audit CAM.

• Default Provisions.  Get notice and cure periods; increase grace period for late rent payments and other cure periods; decrease late fees; limit number of events of default

Some others that I particularly liked:

• Eliminate ability of landlord to relcate tenant or make relocation at landlord's expense.
• No percentage rent or at least establlish a break-point before percentage rent commences
• Make sure property's rules and regulations cover potential problems other tenants might create
• Obtain right of first refual with respect to adjacent space or to buy property

 For commercial tenants looking at lease renewal in 2009, Greg Schenk breaks the news that landlords are likely to offer better deals to new tenants than those already in place and offers the following tips:

• Start the renegotiation process early, as much as a year for long term leases.
• Seek out other suitable locations and obtain real viable bids from other prospective landlords.
• Never accept your current landlord's first offer.
• Never reveal your interest in renewing your lease to the landlord or any of its agents, including property managers, maintenance or janitorial personnel.
• Always refer your landlord to your attorney or other professional representative. 

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And now, another GUEST POST from my source on small business tax stuff, CPA Karen deLaubenfels, who previously guest-posted on this blog regarding "What's Your Tax Basis? Does It Matter?":

If you’re a limited liability company (LLC) with just one owner, or if you’re a QSub, something happened to you on January 1, 2009.

Before that date, you could file your payroll taxes in two ways: either under your company’s own employer identification number (EIN) issued by the IRS, or under the owner’s number (Social Security number or EIN).   As a matter of fact, the IRS in times past would take care to point out that the sole proprietor didn’t necessarily need an EIN.

Now, your single-member LLC (SMLLC) or QSub (an entity formed by election of a parent S corporation to disregard a wholly-owned corporate subsidiary) will need its own EIN to file federal payroll taxes.  You can access the full text of the Treasury Decision here.  In this post, we'll focus on the SMLLC.

Here’s a bit of a digression on what it means to be a “disregarded entity.”  LLCs (an entity formed at the state level) have always presented a bit of a challenge to regulators at the federal level – are they more like partnerships, or more like corporations?  What about an LLC with just one member (owner)?  How could an SMLLC be a partnership, when partnerships must have at least two partners?  How could it be a corporation, when income flows through to the owners? 

The sole proprietor is a default business entity type, in the sense that there are no papers to file, no permissions needed. If you’re doing business and you're not another type of entity, you're a sole proprietor.   As Teri Rasmussen explained in her previous post on this blog entitled : "Partnerships, Corporations, LLCs, Sole Proprietorships, Oh my - Understanding the  Business Entity Choices in Ohio" , this has both advantages and disadvantages.  Simplicity is a major advantage; there are no board meetings, stock certificates, or separate tax forms for the sole proprietorship.  The taxpayer merely includes two additional schedules with his or her regular form 1040: Schedule C showing income and expenses, and Schedule SE for calculating self-employment tax.  The most glaring disadvantage of the sole proprietorship is the lack of personal liability protection, since creditors could “look through” your company to your personal assets in satisfaction of liabilities.

When LLCs came along, there was some discussion about how to treat the entity at the federal level. The result was that any LLC with two or more members is taxed as a partnership as a default, but can elect to be taxed as a corporation.  An SMLLC, though, is taxed as a sole proprietorship as a default (but can elect to be taxed as a corporation as well).  Thus the term “disregarded entity”; at the federal level, the SMLLC does not exist as either a taxpaying entity or (unless it requested an EIN) as an employer. 

At the federal level, the SMLLC is nothing more than a sole proprietorship. 

If your sole proprietorship has employees, you generally need to file several payroll tax forms, usually at the federal, state, and local levels.  If your SMLLC elects to file as a corporation, it is required to have an EIN.  If your SMLLC does not, it was heretofore treated as any other sole proprietorship, and not required to have an EIN. So some SMLLCs with employees had EINs, and some didn’t.

If you’re an SMLLC with employees that has been filing federal payroll tax forms under an EIN, you’re not required to do anything differently than you’re doing now.  However, if you’re an SMLLC with employees that has been filing federal payroll tax forms under the owner’s Social Security number, you have an action item: 

Get an EIN for your SMLLC, and file all payroll filings for wages paid after January 1, 2009 under your EIN.

If you need an EIN quickly, you can get one online here.   You’ll receive your EIN immediately and can use it right away for any purpose, with the exception of IRS e-services, since it will take a couple of weeks for the IRS to update all its files. Paper forms can be filed using the new EIN if a filing deadline is imminent.

In summary, SMLLCs are no longer disregarded entities as regards employment taxes and related reporting at the federal level. It’s important to note, though, that for all other purposes, your SMLLC will continue to be a disregarded entity at the federal level; for example, you as an owner will continue to be subject to self-employment tax on your personal tax return.

Karen L. deLaubenfels, CPA offers accounting advice, including a full line of tax consulting and preparation services, to clients in Central Ohio.  She also offers QuickBooks consulting and bookkeeping services, as well as training for tax staff.   For more information, you can visit her website at www.karendcpa.com.

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The recent Ohio Supreme Court's decision in Dombroski v. Wellpoint, Inc., 2008-Ohio-4827, has only further complicated the determination whether the corporate veil should be pierced in particular cases.  In holding that the second prong of the seminal Belvedere test did not include merely unjust or inequitable acts, but did include "similarly unlawful" acts, the Court did nothing to clarify the circumstances in which corporate veil piercing is appropriate.

I've posted before about Ohio law on piercing the corporate veil, as well as the legal and factual context in which the Dombroski case arises.  In a nutshell, the plaintiff alleged bad faith against an insurance company for denying her medical claim.  She also sought to hold the insurer's parent company liable on a piercing the corporate veil theory.  Because the case had gone up on appeal on the granting of a 12(B)(6) motion to dismiss, the Court assumed that the parent company did in fact control the wholly owned insurance company to such a degree that it had no separate mind, will or existence of its own, thereby satisfying the first prong of Belvedere. 

The issue certified for appeal was:

Does the second prong of [the test for piercing the corporate veil set forth in Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Co., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075], which states that the corporate veil can be pierced when control of the corporation "was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity" also allow the corporate veil to be pierced in cases where control was exercised to commit unjust or inequitable acts that do not rise to the level of fraud or an illegal act?

In answering the question in a 6-1 decision (click here for Office of Public Information summary), the Court responded equivocally, rejecting the most liberal interpretation of the second Bevedere prong, but nevertheless adding additional verbage to the standard:

In view of the reality that shareholders could seriously misuse the corporate form and evade personal liability under the second prong as presentlyworded, we find it necessary to modify the second prong of the Belvedere test to allow for piercing in the event that egregious wrongs are committed by shareholders....

to fulfill the second prong of the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act.  Courts should apply this limited expansion cautiously toward the goal of piercing the corporate veil only in instances of extreme misconduct. (emphasis supplied)

The Court appears to want to choose a middle ground between the interpretations favored by the Courts of Appeal below.  While this conceptually may have been the proper determination, the result seems a bit clumsy and to have added nothing but further confusion.  I agree with the dissent of Justice Pfeifer when he concludes the Court has "muddied the waters" and adds:

The new language seems to be pulled from the air.  Is there a notable distinction between an"unlawful" and an "illegal" act?  Not that the majority identifies.  the words appear to be two ways of saying the same thing.  Potato, potahto, illegal, unlawful - let's call the whole thing off.

Based on the oral arguments in this case, I had hoped for much more from this decision. 

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Pinch me - the Chicago Cubs REALLY are in the post-season and .... let's all hold our breath....  might even manage to make it to the World Series for the first time since 1945 and after precisely 100 years, could, just maybe, break the billy goat/black cat curse and win the World Series! . 

Of course, most or all of these games will be played at night.  And it was twenty years ago today,,, well almost (August 8, 1988 to be precise)... that lights came to Wrigley Field.  So I thought it might be a good time to revsit the part of the story about events along the way to Wrigley Field FINALLY getting lights, years after every other Major League baseball team.  Especially since the part I want to explore involves an unsuccessful effort to get night baseball at Wrigley and illustrates one way to apply the "business judgment rule" I've just been teaching to my Capital University students.  And the irony of talking about getting electric lights just after power has finally been restored to me after doing without for five days due to the incredible windstorm from Ike's remnants which whipped through Central Ohio last Sunday also seems oddly appropriate. 

Young Lawyer Takes on Mr. Wrigley.  I am of course talking about the celebrated case of Shlensky v. Wrigley et al., 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968).  In this case, William Shlensky was a minority shareholder of Chicago National League Baseball Cub (inc.) ("Cubs Corporation"), the corporation which owned the Chicago Cubs and operated Wrigley Field.  After several years of disappointing  financial results, Shlensky became convinced that this trend would continue unless the Cubs "got with the program" and installed lights to play night baseball - just like every single other Major League team had been doing for years.  For the short version of the essence of the case, check out this limerick from ContractsProf Blog:  

As Wrigley explained to the court,

Pro-ball is a daytime sport,

Night ball you can see

Down at Comiskey

Where the teams out for profit cavort.

So Shlensky, being a red-blooded American sued majority controlling shareholder Phillip K. Wrigley (who held 80% of the shares and was also President) in his capacity as a director of the  Cubs Corporation,as well as other directors and the Cubs Corporation itself.  The suit was a shareholder derivative action against the directors for negligence and mismanagement. and sought an order requiring the installation of lights at Wrigley Field.  Shlensky argued:

• While the weekend attendance of the White Sox and the Cubs was about the same, weekday attendance at night games played by the White Sox was much higher than that of the Cubs.
• Installation of lights is readily able to get financing and will quickly pay for itself through anticipated greater attendance.
• Wrigley was refusing to install lights not because of any concern for the welfare of the Cubs Corporation, but rather because he believed that baseball is inherently a "daytime sport."
• The other directors allowed Wrigley to dominate the board and acquiesed in the refusal to install lights even though they knew he wasn't acting in a good faith concern for the best interests of Cubs Corporation, but rather out of an entrenched personal opinion.

Business Judgment Rule in Action.  Shlensky contended that these facts demonstrated arbitrary and capricious acts on the part of the directors constituting negligence on their part in failing to exercise reasonable care and prudence in the mangement of corporate affairs of Cubs Corporation.  The trial court was not impressed and dismissed the amended Complaint apparently rather summarily without permitting any testiimony.

On appeal, the Illinois Court of Appeals affirmed, concluding that it had no business second-guessing the Cubs Corporation's board of directors.  After discussing the essence of the "business judgment rule", including another well known "business judgment rule" case involving Henry Ford and his fight with the Dodge brothers (Dodge v. Ford Motor Co., 214 Mich. 459, 170 N.W. 608 (1909), the Court concluded that in the absence of fraud, illegality, or a conflict of interest, a decision by a board of directors should not be disturbed as long as it had some ratinal basis, evenif in hindsight, the decision was wrong.  

In applying the rule to the facts, the Court said:

we are not satisfied that the motives assigned to Phillip K. Wrigley, and through him to the other directors, are contrary to the best interests of the corporation and the stockholders.  For eample, it appears to us that the effect on the neighborhood might well be considered by a director who was considering the patrons who would or would not attend the games if the park were in a poor neighorhood.  Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deterioprating.  By these thoughts we do not mean to say that the decision of the directors was a correct one.  That is beyond our jurisdiction and ability.  We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision. 

Then the Court proceeded to dissect Shlensky's other arguments, finding fault with his failure to demonstrate a causal link between night ganes and increased profits or to consider the additional expenses installation of lights and playing of night games might involve. 

The Just One Bad Century website "dedicated to the long suffering fans of Chicago's favorite baseball team" (which may become one of my favorite websites) argues that the relative greater success of the Cubs making the post season since lights were installed shows that the Cubs real problem has been so many day games.  If so, then perhaps the real curse on the Cubs was the deference given to the baseball purists on the Cubs Corporation who refused to allow lights at Wrigley Field forty years ago. 

What If?  Of course now less deference is given to directors so the case might come out differently today.  But suppose Shlensky had commissioned an authoritative consulatant's report demonstrating quantitatively the substantially greater profitability of night baseball.  And that the directors simply ignored this.  Would the Court have given Shlensky more of a hearing and been less of an apologist for the directors?  In some parallel universe, the Cubs have already won the World Series repeatedly.      

The Rest of the Story.... And for those who want to know the rest of the story, check out this timeline of the road to lights at Wrigley Field  which has such gems as....

• Shlensky was a 27 year old lawyer (somehow that figures) who had owned two shares of Cubs Corporation since he was 14.
• In 1941,P.K. Wrigley actually bought lights to be installed at Wrigley Field for 6 PM twilight starts.  However, Pearl Harbor intervened and the steel for the light poles was donated to the war effort.
• In1982, the public was told the choice was lights or the Cubs would move.  A Wrigleyville citizens group named Citizens United for Baseball in the Sunshine (CUBS) was formed to oppose installation of lights.
• The first Wrigley Field game under the lights began on August 8, 1988 against the Phillies, but it was rained out after 3 1/2 innings.
• Restrictions on the number of night games played still exist.

And finally...

Got my power back on Thursday night and while I realize that's nothing compared to what folks in Texas are dealing with, I will tell you that reading by flashlight does not work nearly as well now as when I was a kid.  Also that I apparently spend an awfully lot of time on my laptop in the evenings and need to buy a new battery since the one I have only gives me an houor of juice.  On the plus side, I definitely caught up on my sleep and found out how great it can feel not to be sleep- deprived.  So I suppose the whole experience was useful.

I will be going to Oregon in a few days for a golf trip with friends so I may or may not get a chance to post before i leave.   

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In addition to what is proving to be an unusually interesting Presidential election campaign, one of the "hot" issues in Ohio this year is a ballot issue called the Healthy Families Act .  Voters will be asked to decide whether to enact into law a measure that would force businesses with 25 or more employees to guarantee their employees at least seven (7) days sick leave.  Similar measures are apparently playing out all across the country according to the National Partnership for Women & Families.  There's also a bill in Congress on the subject as explained by the HR Capitalist blog in the post: Why You May Add 7 Paid Sick Days to Your PTO Policy in 2009.

I am not a labor lawyer and as yet I haven't really digested the proposed law.  But last week I actually got a call from one of the factions asking if I was going to write about it.  So that got me to thinking about the importance of this proposed legislation to Ohio businesses and made me decide that I probably should make a post about it.

Mike Bowers of the Ideas to Deals blog has an excellent post summarizing the basics of the Healthy Families Act.  A Columbus Dispatch editorial supports passage of the law. However, as Ohio Employer's Law Blog's Jon Hyman notes in his post, Governor Strickland's press release against the Healthy Families Act, Ohio's Democratic Governor has come out against the Act.  In this press release, Gov Strickland calls the ballot initiative " unworkable, unwieldy, and ,,, detrimental to Ohio's economy." 

Solely in the interests of providing information (and not necessarily as an endorsement) here is a fact sheet and an economic impact fact sheet provided to me from those seeking to defeat the measure.  If someone wants to send me similar fact sheets in favor, I'll post those too.   

Earlier this year, Jon Hyman of the Ohio Employer's Law Blog posted a fairly detailed analysis concluding the measure should be rejected in his post Deconstructing the Ohio Healthy Families Act and received many posted comments.  Jon has also promised to post further updates as we get closer to decision day.  

In Jon's post, he also gathers some links to organizations interested in the Act, most of which seem to be opposed to the measure.  In the interests of full information being out there, here are some other links:

• Ohioans for Healthy Families, the group lobbying for the legislation on its Sick Days Ohio website has several news items favoring the Act, explains why one might.believe it's necessary, and how to get involved on that side of the issue
• Policy Matters Ohio, a nonproft research organization has also come out in favor of the Act.
• Ohio Business Votes, a lobbying group opposing the measure, has an informational website explaining how the Act would negatively affect both employers and employees. 

Jon also provides some guidance as to Should businesses be reviewing paid sick leave policies in advance of the Healthy Families Act.

I'm not really sure yet what I think,either professionally or personally.  On the one hand it boggles my mind that there are actually businesses of any size out there that don't provide at least this much paid sick leave in this day and age.  And it seems fundamental to me that, especially given how long it usually takes to see a doctor once you show up for your appointment, we ought to require this sort of thing.

On the other hand, I am mindful of the burden the Healthy Families Act may place on businesses.  And the fact that Gov. Strickland thinks it's a bad idea is also very influential on me.

So for me, the issue is really about understanding how big a burden this places on businesses.  If I ultimately conclude it's enormous, then I will probably, reluctantly, be opposed to its passage.

UPDATE: The Healthy Families Act has been pulled from Ohio's November ballot.  The push for federal legislation continues.

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If you wait long enough, all things old become new again. For a brief four year period over 150 years ago, Ohio had a statutory “commercial court” in which business oriented disputes were resolved. Now a new four-year pilot program will try the idea out again.

New Age of Business Courts

Ohio is among many jurisdictions experimenting with the concept of specialized courts for “business” disputes. One of the driving forces behind this trend seems to be the impression/assumption that having such a specialized court is instrumental in attracting and retaining businesses to a state.  This article about New Hampshire's recent jump on to the business court bandwagon gives you the flavor of this sentiment. 

The 200-year-old Delaware Court of Chancery is of course the grand-daddy of them all. However, Chicago, Manhattan, and North Carolina have had such courts for more than a decade and Rhode Island, Massachusetts, Las Vegas, Reno, Atlanta, Boston, and Pittsburgh have also instituted business courts in some form. Most recently Maine and South Carolina have implemented programs. Colorado and Michigan are currently giving serious consideration to the possibility.  For more information, visit the following:

• Terrific (!!!)  Mississippi Secretary of State Policy and Research Division June 2008 summary/survey of business courts throughout the United States and other resources, including this useful executive summary 
• Central Florida Complex Business Litigation Courts
• North Carolina Business Court
• Maine Business and Consumer Court
• 2005 University of Maryland School of Law survey of existing business and technology courts

Lee Applebaum has penned a very informative article published in the March/April 2008 issue of the American Bar Association’s Business Law Today magazine entitled “The ‘New’ Business Courts: Responding to Modern Business and Commercial Disputes” which provides an excellent overview of the new trend towards specialized business courts. As Lee explains, the new “business” courts tend to have jurisdiction extending beyond the traditional equity jurisdiction exercised by the Delaware Court of Chancery. In addition to the variety of procedural approaches various jurisdictions have taken in establishing “business” courts and/or “commercial dockets”, the scope of cases accepted differs from one court to another.  

• The same issue also has a number of other articles focusing on business/commercial and other specialized courts, both in the U.S. and elsewhere in the world.

Ohio's New  "Business" Courts 

About a year ago, Ohio Chief Justice Thomas Moyer appointed a Task Force to study the best method for establishing commercial litigation dockets in Ohio’s trial courts.  The Ohio Supreme Court has now approved a pilot program permitting Common Pleas Courts in five counties to voluntarily institute business courts pursuant to new temporary rules 1.01 to 1.11 of the Rules of Superintendence of the Courts. Carolyn Kobus, a law clerk at my law firm this summer, prepared an excellent summary of these rules.

Business First (which continues to persist in  requiring paid access to its archives) gave this update as to Ohio generally and Hamilton County in particular.  Hamilton County has already moved forward with the plan and Franklin County is currently considering how to implement business courts. The Ohio Supreme Court's Temp. Sup R. 1.03 sets out the sorts of cases that will be accepted; they are:

1. formation, governance, dissolution, or liquidation of a business entity
2. rights or obligations between or among the owners, shareholders, partners, or members of a business entity, or rights and obligations between or among any of them and the entity
3. Trade secret, non-disclosure, non-compete, or employment agreements involving a business entity and an owner, sole proprietor, shareholder, partner, or member thereof
4. rights, obligations, liability, or indemnity of an officer, director, manager, trustee, partner, or member of a business entity owed to or from the business entity
5. Disputes between or among two or more business entities or individuals as to their business or investment activities relating to contracts, transactions, or relationships between or among them, including without limitation the following:

• Transactions governed by the uniform commercial code, except for consumer product liability claims
• purchase, sale, lease, or license of, or a security interest in, or the infringement or misappropriation of, patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property;
• purchase or sale of a business entity or the assets of a business entity;
• sale of goods or services by a business entity to a business entity
• Non-consumer bank or brokerage accounts, including loan, deposit, cash management, and investment accounts
• Surety bonds and suretyship or guarantee obligations of individuals given in connection with business transactions;
• purchase, sale, lease, or license of, or a security interest in, commercial property, whether tangible, intangible personal, or real property
• Franchise or dealer relationships
• Business related torts
• Cases under antitrust laws;
•  Cases relating to securities, or relating to or arising under federal or state securities laws
• Commercial insurance contracts, including coverage disputes.

There is also a specific list of cases which the “business” court will not hear; these are:

• Personal injury, survivor, or wrongful death matters
• Consumer claims against business entities or insurers of business entities, including product liability and personal injury cases, and cases arising under federal or state consumer protection laws;
• occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
• occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
• Matters in eminent domain;
• Employment law cases
• Cases in which a labor organization is a party
• Cases in which a governmental entity is a party
• Discrimination cases based upon the United States constitution, the Ohio constitution, or the applicable statutes, rules, regulations, or ordinances of the United States, the state, or a political subdivision of the state;
•  Administrative agency, tax, zoning, and other appeals;
•  Petition actions in the nature of a change of name of an  individual, mental health act, guardianship, or government election matters
•  Individual residential real estate disputes, including foreclosure actions, or non-commercial landlord-tenant disputes
• domestic relations, juvenile, or probate division of the court
• jurisdiction of a municipal court, county court, mayor’s court, small claims division of a municipal court or county court, or any matter required by statute or other law to be heard in some other court or division of a court
• Any criminal matter, other than criminal contempt in connection with a matter pending on the commercial docket of the court

Will Ohio's Business Courts Work?

One weakness I see in the pilot program is the assignment procedure for getting the case to a “commercial docket judge.” It relies upon the attorneys involved in the case to file appropriate motions to have the case transferred, and if they fail to do so, by the judge presiding over the case. To me it seems like it would have been a whole lot easier to have the case designated as a “commercial” case when filed and routed directly to the appropriate judge from there. In Franklin County, cases such as foreclosure, professional tort, and other particular sorts of cases are already separately designated by specific letter abbreviations included in the case number they are given. 

In addition, while the temporary rule requires a ruling on the transfer motion with two days, as well as decisions on other motions within 60 days, I’m a bit skeptical as to how often that will actually happen in reality.  

On balance, however, I support the concept of “business” courts. Throughout most of my career much of my litigation experience has occurred in federal bankruptcy court. I have always appreciated the fact that you could proceed to deal with the particular issue involved rather than having to begin each time by educating the judge as to the entire philosophical and structural framework of applicable law.  

In addition, over time, as a “regular” down at bankruptcy court, attorneys come to understand the likely range of results emanating from particular recurring fact patterns. This allows attorney to offer better counsel and advice to clients as to the relative merits of settling or pushing forward with the case. That in turn promotes judicial economy as more cases are resolved by the parties now that they have greater certainty as to possible outcomes.

I hope that the Franklin County Common Pleas judges agree to participate in the pilot program.

UPDATE: The Daily Reporter, the daily legal newspaper in Columbus, reports that Franklin County judges will join Hamilton County in a pilot commercial docket program.  Cuyahoga County, where Cleveland is located, is also expected to approve participation in the pilot program.  The pilot program is supposed to be implemented by early 2009 and would remain in effect through July1, 2012.

UPDATE: The University of Maryland School of Law Journal of Business and Technology's website has an up to date  summary of  Recent Developments in State Business and Technology Courts which briefly explains the status in more than twenty states and also has some interesting recent news briefs.  (Hat tip to Rush Nigut of Rush on Business for this link.)

UPDATE:  The Cuyahoga Common Pleas Court is now on board for the pilot program.  Check out this informative Q & A on business courts appearing in The Cleveland Plain Dealer. 

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Suppose you’ve decided that you’ve learned all you can from where you work now and want to put it to use by opening your own company.  Or the grass is looking mighty greener at another company in your industry and you’d like to make a move.  Hold on a minute!  Before you turn in your resignation, you need to consider whether you are subject to a noncompetition agreement, and if so, how that will affect your ability to move on.

What Noncompetes Do

Noncompetition agreements, or noncompetes as they are often called, may be a separate agreement, but are frequently part of an employment agreement.  Their purpose is to protect an employer from unfair competition by restricting the ability of an employee to compete with his or her former employer immediately following termination of employment.  Sometimes employees are asked to sign such an agreement after they have already been employed for quite a while.

Essentially, an employee signing a noncompete promises not to start, work in, own, or otherwise be involved with another company competing for the same business for a specified period of time after that employee stops working for the original company.  The idea is that in the course of doing his or her job, an employee learns valuable nonpublic information about how the company operates. In addition, an employer may have invested time and money in training the employee.

General Enforceability

Usually, employees asked to sign a noncompete have little choice but to agree if they want to work or continue to work for the employer.  Not infrequently, the question comes up as to whether this sort of agreement can be enforced.  Perhaps predictably, the answer depends on many things, including what state you are in and how stringent the restrictions are.

A few states such as California, Montana, and Oklahoma tend to view enforcement of noncompetes as against public policy and severely limit their enforceability.  Others have specific statutes governing use of noncompetes. Several states apply a “reasonableness” test, with some making an up or down decision based on the noncompete as written and others modifying the restrictions as they deem necessary.  Wikipedia has a very detailed Non-compete clause entry which focuses specifically on enforceability in California, Massachusetts, Ohio, and Virginia.

In Ohio, so long as the employer hasn’t gotten greedy, noncompetes are generally enforceable, even if they aren’t signed until long after employment originally began.  The Ohio State Bar Association’s News You Can Use feature offers a concise FAQ regarding “Are Noncompetition Agreements Enforceable in Ohio?”    In determining enforceability, Ohio courts look at three main factors enunciated in Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E. 2d 544 (1975):

• Whether the restriction is no greater than is necessary to protect the employer’s legitimate interests
• Whether the restrictions impose undue hardship on the former employee
• Whether the restrictions are injurious to the public

How Reasonableness Plays Out

How do these factors work in “real life”?  Of course, every case is different, but there are some general principles. The duration, geographic range, and scope of the prohibition are especially important.  Thus, noncompetes of one year or less are often found enforceable while longer periods become progressively less enforceable. 

Geographic range is related to the nature of the business; if it has a single location and serves only a local clientele, a noncompete prohibiting employment anywhere in the world is unlikely to be enforced.  If there are multiple locations, the prohibited proximity becomes important; restrictions forcing the former employee to work in the next county may be enforceable in these cases.   

Noncompetes which have the effect of preventing any sort of employment by the former employee will generally be found overly broad.  The prohibited activity must be related to the company’s existing or perhaps realistically potential business or industry.

One recent case involving a hairstylist with an eight month noncompete (Charles Penzone, Inc. v. Koster, 2008 Ohio 327 (10th App. Dist.) illustrates how subjective the factors for determining enforceability of noncompetes really are.  It also clearly demonstrates the predominant employer-friendly perspective on the issue which seems to be held by many Ohio courts. 

• The trial court, in part because there was no evidence the hairstylist had done anything other than service former customers who sought her out, refused to enforce the noncompete.  It also felt that forcing the hairstylist to “scrutinize every potential client who walked through the salon door” was an undue hardship and preventing members of the public from utilizing their preferred stylist was injurious to the public.
• The Franklin County Court of Appeals reversed, finding that the hairstylist could easily tell which customers were “off-limits” and that the restriction did not prevent those customers from having other hairstylists service them during the restricted period.  

In another case involving a rival title company hiring away a key employee with a five year noncompete, the United States Sixth Circuit analyzed the issues this way in Chicago Title Ins. Co. v. Magnuson, 487 F.3d 985 ( 2007):

Overall, because Chicago Ttle had critical customer and employee relationships to protect, because these relationships directly affected Chicago Ttle’s ability to compete in the market, because Magnuson could influence the continuity of these relationships, because the [noncompete] Covenant contained appropriate geographic and temporal limits, because Magnuson had other means to support himself (his law degree), and because at least some of Magnuson’s relationships were established or strengthened during his employment with Chicago Title, we find that the district court properly concluded that the Covenant was reasonable for at least two years following Magnuson’s departure from Chicago Title.

So what happens if you violate a noncompete?  Your former employer can sue you for damages which may be lost business because of your actions – this could result in very expensive attorney fees -- and the pending lawsuit will often have the effect of lengthening your noncompete period. 

Clients sometimes ask me whether it matters that they signed the noncompete years ago, apparently in the hope that there is some sort of automatic expiration period.  No it does not matter how long ago or how recently you signed the noncompete.   

What if other people have left and the employer has never really enforced the noncompete before?  Well, maybe you might have something here.  This is, by the way, why you should expect to be sued if you violate a noncompete; failing to come after you might make it more difficult for the employer to enforce the noncompete later against someone else.

What if the company gets sold to a new owner?  Read my post on "Can a New Owner Enforce a Noncompete Made by an Employee with the Prior Owner?"

Drafting Tips for Employers

From an employer perspective, the key is to be realistic about the restrictions placed upon former employees.  A 2006 article in HR Magazine by Stephen L. Richey entitled “Tailor Non-competes to a T: a One-Size-Fits-All Non-compete Agreement Won’t Pass a Judge’s Inspection” provides several helpful hints about what to think about.  Employers can also take some comfort in the fact that Ohio courts will usually modify noncompetes that go too far rather than simply refusing to enforce them at all.  

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Anita Campbell of the Small Business Trends blog has recently offered an interesting post inviting small business owners an opportunity to Monetize Your Website or Blog by Offering Trade Magazines.  Check out both the publications available that you might like  and how you can participate if it seems like a good fit to you.

Anita explains that TradePub.com is a way to get B-to-B trade publications for free and links to the TradePub.com feature on her site.  According to Anita, TradePub.com is now looking for additional blogs and websites interested in affiliating with TradePub.com to offer a trade publication storefront on their website.  In addition to offering an additional service to visitors to your site, you will get paid a fee, varying by publication, for each new subscription your readers make through your storefront.  The fee may be as little as a dollar per subscription, but can also be as much as $5 or $10, or in a few cases, even $20.

I took a look at the publications available and was surprised at the range.  Virtually every industry seems to be represented.  Within minutes, I found two that seemed like they'd be useful to me, including one called The Deal which is described as "the indispensable newsweekly for all dealmakers covering M&A, bankruptcy, private equity, venture capital, law & tax, corporate."  The confirming e-mail said it might take up to 12 weeks for the subscription to kick in, which was a little disappointing, but then I suppose you shouldn't expect too much for free.

As far as signing up to be an affiliate, I'm still thinking about that.  It certainly sounds like a good program.  From what Anita says, it also appears to be low maintenance from the site owner perspective.  Anita also points out that once you sign up, you get stats about which publications are of the most interest to your readers and that can give you useful information about topics your readers are interested in.

To become an affiliate, you must sign-up with RevResponse.

• for more information on how the program works, click here or here.

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 I've often said that I consider TAX a four-letter word.  So I was most pleased when CPA Karen deLaubenfels accepted my invitation to make a guest post on this very subject. 

>>>>>>>>>> So, without further ado, KAREN DELAUBENFELS on TAX:....

A business tax issue that is somewhat neglected is owner tax basis, which is, roughly speaking, the owner’s stake in the business. Tax basis of business ownership is a topic of interest regardless of entity choice because it can affect the amount (and whether)  you may owe the government for taxes.  However, we focus here on the tax basis of a corporate shareholder.   

Many entities aside from actual corporations, such as LLCs, may wish to be taxed as a corporation under the “check-the-box” regulations, which allow the non-corporate entity to choose whether to be taxed as a “flow-through” partnership/sole proprietorship or a C (regular) corporation. The C corporation can then elect to be taxed as a “flow-through” S corporation, as Teri Rasmussen mentions in her article, "Taking the Plunge - How to Choose the Right Business Entity for Your Business." In a “flow-through” entity, the owners are taxed on their share of the company’s income, regardless of whether they receive any actual distributions of cash or property. Many of these non-corporate entities choose to be taxed as S corporations to maintain the flow-through aspect of the business, while avoiding possible ambiguity about whether owners may be treated as employees, allowing for withholding and tax-free fringe benefits available only to employees. Regardless of the entity choice, though, basis is a key player in determining taxability of any distributions to owners.

Each business owner has a tax basis in that ownership, unique to that individual. This basis is often, roughly speaking, the owner’s investment, plus earnings of the business, minus distributions to the owners and losses of the business, although the calculation differs somewhat depending on the type of business entity. We’ll focus on an entity that comprises 61.9% of the total number of corporations in the U.S. according to 2003 IRS statistics: the S corporation.

So what happens when the owner of an S corporation takes a distribution of cash or property? The short answer is that it’s generally not taxable, since the owner has already been taxed on the flow-through income; however, the exceptions to this general situation can have serious tax consequences for the business owner, and deserve a look.

An S corporation has a different set-up than other business entities, and is distinct even from other flow-through entities. The owner’s basis in shares of stock generally begins as just their cost, as with any other corporate shares; however, whereas the C corporation owner’s stock basis doesn’t change, the S corporation shareholder’s basis in the shares is a moving target, changing with corporate earnings and the owner’s contributions and distributions. In addition, if the owner makes any loans to the S corporation, there’s an additional quirk of the S corporation, loan basis. Although loan basis is beyond the scope of this post, it should be noted that it can affect the deductibility of corporate flow-through losses, and is thus worthy of consideration by the S corporation shareholder as well. 

Whether a distribution to the shareholder is taxable or not depends on whether the corporation has sufficient AAA, PTI, AEP, and OAA, and then on whether the shareholder has any tax basis in his/her shares.

This jumble of letters deserves some explanation. 

• AAA (the Accumulated Adjustments Account) tracks the corporation’s contributions, taxable earnings/losses, and distributions. A positive balance in this account represents corporate earnings that have been taxed as flow-through income, but not yet distributed to owners.

• PTI (Previously Taxed Income) is an “old-school” analog of AAA, which is only (possibly) relevant for S corporations that were in existence before 1983.

• AEP (Accumulated Earnings and Profits) is only (possibly) relevant for S corporations that were formerly C corporations. AEP is a topic in itself, and deserves its own separate discussion. For now, let’s note that any distributions from AEP are taxable as corporate dividends.

• Finally, OAA (the Other Adjustments Account) tracks the corporation’s non-taxable items affecting shareholder basis. This would include such items as tax-exempt municipal bond interest and “key person” life insurance proceeds, along with their associated non-deductible expenses.

Every time a cash or property distribution is made to shareholders, it reduces the balances in these accounts, in the order given above. As long as distributions do not use up AAA and PTI, they are not taxable. If AAA and PTI are gone, any distributions are next deemed to come from AEP, and are taxable as regular corporation dividends, subject to lower tax rates at present. When AEP is gone, distributions are deemed to come from OAA, and are again not taxable.

Next, though, we have the situation to watch out for, as it’s generally avoidable with good tax planning: If AAA, PTI, AEP, and OAA are consumed, the distributions are a return of the shareholder’s capital, lowering his basis in his shares. Once basis is used up by distributions, any additional distributions are taxable gain to the shareholder. 

Do you need to know your AAA, PTI, AEP, and OAA?  If your corporation has ever been a C corporation, you need to look at all four. If not, you need at least AAA; if you sell your ownership interest, your taxable gain may be reduced by your share of any positive balance in the AAA account.

Do you need to know your tax basis in your corporate ownership?  Absolutely. How else will you know whether your distributions have crossed the line from tax-free to taxable gain? 

Karen L. deLaubenfels, CPA offers accounting advice, including a full line of tax consulting and preparation service, to clients in Central Ohio.  She also offers Quickbooks consulting and bookeeping services.   For more information, you can visit her website at www.karendcpa.com,  

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In recent years, the concept of having an "advisory board" has grown in popularity.  Should your business have one and, if so, how do you get one set up?

An advisory board is similar to a board of directors in some respects, but there are some important differences.  An advisory board is a small group of hand-picked professsionals offering advice to a privately held business in areas the owners may feel they lack skills or experience.  It differs from a board of directors because members of a board of directors make decisions on behalf of the company while an advisory board simply offers suggestions and ideas which may or may not be acted upon.  In addition, those serving on a board of directors have fiduciary duties to all of the company's owners, and in some cases to creditors and other third parties.  

Usefulness of Advisory Boards.  Advisory boards may be particularly useful for more recently formed companies or companies in transitioning to a larger presence in the marketplace, but more established companies can also benefit.  For small businesses with only one or two owners, advisory boards can be a useful resource giving more structure to decisionmaking.  Among the ways an advisory board can be useful are:

• Strategic Planning.  For companies in transition, having advisory board members who may have "been there, done that" can be helpful in mapping out where a company may want to go next and in providing a reality check as to what may be needed to get there. 
• Practical Advice and Evaluation.  Advisory board members can fill gaps in business knowledge and be a good sounding board in making ordinary business decisions about personnel policies, prospective business partners and opportunities, marketing and pricing strategy and tactics, etc.
• Leverage and Influence.   The knowledge, contacts and experience of advisory board members can sometimes lend credibility and clout to the company in its marketplace.  

Putting an Adviosry Board Together.  So how do you get an advisory board put together?  Various nonprofit groups offer advisory board programs.  For example, the Womens Presidents' Organization offers peer advisory boards for its chapter members  In addition, in Columbus, the Advisory Board Exchange - an initative of Business First - offers an ongoing program open to applicants averaging at least $3 million in revenue annually over the past three years and which are headquartered in Central Ohio. 

Another possible organized advisory board alternative  is the Athena PowerLink program sponsored by the Columbus National Association of Women Business Owners (NAWBO) chapter.  One woman-owned business is selected as a recipient each year and provided a custom-tailored group of advisors for a year.  Applicants must have been in business for at least two years, have at least two employees, and generate annual revenues of at least $250,000 for manfacturing concerns or $100,000 for service companies.

Business owners can also put together an advisory board on their own, perhaps starting by asking an attorney, CPA, or financial advisor to serve on the advisory board.  Retired executives may also be good  prospects.  In addition to having a genuine desire to help a business grow and mature, these professionals enjoy the opportunity to meet and become acquainted with other like-minded professionals. 

  .

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If you've been in business long at all, somewhere along the line there may well have been some sort of dispute about the amount a customer owes.  And if you've had any contact at all with an attorney, you have undoubtedly been told to watch out for "payment in full"  situations in which you receive checks purporting to be "in full satisfaction" or containing some similar endorsement indicating that the customer intends this payment to be it.  In fact, if you're in Ohio, you have probably been admonished (and maybe even established as policy) that any check accompanied by a such a restrictive endorsement, or any cover correspondence using this language, MUST be returned to the customer. 

Simple enough.  But suppose you receive a cover letter enclosing a check for less than the amount owed which doesn't use these "magic" terms of art?  What if the letter specifically states that it is not placing any restrictive endorsement on the check to you, but hastens to add something to the effect that this is all the money we believe is owed to you?

In Ohio, the answer has changed over the years.   Prior to the 1989 Ohio Supreme Court case of AFC Interiors v. DiCello, 46 Ohio St.3d 1, 544 N.E.2d 869 (1989), creditors faced the dilemma of having to choose between  accepting the lesser amount offered and writing off the balance or rejecting the partial payment being offered in favor of pursuing the debtor for the entire amount due.  If a check offered "in full payment" or "in full satisfaction" was cashed by the creditor, the remaining amount owed simply could not be recovered.

From 1989 through 1994, there followed a glorious period for creditors in which they could rely upon Ohio Rev. Code 1301.13 to take the partial payment AND still pursue the debtor for the balance if they did so while make a "reservation of rights".  Thus if the creditor endorsed the check by writing words such as "under protest" or "without prejudice" just above their endorsement before cashing the check, the creditor had managed to have its cake and eat it too.  In this way, creditors accepted the partial payment, applied it against the balance owing and then were permittred to continue further collection efforts.  

All this changed in 1994 when Ohio adopted the revised version of Uniform Commercial Code Articles 3 and 4.  As a result of the change in the law, making a reservation of rights was no longer possible.  In addition, if the partical payment was accompanied by correspondence indicating that the payment was ended to satisfy the obligation in full. cashing the check meant that the creditor could not pursue the trmaining ballance.  New Ohio Rev. Code 1303.40 (A), which remains in effect today, provided that

the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.

 This had the effect of returning Ohio to the pre-1989 common law era.

So, today, do not be fooled if receiving a partial payment check.  In addition to the obvious situation in which it is clearly marked as "payment in full", you must also pay attention to the correspondence accompanying the payment.  If that correspondence indicates that the sender does not intend to pay the balance, then you are cashing the check at your own risk, even if there is no restrictive endorsement placed  on the check.  

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Perhaps you remember the Saturday morning cartoon The Jetsons featuring poor George Jetson and his trials and tribulations in a future filled with all manner of technological conveniences.  (Click here if you've just been hit with a wave of nostalgia and want to relive episodes.)  George's job at Spacely Space Sprockets mostly consisted  of pushing a button at his computer, sorta like all of us do now. 

While George may have intended to make contracts with the push of the button, we don't always realize that's exactly what we've done.  Sometimes it's not "just" e-mail - you just made a binding contract.

Most of us think of e-mail as an informal casual form of communication.  As a result, we tend to be much less careful about what we say than when we put it in an old fashioned letter. And that could be trouble when sending e-mail about the terms of a business deal you think you're still "just" negotiating.  I've posted before about how a series of letters exchanged between two parties can sometimes result in a contract being formed.  The same thing can happen with e-mails, or even voicemail.

Uniform Electronic Transaction Act. Ever heard of the Uniform Electronic Transaction Act (UETA), codified in Ohio in 2000 as Ohio Revised Code Chapter 1306?  It takes contracts into the 21st century by expanding the meaning of what it means to be the time honored "written agreement" and "signature" needed to form a binding contract enforceable against the parties to it. 

The UETA defines an "electronic record" in such a way as to include both e-mail and voicemail.  In addition, an "electronic signature", defined as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted  by a person with the intent to sign a record", can easily include something as simple as typing your name at the end of an e-mail or even just saying your name when leaving a voicemail. 

The provisions of UETA apply whenever the parties have agreed to conduct negotiations by electronic means.  Importantly, no formal agreement to use these channels is necessary - it can be implied from the surrounding situation and circumstances, including the conduct of the parties.  So... if you use e-mail to work out and close a business transaction, you are potentially at risk for creating a binding contract before you may have intended to do so. 

Real Life Example.  Is this really a potential problem or is it just another of any number of "parade of horribles" that never actually happens in "real life"?  Consider the following e-mail exchange in a recent case (Klebanoff et al. v. Haberle et al., 978 So.2d 598 (La. App, 2008)) regarding the purported settlement of a dispute involving a mineral lease:

• Phillips: "If you want, you can just propose [the plaintiffs} pay me for what I have in the deal and I will convey my interest to them."
• Scott: "We agree to this proposal of settlement."
• Phillips: Demands payment in full, saying "I will not finance.... would expect to be paid for what we have invested at which point we would convey the interest over."
• Scott: Offer accepted, but also says, "Now it seems as if the only issue that we do not have a complete meeting of the minds with respect to is how much your aunts will 'finance' this transaction/compromise and how much time you will allow them to do it."  Includes other comments, including gratuitous comment that plaintiffs had been "coerced" into signing over the interest at stake.
• Phillips: "I wll no longer try to work with you, your clients can either pay $56,136,10 in two weeks or I will have my attorney contact you.... Please let me know how you would like to proceed."
• Scott: Indicates "thrown for loop" by demand for immediate payment instead of payment plan, but says, "Nevertheless, subject to working out the financing aspect, we have a compromise.  I will do what I can do to scrounge up some financing for Carla and Melinda."
• Phillips: "If I don't receive the money before the logging of the 30-3 the deal is off and you will have to resume litigation....  Expect a letter outlining our conversation and my proposal from my attorney.  I will have [the accountant] include the information you requested below."
• Scott: "I am pleased we have a deal.... I look forward to hearing from your attorney so we can get this matter concluded." 
• Phillips: "What deal do we have?  The 33% back in after payout or the payment of the un-recovered funds before logging the Frierson 30-3."
• Scott: Inquires why hasn't gotten the documentation "to close our settlement of a return assignment of yours and Haberle's interest in the Yarber lease for the unrecovered amount of $56,000."
• Phillips: "The 33 percent back-in is the current structure....  However, I would rather just get the money I have in it back and move on....  We can make the deal effective Feb 1 and any additional funds received will be forwarded to your clients."
• Scott: Advises that $$ ready to be transferred and requests assignment documentation to be executed.
• Some back and forth e-mails about the assignment and preparation of a general release.  Scott eventually files with the Court to enforce the settlement.

>>>>> Court determined that the parties had indeed reached a binding agreement, saying:

the parties'positions were clearly expressed in writings which are recognized under the [UETA].  The object of their communication was never anything other than a compromise,  We find no presumption of an intent not to be bound until the execution of a contract in a special form. 

So what should you do?  Stop using e-mail and voicemail?  Well maybe yes if you want to be super safe.  But for the rest of us who can't imagine how we ever did business without e-mail and voicemail, the best answer is to be just a little more careful in using e-mail and voicemail.

• If you're frequently using e-mail to reach a deal with someone, it may be a good idea to add a standard disclaimer below your signature line indicating that the message is not intended to form a binding contract until ultimately reduced to a single document signed by both parties.  If you don't want to include this sort of disclaimer on all your e-mails, at least mention something early on, and perhaps later as well, about how of course everything needs to be reduced to a separate written agreement and reviewed by your attorney before it becomes binding. 
• When leaving a voicemail, don't get so specific on all the terms unless you really are at the point that you're ready to have a deal.  Sometimes it might just be better  to leave a short "call me" message.

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Now that I've been doing this law blog thing for about eight months, I've had a chance to get acquainted with my neighbors in the blogosphere.  There are of course my subject matter compatriots all across the country that I've enjoyed coming to know through their blogs (Chris Moander of the relatively new Wisconsin Business Law and Litigation blog and Rush Nigut of Rush on Business from Iowa (the home in my youth) especially come to mind).  But today I wanted to focus on my geographically proximate neighbors practicing law in Ohio while writing their blogs.  

Like anyone else I have my favorites.  I don't claim to be any arbiter of quality or worth so the following is really nothing more than what I've found I've liked the most so far. 

Perhaps my own personal favorite Ohio-based blog is The Briefcase which has been published by solo practitioner Russ Bensing for quite a while.   It promises to provide "commentary and analysis of Ohio law" and it certainly delivers.  Russ gives brief summaries and case updates of Ohio civil and criminal cases decided by the various Court of Appeals and the Ohio Supreme Court with a bit more criminal than civil cases.  While this is of course useful, his regular "Friday Roundup" feature focusing on the more entertaining legal cases out there is a must-read for me every week.  In addition, even the case updates and summaries are given with a definite bit of "attitude" that makes them much more interesting than the usual dry case summary.  And his "About" section is particularly well done.  Russ's stuff is not often the sort of thing I tend to link to (which may say more about me than him), but I certainly appreciate his contributions.

My other "substantive" favorite  Ohio-based blog is the Ohio Employer's Law Blog published by Jon Hyman of Kohrman, Jackson & Krantz  for more than a year.  Its tagline is  "Practical employment law information for businesses in Ohio and beyond."  What I like about this blog is Jon's well written, informative, and useful (even "practical") posts about important issues in the labor and employment law areas.  I also think Jon's analysis of the legal issues he covers is clear and seems right on point.  In addition, I like his regular "What I'm Rreading" series which features several quick links to other interesting posts around the blogosphere.  I don't practice in this area so I appreciate having such excellent resource available to keep me up to date about pertinent legal developments. 

Ohio Employer's Law Blog is one of two Ohio-based blogs focusing on employment and labor issues.  The other is Porter, Wright, Morris & Arthur's Employer Law Report which says it will be "Reporting on recent legal developments and trends affecting employers".  It has been published sporadically over the last couple of years, but now seems to be adding new worthwhile posts more frequently. 

The D&O Diary published by Kevin M. LaCroix of Oakbridge Insurance Services, an insurance intermediary focused exclusively on management liability issues, focuses on perhaps the most complex issues of any Ohio-based law blog.  It is intended to be "A Periodic Journal Containing Items of Interest from the World of Directors and Officers Liability, with Occasional Commentary".  I haven't had much chance to become fully acquainted with this blog yet, but hope to so in the near future.

When it comes to coverage of both substantive and professional developments of interest to Ohio lawyers, I like the Cleveland Law Library Weblog the best.  It explains that "our goal is to inform local attorneys of major legal developments important to their practice".    I often find ideas for posts by reading this blog and appreciate the links usually provided.  The Cincinnati Law Library Blog  and the Moritz Legal Information Blog which provides "Legal Information and Research Resources Brought to You by The Michael E. Moritz Law Library at The Ohio State University" also provide these sort of services.

One of the newest Ohio-based law blogs is the Ohio Real Estate Blog published by the attorneys of the Real Estate Practice Group of Kohrman, Jackson & Krantz which started up only a couple of months ago in April.  In same real estate practice area is the Build on This! blog published by the attorneys of the Real Estate and Construction Practice Group of Buckingham, Doolittle & Burroughs, LLP which offers "Current news, information, and events affecting the real estate, construction and land use industry and its professionals".

Another recent addition to the blogosphere is the Reasonable Doubts blog published by Jeffrey Davis.  It started in March 2008 and, as its name would suggest, focuses on crminal law.  In addition, the Ohio Family Law Blog, published by Robert Mues of Holzfaster, Cecil, McKnight & Mues, LPA, began in December 2007 and tries to provide "Family Law and Divorce Information for Ohio Families Seeking Solutions".

Interestingly, there are TWO Ohio based law blogs called Sixth Circuit Blog.  One seems to focus on criminal law and offers "Case summaries and commentaries by federal defenders of the Sixth Circuit".  The other, published more sporadically by Eric Zagrans, focuses primarily on civil law and is "Devoted to Appellate Law and Practice Within the Sixth Circuit and Its Constituent States"

Rounding out the roster of Ohio-based law blogs (at least those I'm aware of) are the following with which I am less familar, in part because they relate to areas of law with which I have less experience in my day to day practice:

• The Ohio Trust and Estate Blog published by Michael D. Bonasera of Buckingham, Doolittle & Burroughs, LLP
• Tsibouris & Associates Law Blog published by the attorneys at Tsibouris & Associates 
• Consumer Rights Law Blog published by Ron Burdge  and focusing on "Motor Vehicle Lemon Law, Consumer Protection Law, Car Law, News, Notes, Issues, and Updates"

While there are several newer Ohio based law blogs, there are also many that have been published for two or three years or even longer.  There are also some earlier Ohio-based blogs that are no longer publishing.  In addition, there are several "business" blogs based in Ohio that touch on legal issues from time to time, but that's a subject for another day.

I hope I haven't forgotten anyone, but if I have, just add a comment with your URL and then we'll know about you too. 

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From the comfort and convenience of my office computer this morning, I watched the oral argument before the Ohio Supreme Court in Dombroski v. Wellpoint, Case No. 2007-2162.  In this case. the Court was asked to answer the question "when may a tort plaintiff pierce the corporate veil to pursue recovery from a "parent" corporation".  The Court allowed both sides substantially more than the allotted 15 minutes each, asking both attorneys numerous questions. 

• As an aside I want to mention how wonderful it is to be able to see Ohio Supreme Court oral argument without the hassles of parking and transportation. The Ohio Supreme Court has been doing this since early 2004. but this was my first experience utilizing the option. Not only did I save the time coming and going (in pouring rain today I might add), I tuned in a little early and was able to work on other matters right up to the minute oral argument began. The picture is clear and shows close-ups of the attorneys and Justices as they speak. The sound quality is terrific. In many respects, this was actually better than going in person.  You can still see the oral argument by going to the video archives.
• I have a case coming up shortly before the Ohio Supreme Court which does involve the corporate veil piercing issue. So I suppose I'm just a little more interested than I otherwise would be, even though at the moment we're only up on a preliminary procedural issue. (If I don't win on that, we'll be back on the corporate veil piercing issue later.)

Suzanne Richards of Vorys, Sater, Seymore & Pease argued on behalf of the defendant-appellant "parent" company shareholder against which plaintiff-appellee Dombroski seeks recovery.  Robert Palmer appeared on behalf of Ms. Dombroski.  Both attorneys were extremely well prepared.  Although the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation jointly submitted an amici curaie brief in support of the defendant parent company, they did not participate in the oral argument.

Factual and Procedural Background.  In a nutshell, the most salient facts are that Ms. Dombroski was denied insurance coverage for a procedure deemed "experimental".    Ms. Dombroski had a health insurance policy issued by defendant Community Insurance Company ("CIC") which utilized Anthem  UM Services, Inc. ("AUMS") to administer its policies and process claims.  Still another company, Anthem Insurance Companies, Inc.  ("AICI") defined the scope of the coverages under CIC policies.  CIC, AUMS, and AICI were all subsidiaries of  defendant Wellpoint, Inc. ("Wellpoint").  Coverage was apparently denied as a result of a blanket policy by defendant AICI.  Dombroski sued everyone for bad faith denial of her claim.  Counsel for Ms. Dombroski conceded that undercapitalization was not an issue.

AICI and Wellpoint filed motions to dismiss each of them as a party defendant on the grounds that the contract was with CIC and not with them and there was no grounds for bypassing the corporate entities.  The trial court agreed, but the Seventh Appellate District Court of Appeals reversed, holding that the second prong of the Belvedere test could be satisfied through the showing of an "unjust" or "inequitable" act even if it did not rise to level of fraud or illegality  On appeal, the proper interpretation of Belvedere for determining when it is appropriate to pierce the corporate veil was certified because of a conflict among the Courts of Appeal.

Oral Argument Synopsis.  All of this is a very long introduction to the oral argument itself.  Counsel for Wellpoint emphasized that the second prong of  Belvedere required the parent company/shareholder to have "perpetrated a second wrong" by deliberately destroying the ability of the defendant subsidiary to satisfy any judgment against it.  Counsel for Ms. Dombroski emphasized that "piercing the corporate veil" is an "equitable argument" and that insurance bad faith claims are "fairness torts".  He also emphasized thhat Wellpoint set corporate policy for the subsidiaries.  Several of the Justices seemed to have difficulty understanding the complete corporate structure and a couple asked if perhaps the case was not yet ripe for determination.

Justice Pfeifer suggested that perhaps the Court didn't think all that carefully about  the test formulated in Belvedere because the veil piercing was a relatively small part of that case and that the whole test should be re-evaluated.  Later in the oral argument, he posed the question of what would happen if and when the plaintiff tried to depose the nonparty parent regarding the establishment of the policy leading to the denial of coverage.

Chief Justice Moyer suggested that, although the question certified was the proper interpretation of Belvedere, the case could actually be decided on much narrower grounds.  He posited that if a medical insurance company sets up a subsidiary with the purpose of hindering recovery by plaintiffs, that would be "illegal" and easily fall within all interpretations of Belvedere's second prong.  Justice Lanzinger later asked a similar question.

Justice Stratton seemed to think (and I tend to agree) that Dombroski should have an adequate direct claim against CIC and consequently no veil piercing argument was necessary.  Justice O'Connor was concerned that focusing on whether an "unjust" or "inequitable" act might "open the floodgates" for litigation in this area; she indicated that she felt that there had to be "some level of dishonesty"  before recovery could be had.      

My Thoughts.  I tend to agree that more must be proven than just that there was an "unjust" or "inequitable" act perpetrated on the plaintiff to justify piercing the corporate value.  Otherwise the three prong test of Belvedere is really collapsed into a single inquiry.  I also think that sometimes the world is not fair and people who really don't deserve it suffer misfortune; I don't think that someone else should be held responsible for this occurrence in every case.

At the same time, I am not altogether sure that the more stringent test really helps the defendant "parent" company in this particular instance.  It does seem to me that the multiplicity of subsidiaries may well have been set up to thwart policyholders seeking to challenge denial of coverage.  To the extent that is true, I think the parent company may have abused the underlying  conceptual policies of limited liability and should be denied the benefits of that legal doctrine as a consequence.

I am also concerned, however, as to what effect a more "flexible" standard for determining when piercing the corporate veil is permissible would have on closely held companies with a limited number of individuals as equity owners.  Here, especially, something more sinister than suffering by the plaintiff ought to be required.  If that is all that is necessary, then every complaint should include a count seeking the piercing of the corporate veil.  Almost by definition, if there is any actionable claim at all, it is because something "unjust" or "inequitable" happened to the plaintiff.

Perhaps the answer is to introduce further confusion by bifurcating the standards for piercing the corporate veil, having one applicable only to closely held entities, or at least to imposing personal liability against individuals, while the other is applicable only to more sophisticated transactions.

Oh yeah - how do I want it to come out to help my case?  I like the Belvedere standard just as it is, thank you, and wouldn't mind if you made it even more restrictive.

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Everyone hates insurance companies, especially when they deny individual policyholders coverage for medical treatment.  But does that mean that corporate formalities should be ignored to permit the unfortunate policyholder to bring an action against the parent company of the subsidiary denying coverage on the grounds of a bad faith breach of the insurance policy contract?  Is it enough if the Court finds that "unjust" or "inequitable" acts have occurred even if they don't rise to the level of fraud or illegal action?  On its face, that is what the Ohio Supreme Court is called upon to decide in Dombroski v. Wellpoint, Inc., et al., Case No. 2007-2162 when  it hears oral argument in the case on Wednesday (June 4, 9 AM, third case on the docket) this week.    

Interpreting Belvedere.  However, the Ohio Supreme Court has taken the opprtunity to resolve a conflict among Ohio Courts of Appeal concerning what is required to"pierce the corporate veil" and impose liability upon a corporation's shareholders or upon the parent company of a corporate subsidiary.  In a January 23, 2008 Entry, the Court ordered the parties to brief the following:

Does the second prong of Belvedere Condominium Unit Owners' Assn. v. R.E. Rourke Cos.. Inc. (1993), 67 Ohio St.3d 274, which states that the corporate veil can be pierced when control of the corporation "was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity" also allow the corporate veil to be pierced in cases where control was exercised to commit unjust or inequitable acts that do not rise to the level of fraud or an illegal act?

The Ohio Supreme Court's Communications Office has prepared a concise summary of the factual and procedural background of the Dombroski case, as well as the specific insurance-related issue presented.  You can see and hear the oral argument from the comfort of your own computer, either live or in the archives as early as close of business on the day of oral argument, through the use of streaming video technology. 

By consulting the Supreme Court's on-line docket, you can also review or download the briefs filed in the case, including an amicus curiae brief filed jointly in support of the appellant-defendant parent company by the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation.  The defendant-appellant's brief has a rather extensive survey of caselaw in Ohio and elsewhere addressing the proper standard for "piercing the corporate veil." 

Deciding What It Takes to "Pierce the Corporate Veil".  The Belvedere decision established a three prong test to be met before a corporate form may be disregarded and shareholders held personally liable for the misdeeds of a corporation, namely:

• Control over the corporation by those to be held liable so complete that the corporation had no separate mind, will or existence of its own.
• Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.
• Injury or unjust loss resulted to the person seeking to disregard the corporate entity from such control and wrong.   

Some courts, including the Seventh Appellate District Court of Appeals below in the Dombroski case (173 Ohio App.3d 508, 2007-Ohio-5054, 879 N.E.2d 225), have broadly interpreted Belvedere to include situations in which the corporate form was abused to the detriment of the plaintiff, but no illegal act or intent to defraud could be shown.  These cases include:

• Wiencek v. Atcole Co., Inc. (3d Dist. 1996), 109 Ohio App.3d 240, 671 N.E.2d 1339
• State v. Tri-State Group, Inc. 2004-Ohio-4441 (7^th App. Dist.)
• Stypula v. Chandler,  2003-Ohio-6413 (11^th App. Dist.)
• Sanderson Farms v, Gasbarro, 2004-Ohio-1460 (10th App. Dist.)
• Dalicandro v. Morrison Rd. Dev. Co., Inc., 2001 Ohio App. LEXIS 1765 (10th  App. Dist.)
• Robert A. Saurber Gen. Contractor v. McAndrews 2004-Ohio-6927 (12th App. Dist.)

• Collum v. Perlman, 1999 Ohio App. LEXIS 1938 (6th App. Dist.)
• Widlar v. Young, 2006-Ohio-868 (6th App. Dist.) 
• Nursing Home Group Rehab. Serv., LLC v. Suncrest Health Care, Inc., 162 Ohio App3d 577, 2005-Ohio-3945
• Siva v. 1138 LLC, 2007-Ohio-4677 (10th App. Dist.)

What Should the Standard Be?  Many of the cases involving "piercing the corporate veil" focus on smaller privately held corporations in which the individuals constituting the shareholders have not adequately capitalized the business enterprise, commingled corporate and personal funds, or otherwise ignored corporate formalities.  In these cases, it is fairly easy to reach the conclusion that the corporate form should be disregarded.

The Domboroski case presents a more difficult situation.  As explained in plaintiff Dombroski's brief:

The facts in Dombroski present the challenge of how the doctrine of piercing the corporate veil is to be applied in the realtiy of today's insurance organizations, which frequently includes a parent corporation that does business through many subsidiaries.... Multi-state insurers, such as WellPoint or "nthem", which run its insurance business through affiliates while utilizing an integrated and centralized web of policies and procedures seek to return to the "good old days" when they were free to refuse or pay claims - for good reasons, for bad reasons, for no reason at all - safe in the knowledge that regardless of the unjust resulta their decisions bring to their insured....

However, I agree with the appellant parent company and amici curiae that encouraging the expansive view of "piercing the corporate veil" advocated by plaintiff Dombroski is likely to result in shareholders, particularly in closely held companies, being added as defendants virtually anytime the company itself is sued.  As the amici curiae  brief puts it:

If the opinion below is upheld by this Court, shareholders of Ohio corporations would face being haled into court and held personally liable whenever a tort claim is asserted against the corporation, or the corporation is alleged to have violated a regulatory statute, or the corporation is portrayed as having engaged in conduct that is characterized by the plaintiff as "unjust or inequitable."  Such a result would have devastating consequences for the concept of limited shareholder liability and for the ability of small business owners to use the corporate form as a successful engine for economic growth, jpb creation, and social progress.   

The defendant-appellant parent company's brief makes the further point that:

Because it jettisons the most salient factor of proper veil-piercing analysis - that the shareholders must misuse the corporate form to perpetrate a fraud or an illegal act - the appellate court's interpretation will make veil piercing more common. That result, in turn, would make it less likely that entrepreneurs will form corporations and that investors, large and small, will invest in those corporations as they conduct business activities and help the economy to grow.

My concern here is that the desire to rein in insurance companies, and what some might perceive as their arrogance, will result in "bad law" being established in this area.  While it might seem attractive under the facts of this case to be less insistent upon requiring a demonstration of fraudulent or illegal intent, the result will certainly give both large and small businesses pause.  If the focus of the "piercing of the corporate veil" analysis shifts from the actions and motivations of the company's owners to the nature of the plaintiff's loss, the utility of the corporate form will become much less for businesses.  Ohio's business climate will be viewed even less favorably.

It will be interesting to see how this case unfolds.   

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Your business supplies a service or product to a customer and then bills the customer.  One month goes by, then two, and you hear nothing from the customer - no payment, no complaint, no explanation.  By the third month, you are probably becoming rather irritated at the very least and depending on how things are going financially, may be getting a bit concerned.  Or perhaps you've called the customer only to receive a series of excuses and promises that payment will soon be forthcoming.  What do you do?

Chris Moander of the Wisconsin Business Law and Litigation blog has been making a series of posts about how and when to make the decision to go to court to collect these sort of delinquent accounts.  My favorite, with the attention-getting title of "Would lower legal bills motivate you to organize your files?", explains what sort of information and records are helpful to your attorney when you turn the account over ro him or her for collection.  

What to Give Your Attorney.  I agree with everything on Chris' list and with his general point that the more organized information you can give your attorney about a delinquent account, the more quickly -- and inexpensively -- things can move forward.  While all of the items mentioned by Chris are certainly helpful, here's my list of what I find especially useful when I am asked to file a lawsuit against a customer who hasn't paid as agreed:

• Basic contact information (i.e.name, address, phone) of customer
• Credit application, purchase order, or contract documenting the purchase
• Invoice
• Ledger or account history for at least the last 3-4 months
• Copy of any checks previously sent by the customer (or information about the bank used by the customer)
• Any correspondence (including e-mails) exchanged (i.e. sent to, or received from) the customer relevant to the outstanding debt
• Any pertinent information about general nature or length of the relationship with the customer, i.e. was it generally good before this or has this customer always been difficult, is this a huge part of your revenues

With this information, I can get a fairly good idea of what the best approach might be and have what I need to file a lawsuit.  Getting it on the front end saves both time and money.

Why Collect?  Chris also addresses the question "Why collect?", and in another post entitled "Time to call Mr. Wolf", provides some guidelines concerning when it might be time to turn the matter over to your lawyer.  Again I agree wholeheartedly with Chris, but let me add some additional thoughts.  As far as the "why", that much seems rather self-evident.  Unfortunately, the world is not a perfect place and not everyone voluntarily does what they should.  If you're not willing to force the issue of payment when appropriate from time to time, it won't be long before you find you're not making any money and may have to go out of business altogether.

Deciding When to Pursue Legal Action.  Knowing "when" to pursue payment through legal channels and "when" it might be helpful to turn the matter over to your attorney is more complicated.  As Chris suggests, if any of the following are true, it probably is time to "go legal":

• The account is 90 days past due, and in some cases, even sooner.  If you wait too long to pursue legal action, events and circumstances may have occurred in the interim which make the legal option less effective
• Suddenly there's a "problem" with the product or service sold or the customer now has some other dispute with you and the customer wants some or all of their money back.  Of course in many cases, it makes good business sense to just go along with the customer and give a discount.  However, make sure you are doing that in appropriate cases.
• You've endured a series of excuses and broken promises that payment is right around the corner.

There are also times when it probably doesn't make sense to play the "legal" card:

• If there really was a problem or defect in the service or product, even if it wasn't near as big a deal as the customer is now making it
• The amount at stake is relatively small (or relatively small in comparison to the complexity of the situation resulting in nonpayment - read, lots of legal fees to sort through the facts and counter-allegations)  
• You have very important noneconomic reasons for wanting to avoid a dispute - perhaps it's your wife's brother's business
• Someone in your company engaged in some sort of objectionable behavior or made what could be characterized as misleading statements to the customer about any aspect of the business relationship between you (e.g. one of your sales people said somethingto the customer about waiting for the customer to get back on their feet before pressing for payment)
• There's virtually no chance the customer has any money or assets available to pay any judgment obtained

Thus knowing "when" it's time to pursue legal action is a case by case decision.  Often the choice will not be clear-cut. 

Once you've made the decision to pursue legal action, if the debt is small, you may still be able to handle it without the intervention of a lawyer if you really want to do so.  In Columbus where I live and practice law, and elsewhere throughout Ohio (and probably in other states as well), there are "Small Claims Courts".  In Ohio, these courts only have jurisdiction to hear matters involving $3,000 or less.  In addition, while it is possible for an officer or employee of the company to handle the case on behalf of the company without an attorney, he or she may only present documents such as invoices and testify only about facts of his or her own personal knowledge; no questioning or cross-examination of the customer's witnesses is permitted.  The Small Claims Division of the Franklin County, Ohio Municipal Court has prepared a very useful synopsis of how this court works.

If you decide to consult an attorney, that does not necessarily mean there has to be a lawsuit.  Often a letter from your attorney can prompt a response from the customer and it will be possible to work out a payment plan or other resolution of the matter.  An attorney can also help you make the determination whether pursuing collection makes sense in a particular case.

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Mentoring matters - and is important and rewarding - to both the person being mentoring and the person doing the mentoring.  It's not something that can really be successfully institutionalized in any company, but when it happens "for real", it's a crucial and life-changing experience for both people.  And we all ought to look for ways to nurture the environment and circumstances which actually DO make it happen spontaneously.   

Last week I had cocktails with a woman with whom I suppose I have a kinda mentoring relationship.  She works for a different firm than me - a larger, perhaps objectively, more prestigious firm than my current firm - but I feel lots of pride and satisfaction that I helped her get the interview with that firm.  I know she had to "win" the interview and that her standing and success at that firm now are all hers, but it makes me feel good that she has done so well and that I can still give her useful advice about how to maximize her success.

My Mentors.  In about a year and a month, I will turn the big 5-0.  So I suppose it makes sense that I've been in a "taking stock" mood lately and thinking, among other topics, about the whole mentoring thing.  As I talk with other lawyers, both contemporaries and younger attorneys, I've begun to realize EXACTLY how fortunate I've been in my career when it comes to having always had people along the way who were both willing and able to show me how to become the "right" sort of lawyer.

As I've moved along in my own career, I've become especially appreciative of the "non-billable" intangible aspects of being that certain kind of lawyer which today I am truly proud of being every day.  These exceptional individuals taught me every day in both their word and deed what I really wanted to be, and should be, when I finally became a "grown-up" lawyer.

And it's so many years later that some of these mentors in my professional life perhaps do not, and may not ever, know or really understand how important they have been in how I approach and do so many things today.  Perhaps just importantly, I doubt that either of us realized how significant they would later be in making sure my "mentee(s)" will grow into the sort of ethical, intelligent, pragmatic lawyer we all want to see.

I still remember the lawyer (then a fairly experienced associate on the brink of becoming a partner) who came by my office my very first week as an employed attorney.  He explained the "nuts and bolts" of recording time (the thing that will always MOST matter to any lawyer in private practice), as well as many other practical aspects of being a lawyer they just don't teach you in law school. 

It was a small, perhaps even selfish, act since he was going to be the one billing much of my time (or at least the one reviewing bills which included time I spent working on matters).  Yet it opened the door for a personal - yet professional - relationship between us which made it O.K. for me to ask the "stupid" questions about how to do things that young lawyers really DO need to know answers to.  It also helped me connect more to the firm because he was also the person I could go to when something about the "goings on" at the firm puzzled or concerned me.

Then there was the other relatively experienced partner who taught me much of what I know today about the substantive aspects of my practice area.  But what he really did - which I might not have gotten from anyone else - was teach me about "being" a "worthwhile"  lawyer.  Sure he taught me about being an ethical attorney, both generally as a concept and more specifically as issues arose in our day-to-day practice.  However, as crucially important as that was and is, what has and will continue to resonate with me is how he helped me understand about what it really takes to be an effective lawyer and what I should strive to be.

And later, there were the name partners in a much smaller firm with whom I spent a decade of my life.  One was sorta like my "big brother" who both challenged me and insisted that I continue to mature as a lawyer.  The other one "got" who I was and what I needed to do to become the best lawyer I could ever be.  In different ways, both of these individuals - as well as my previous mentors - helped me understand my potential and path to becoming a better attorney (and person).

My Mentees.  Back to my mentee.  I became involved with her when, as a first year law student (for whom law jobs are sometime tough to get), she was sufficently  persistent (without being annoying or unreasonable) that I finally gave her a job as a law clerk; she was FANTISTIC!!  When we got together last week (almost four years after we met one another), she told me that she is getting married - and I am thrilled for her.  We spent most of our time together talking about her - and her upcoming nuptials, career path, and current situation.  And while I have to admit, I often spend as much time talking as listening, it felt VERY O.K. to hear all about her this time and where's she at and what she wants to do, personally and professionally.

There is also another  attorney I know who is a little further along the prescribed career for sucessful lawyers.  She's just made a change in moving to a new law firm.  Since I've actually done this a couple of times, I could give her useful information based on my experiences.  Being able to help her make this transition in the most sucessful way possible mattered to me and made me feel good about myself and what I stand for as an attorney.            

The Fruits of Mentoring. Today, it doesn't really even enter into my mind NOT to try to help younger folks.  It's the way I was "brought up" as a lawyer and I can't even imagine behaving any other way.  My point in sharing this is that it REALLY does matter what you or I do (or, tragically, fail to do) with the younger and/or less experienced folks in our organization (whether it's a law firm or some other sort of business) - AND that it might be a LOT of years before you ever find out (if you ever do) - how much it matters.  Really matters to that person and to the individuals that person later interacts with.... and the individuals they later interact with.... and, well you get the picture....

Click here and here for some other "testimonials" about the power and importance of mentoring.  I'd link to more, but my Google search turned up disappointing results - search for "billable hour" and you'll get lots of hits; search for "mentoring" or some variation thereof and there's just not that much out there.  I'd like to think that's because of how deeply personal and meaningful these relationships are and that we don't quite know how to talk about them.  Or maybe it's because if you've been lucky enough to have this valuable experience, you tend to take it for granted and think it's a normal part of everyone's career path; and if you haven't been so fortunate, you're not really certain what the "big deal" about this is anyway.  So, anyone, other stories???   

Many companies try to "assign" mentors to new hires.  I know they mean well, but I honestly don't believe that these sort of relationships can happen this way.  Nor can you just go up to someone and say, hey, would you be my mentor or, on the other side of the relationship, can you force yourself on a younger colleague as "the" person who can show him or her the way.  Mentors are just drawn to one another and do the "choosing", if you can call it that, themselves - mostly without really being aware it's happening.

The most we can do is create an environment which facilitates and is conducive to making these relationships happen.  It needs to be a fundamental part of a company's culture that never occurs to anyone to question.  A few years ago it was popular to say that "it takes a village to raise a child" - well, it also takes a village to bring  a lawyer, accountant, banker, or business person to maturity.     

In today's bustling world of commerce in which everything seems to go faster and faster and profit margins sometimes seem to be getting smaller and smaller, it might be easy to overlook this aspect of professional business life. However, if we want a better world or a better profession, it really is up to us experienced types not to let that happen. 

To me, it's not that different from growing up as a human.  There really are just some things which parents (or law partners or senior executive members of a company or organization) do need to instill in their offspring (or proteges).  I am willing to take on that responsibilty.  How 'bout YOU????      

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Sharmil McKee of the Small Business Blog out of Philadephia recently made (on April 12) an interesting and concise post on the bare essentials of making a contract entitled "What should be included in a contract?"  (Because this blog doesn't allow you to bookmark precise calendar posts, you may have to scroll down to get to this post.)  She suggests dividing a piece of paper into four squares:

> What are you promising to do?                      

> What happens if you break your promise?

> What is the other person promising to do?

> What happens if he/she breaks that promise? 

Sharmil also gives a useful example of how this would work.  While there are indeed many parts of making a contract, this does get to the essence of what is being agreed and may be a helpful shorthand way of thinking about contracting.

Contracts are, however complex, in the end nothing more than promises that law will enforce.  They include the things everyone thinks about like an employment agreement, or a contract for the sale of goods or services,  or a confidentiality agreement.  However, contracts also include loan documents, the lease for your store or office, and agreements between owners of the same company such as Operating Agreements for limited liability companies or close corporation agreements for corporations with a limited number of owners.

When courts have to decide whether a particular contract should be enforced one way or another, there are several important considerations.  At the most basic level, both parties to the contract must be adults, have full mental capacity (e.g. not be drunk or have a mental illness), and, if signing for a business entity such as a coporation or LLC, be authorized to execute the contract on behalf of that company.  There is also the "reasonable man" with whom all law school students quickly become acquainted - he is a hypothetical objective person and courts are always asking what he would do or think in the facts and circumstances before them to reach appropriate decisions in contract cases.

Offer and Acceptance.  Key to any valid contract is an "offer and acceptance" or what did each party promise to do.  Often this consists of one party agreeing to pay a certain sum of money either immediately or over some period of time in exchange for the other party delivering certain specific equipment, goods, or services.  At a minimum, for there to be a contract, a court must be able to determine:

• The identity of the parties to the contract (and in complex transactions, there may be multiple parties with different obligations)
• The subject matter of the offer, i.e. what is being sold
• Quantity of what is being sold, both how many and what measurement unit is being used (e.g. hours, currency, feet, meters, pounds, etc) - this is often where things can become ambiguous
• "Meeting of the Minds" which is legal speak for saying that everyone was on the same page about what each was promising to do

I've previously posted about the "battle of the forms" which arises when the contract is made through a series of correspondence or the exchange of pre-printed forms with lots of extra "Terms and Conditions" which don't match.  Suffice it to say that when this happens, things can get a lot more complicated than anyone expected.  There can also be various counteroffers exchanged before final agreement is reached which can also make it more difficult to determine what was in fact agreed or whether there was a "meeting of minds" at all.   

Consideration.  Another critical part to a valid contract is the exchange of "consideration" among the parties.  This simply means that each party must get something of value from the contract, which may or may not be monetary.  Thus either a bargained-for benefit or a bargained-for detriment will work.  This distinguishes contracts from gifts and also from situations in which someone is already obligated to do something.  This is also often an area of dispute, particularly if there have been various modifications of the contractual relationship along the way.

More Information on Contracts.  For more information about contract basics, you can visit Findlaw's "Contract Law-The Basics" page.   In addition to general information about contracts, it also has several tips for making (and keeping) contracts, including:

• Ten Tips for Making Solid Business Agreements and Contracts
• Do's and Don'ts: Contract Terms
• Checklist: Contract Terms
• Top 10 Reasons to Avoid Breaching a Contract

I've previously posted about not relying too much on form contracts because they are generally slanted towards one side of the other, which may or may not coincide with yours in your particular deal.  In addition, they may be either too simple or too complex for your transaction.  And of course, there really is no such thing as "fine print" which you can just ignore - make sure you understand what every paragraph of the contract is saying. 

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Over the past few months, I have become much better acquainted with the ins and outs of state taxes in Ohio, as well as the consequences of a failure to pay when due,  than I would have thought likely.  So let me impart a bit of the knowledge I've gained mostly from hard work and experience. 

Unemployment Contributions.  I've become convinced that the absolute worst state  tax obligation in Ohio to fail to pay has got to be the unemployment contributions required to be paid to the Ohio Department of Job and Family Services (ODJFS) pursuant to Ohio Rev. Code §§4141.23 and 4141.27.  Why?  Well, mostly because the interest and penalties charged on these obligations is by far and away the most substantial of any unpaid state tax obligation in Ohio.  In addition, officers and others charged with responsibility for payment of unemployment contributions can be held personally liable for these amounts. 

Interest alone accrues at the rate of 14% per annum on the unpaid amounts required.  Moreover, unlike even the strictest lender, ODJFS charges interest on accrued interest, thus making it entirely possible that the interest and penalties on unpaid unemployment contributions will dwarf the actual amount originally due. 

On the brighter side, unlike many other state tax obligations, the State of Ohio is required to actually file a lawsuit and obtain judgment before moving on to the particularly intrusive collection activities such as bank account garnishment.  However, the assessment is presumed to be valid which considerably limits the options of the delinquent taxpayer and consequently shortens the litigation process.    

Sales, Withholding, and Use Tax.  In the case of Ohio state sales (Ohio Rev. Code §5739.13), withholding (Ohio Rev. Code §5747.13(C)), and use tax (Ohio Rev. Code §5741.14),  if the taxpayer fails to pay in a timely manner, the State of Ohio has the right to file a lien immediately without first filing a lawsuit.  This lien will then have the same effect as a judgment lien.  This means that the delinquent taxpayer may unexpectedly find bank accounts cleaned out through garnishment.  In addition, other post-judgment collection activities such as judgment debtor examinations and enforcement of the lien through foreclosure are a definite reality. 

To make matters worse, various penalties and interest add up quickly.  First  there is a "late" penalty for failing to file the required return in a timely manner in an amount equal to 10% of the amount assessed by the Ohio Department of Taxation.  In addition,  for failing to pay the required tax when due, there is another penalty  in the amount of the greater of $50 or 50% of the amount due.  There are also a variety of other charges and penalties levied upon the delinquent taxpayer.  And none of these are negotiable.  On top of everything else, interest will be assessed on the amount of the obligation.     

As further inducement to pay sales and withholding tax, the company's vendor license and/or liquor license may be suspended or revoked if this obligation is ignored.  During the period of suspension or revocation, no sales of items for which the license is required may be made.  There is also a charge to get the applicable license reinstated.   

In addition, sales, withholding, and use tax are all "trust fund" taxes.  This means that officers, employees, or other representatives of the delinquent taxpayer may find themselves subject to personal liability if they are a "responsible party" charged by the company with ensuring these amounts were properly paid in a timely manner. 

For more detailed information about the scope of sales and use tax, the Ohio Department of Taxation has a helpful Sales Tax FAQ on its website. 

Workers Compensation Premium Contributions.  Like state sales, withholding, and use taxes,  the workers compensation premium contributions required to be paid to the Ohio Bureau of Workers Compensation pursuant to Ohio Rev. Code §4123.35 are post-judgment type obligations.  Thus a failure to pay these amounts can result in unfavorable collection activities against the delinquent taxpayer relatively quickly as spelled out in Ohio Rev. Code §4123.37.  In addition, in some cases, liquor licenses can be suspended for failure to pay workers' compensation premiums when do.   

Income Tax.  If  business or personal state income tax is not paid promptly when required, a lien can be filed immediately against the taxpayer in a similar manner and with similar consequences as when state sales, withholding, or use tax is not paid.  In addition, any subsequent state income tax refunds due to the taxpayer will be rerouted to the State of Ohio. 

Corporate Franchise Tax.  Corporate franchise tax is being phased out and replaced by the corporate activities tax.  Until that transition is complete, corporate franchise tax works much the same way as state sales tax except that there is no personal liability for failure to pay.  However, if the corporation is in existence for even part of the year, it must pay at least the minimum tax of $50.00.   

Going Out of Business.  If you have ceased doing business, it is important to notify the State of Ohio IN WRITING of this fact so you do not continue to be assessed taxes and penalties.  To be certain it takes, you should consult the website for the applicable taxing authorities and follow the instructions concerning any forms or other procedures for providing notification that you are no longer in business.  In many cases, if you fail to make proper notification, you will still be required to pay penalties and other charges even though you weren't doing any business.   

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So you've decided to "get with it" and enter the 21st century in your marketing and business development efforts?  You're really going to do it - harnessing the power and magic of the internet and e-mail marketing!  GREAT!  But did you know that there are some legal pitfalls waiting to trip you up if you fail to do it correctly?

And failing to do it right CAN cost you - BIG TIME!  Recently, at the request of the Federal Trade Commission (FTC), a federal judge in Chicago, Illinois ordered Sili Neutraceuticals, LLC and Brian McDaid to pay more than $2.5 MILLION for making false advertising claims and sending illegal e-mail messages in violation of the FTC  Act and the CAN-SPAM Act.  Why?  Well, according to the FTC  Press Release, among other reasons, the commercial e-mail messages being sent

• had misleading subject headings
• failed to provide clear and conspicuous notice of the opportunity to decline receiving any further e-mails from the sender
• failed to provide  a functioning return e-mail address
• failed to include the sender's valid physical postal address 

Nor is this simply an isolated incident or a problem only for inexperienced or small businesses.  FTC also recently settled with Cyperheat, Inc. regarding the behavior of its downstream affiliates, imposing significant monitoring responsibilities on Cybernet, Inc.  For a summary of the responsibilities being imposed and suggestions on how to avoid trouble, visit "Affiliates: What is a Company's Responsibility?" post on Laura Adkins'  Word to the Wise blog.

What CAN-SPAM Is All About.  So what, exactly, is this CAN-SPAM Act and how can you make sure you don't accidentally run afoul of its requirements, exposing yourself to unwanted possible liability and interference with the operation of your business?

• The CAN-SPAM Act is  the Controlling the Assault of Non-Solicited Pornography  And Marketing Act of 2003.  Its purpose is to authorize the FTC to enforce the first national standards for sending commercial e-mail, and to limit the bulk sending of e-mail.

• On its website, the FTC provides an excellent summary concerning "The CAN-SPAM Act: Requirements for Commercial Emailers" which highlights the major requirements of the CAN-SPAM Act, as well as the penalties for non-compliance and "Remove Me" Responses and Responsibilities: E-mail Marketers Must Honor 'Unsubsribe' Claims" which gives specific guidance concerning responsibilities of businesses using e-mail marketing techniques.   

Scope of CAN-SPAM Act.  The CAN-SPAM Act differentiates between "commercial" and "transactional" messages.  Thus, messages that are primarily invoicing or related to account information are not subject to CAN-SPAM.  You can even include some advertising content as long as it occupies a non-prominent postion.  (Some may wonder if it's even worth the effort to do this, especially since including any advertising arguably exposes you to at least some risk of liability.)  Rule of Thumb - if you're sending exactly the same message to lots of customers or clients (or potential customers or clients), CAN-SPAM probably applies. 

Religous or political messages are exempt.  Also, at least to some extent, messages to existing customers or others who have affirmatively inquired about your goods or services may also be exempt.

The Bottom Line: What You Really Want to Know.  If you're like most business owners, all you really want to know is what - exactly - you have to do to be safe.  Obviously, to be sure you have properly complied, you should consult legal counsel to advise you about your particular situation.  However, here is some very GENERAL guidance:

• Unsubscribe Compliance.  Recipients of your e-mail  MUST  have an effective option to unsubscribe and you must comply within 10 days (or if at all possible, sooner).  You should also keep a list of folks whose "unsubscribe" requests you have honored so you can demonstrate compliance if necessary.  In addition, once someone has unsubscribed, you can't legally sell or transfer that person's e-mail address or other information. 

• Content.  Be SURE to accurately reflect yourself as sender and don't get too cute with the subject lines; accurate and proper descriptions are essential.  In addition, you MUST include your physical postal address within the body of the e-mail.  (It's probably not a bad idea to also include the main phone number for your business.)  While providing a link to your company website might satisfy the address requirements, why take the chance?  Finally, if your company is involved in the distribution, production, or other connection, with or of "adult content", you MUST so label it. 

• Sending Behavior.  Don't send messages with false headers, through open relays, or which contain a harvested e-mail addresses.

Other Points to Keep in Mind.  If you promise refunds to dissatisfied curtomers, make certain you deliver.  Identify your e-mail, or otherwise make sure it can be identified, as an advertisement.  Remember that even seemingly innocuous correspondence such as notifications of "seminars", "open houses", or "receptions" can still fall within the orbit of CAN-SPAM.   

What Can Happen If You Mess Up.  Each violation (and every single e-mail sent can be considered a separate violation) is subject to fines of up to $11,000.00 (so if you sent the same e-mail to 10 people, that could potentially be a $110,000 fine).  Additional penalties, including criminal prosecution and imprisonment, are also a possibility under certain conditions.  So you kinda want not to mess up on this.

BOTTOM LINE (Practical Legal Counsel): It's just not that hard to make sure you're doing it right so why take the risk?  If you pay attention and make the effort, you can virtually eliminate this potential liability.  If you don't, it really could be the end of your business.  And, of course, good legal counsel can help make sure you're addressing this concern effectively.   

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You probably have some regular customers who order items from you from time to time.  Maybe there's a purchase order involved, but for whatever reason, there's never been any actual written contract between the two of you regarding the relationship as a whole.  Now suppose some of these customers start stretching out payment on you after you invoice them for their purchases.  What can you do?

What about adding a notation to the invoices indicating that interest will be charged on any amounts not paid in 30 days?  That's exactly what a farm cooperative did (to the tune of 24% per annum) in a case decided last week by the Ohio Supreme Court.  (The creditor said it also sent a letter about the new finance charge, but there was some dispute whether the customer ever received the letter.)  The customers continued to purchase items after the invoices indicated interest would be charged on unpaid amounts, but eventually ran up a balance which they failed to pay.  The farm cooperative then sued. 

Holding.  Result?  In a unanimous decision (which includes one Justice concurring in the judgment only) in Minster Farmers Coop. Exchange Co., Inc. v. Meyer, 2008 Ohio 1259, the Ohio Supreme Court held that those notations were not enough to constitute a "written contract".  Therefore, according to the Court, the farm cooperative could not collect interest on the unpaid amounts in excess of the statutory amount permitted under Ohio law pursuant to Ohio Rev. Code 5703.47 (in this case 10%).  As usual, the Ohio Supreme Court's Office of Public Information has prepared a useful and informative summary of the case.   

Ohio Supreme Court's Reasoning.  As the Ohio Supreme Court saw it, under Ohio Rev. Code 1343.03(A)(3), a creditor is not permitted to charge more than the applicable statutory rate on a book account "unless a written contract provides a different rate of interest".  Thus the question was whether the notations on the invoice constituted a "written contract."

To answer this question, the Court had to consider one of my favorite  issues of contract law: the infamous "battle of the forms".  The creditor asserted that Ohio Rev. Code 1302.10 rather than Ohio Rev. Code 1343.03(A)(3) should control the result.  Ohio Rev. Code 1302.10 provides that a written confirmation of a commercial agreement sent within a reasonable time operates as an acceptance in most cases even though it has "additional" or "different" terms.  According to the creditor, the provisions concerning interest were "additional" terms that, absent any objection by the customer within a reasonable time, became an enforceable part of the contract between the creditor and the customer.

The Supreme Court rejected the argument that there was even a "written contract", holding that the more specific statutory provisions of Ohio Rev. Code 1343.03 applied.  For "additional" terms to come into a contract, first there has to be a written contract.  According to the Court, the weight of authority in Ohio had concluded that invoices did not constitute "written contracts" for purposes of Ohio Rev. Code 1302.10.  The Court agreed with the determination by these courts that the customer needed to sign indicating his agreement to the new interest rate and opined:

By stating interest terms on invoices or account statements, [creditor] Minster Farmers made no attempt to condition the acceptance of orders on [customers] Meyer's or Due's agreement to Minster Farmers' interest rate terms; instead it tried to unilaterally impose those terms after the fact....  Minster Farmer's placement of an interest rate on invoices contained no promise by Meyer or Dues and demonstrated no meeting of the minds between the parties.

Prospective Application Only.  Thankfully, the Ohio Supreme Court limited application of this new rule to transactions occurring in the future.  As it explained: " We do not intend for this decision to create shock waves throughout the many sectors of Ohio's economy that rely on book accounts to do business, nor do we wish to encourage a propagation of pleadings regarding past practices."   

What It Means.  If you want to charge interest on unpaid accounts or purchase orders, make sure that it says that on the very first correspondence or documentation you send the customer. 

• Even then, unless you also add language indicating that you are unwilling to do business unless the customer agrees to this, don't expect to be able to enforce your chosen interest rate if the customer objects. 
• With this sort of language, you have a better chance of having your interest rate enforced, but it would be best to have the customer actually sign off in writing on the interest rate. 
•  If that first time payment of interest is mentioned is on an invoice sent along with the item purchased (or delivered later) which is not signed by the customer, you may have difficulty enforcing the interest provisions in any event.  
• And of course every case is slightly different and will turn on its specific facts.

Maximum Interest Rate.  One other thing you should be aware of is that for trade accounts and other business loans and indebtedness less than $100,000.00 and not secured by real estate, Ohio Rev. Code 1343.01 caps the permissible interest rate at 8% per annum.  (There are some other exceptions in Ohio Rev Code 1343.01(B), but this is the gist of it.) 

Yes I know the banks and credit card companies charge waaay more than that.  So why can't you?  Well, because you are not a federally chartered financial institution, that's why.  Federal law "preempts" state law and allows banks and credit card companies to charge more; there's also some other laws applicable only to banks and credit card companies and not to you.  

So, let's be careful out there about slapping interest rates of 18% plus on those slow paying accounts....

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With it being April Fools' Day and all - and being far enough removed from the historic near blizzard that dumped 20 inches of snow here in Columbus a few weeks ago that one can actually start to believe Spring is here -  it seems appropriate to honor the approaching golf season in Central Ohio by taking a look at where golf (and golfers) seem to meet the Law.  And the consequences thereof (come on, did you really think I'd resist the temptation to use the legalese). 

Suppose you and your foursome are out in the middle of the back nine.  Playing ready golf, one of your golfing companions has gotten further up the fairway and is now waiting for you to hit.  She's off to the right and certainly nowhere near where you want the ball to go.  Do you ask her to move just to be sure you don't hit her or do you go ahead and hit?  What happens if you do hit her?  Are you legally responsible then?

Assumption of Risk = Recklessness, Not Just Negligence, Required for Liability

In Ohio, the seminal (i.e. case which sets the standard) case regarding golf accidents is Thompson v. McNeill, 53 Ohio St.3d 102, 559 N.E.2d 705 (1990).  A foursome of women reached the twelfth hole at a private country club.  Lucille  McNeill's second shot went to the right, landing in a water hazard and JoAnn Thompson went to look for the ball.  McNeill chose, as she could under the rules of golf, to hit another ball from her same position.  When McNeill hit her third shot, Thompson was still near the water hazard, about 15 yards away, but at angle of nearly 90 degrees  from the intended path of the ball.  McNeill shanked the ball and hit Thompson in the right eye, causing severe injury.  It wasn't clear whether McNeill yelled "Fore" as golf etiquette requires.

The Ohio Supreme Court held that to be liable, McNeill had to have acted recklessly or with the actual intent of hurting Thompson.  Mere negligence was not enough because when golfers enter the course, they have "assumed the risk" that inherent "foreseeable" accidents or injuries might occur.  Because "a golfer accepts the risk of coming into contact with wayward golf shots on the links" and "[s]hanking the ball is a foreseeable and not uncommon occurrence in the game of golf", the Court ruled in favor of McNeill, the defendant.

Rules to Play By 

So against this backdrop, here are some rules to think about next  time you play a round:

1. Because of the "assumption of risk" perspective, if you do get hit by a ball on the golf course, whether by someone in your own foursome, or another group, it will probably be difficult to convince a court that you should be compensated for your injuries by whoever hit you.
2. If at all possible, you really should yell "Fore" and not just because it's customary to do so.  In Thompson, the Ohio Supreme Court commented:
   • "If for example, a golfer knows another is within the line of flight of his shot and fails to offer the customary warning of "fore", liability might accrue.  Such conduct could amount to reckless indiference to the rights of others."  
3. If you are going to hit someone, it's way better to do it with a really bad shot - that way it's clearer that it shouldn't have been forseeable, i.e. reckless.  Maxwell v. Rowe, 1998 Ohio App. LEXIS 4396 (9th App. Dist.) ("the fact that Jeramie was near the green when he was struck is evidence that Todd's ball went where Todd intended it to go.")
4. While most states apply the same sort of recklessness standard as Ohio, a few - Illinois to be specific - only require the injured golfer to prove negligence to impose liability on the golfer responsible for hitting the errant golf ball.  Zurla v. Hydel, 289 Ill. App.3d 215, 681 N.E.2d 148 (1st App. Dist. 1997).  So, if you're playing golf in Chicago, be especially vigilant about not hitting other golfers. 

And now,

A Little About Me and Golf (and Why It Matters)

I've been playing golf for a few years now, mostly just for fun but occasionally to entertain clients and possible referral sources for my business, commercial, and transactional law practice.  I am by no stretch of the imagination REMOTELY  good, but I enjoy it (heck I can admit it, I'm addicted to it) anyway.  How do I know that?  Well, I've managed to rationalize my golf habit as an extremely efficient use of time.  The way I see it, when I golf, particularly with clients or prospective clients, I am simultaneously accomplishing:

• Socializing (which is fun and essential to staying a well rounded normal adult)
• Business development (which is essential to my career happiness as a successful lawyer)
• Exercise (which is essential to basic physical health and well  being as a human)
• Productive release of my natural competiveness and enhancement of my ability to know myself (the cliche is that golf is life and that what happens on the golf course really is indicative of behavior in "real life")  

Socializing.  Through golf, I've met some terrific folks and made some really good friends, especially through my involvement in the Columbus Chapter of the Executive Women's Golf Association.  So I definitely appreciate the socializing aspect of the golf experience.  I've also noticed that it can be a real ice breaker when you're faced with meeting and interacting with folks you haven't met before in a business/professional situation.  Regardless of ability, ALL golfers feel frustration at times and every golfer has a favorite course.  So if I know (or suspect) my counterpart plays golf, suddenly it becomes easy to establish a productive working relationship within which to do business.  And that HAS to be good for all concerned.

Career and Business Development.  One of the nice things about golf and being a woman in the business world is I don't actually have to play all that well to have golf work for me (which in my case is DEFINITELY a good thing) in a business context.  As I mentioned, even just talking about it helps me establish common ground with people with whom I might otherwise have difficulty establishing a connection.  And there are an awful lot of men who really aren't that good who feel very comfortable playing with me.  In addition, as any avid golfer will tell you, golf is really about being competitive with yourself which allows golfers of different abilities to still have a good time playing together. 

Perhaps the greatest utility of golf in the business development department is that you get 2-5 hours of uninterrupted time one-on-one time with the client, referral source, or prospect in a relatively relaxed environment to become acquainted on the personal level that really matters most.  How many lunches would you have to do to get to the same place? 

Finally, did I mention it's FUN! - which makes everyone feel more postive towards a continued relationship with one another.

Exercise.  Ahhh..... EXERCISE - I know I need to do more of it, but I can never seem to establish a "gym" routine.  When I play nine holes, I frequently walk.  And even when I ride when playing a full eighteen holes, I do get some exercise...... painlessly.

Introspection.  That stuff about Golf = Life -  well, it's true and I learn a great deal about my personal strengths and weaknesses almost every time I play. 

Now, if only it would get warm, or at least warmer....

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Joel Labiva has written a useful post over at the Small Business Trends blog, complete with links, about a variety of free tools for business folk available on the Small Business Administration's website. They include information on:

• Small Business Planner (with information about what it means to be an entreprenuer anyway and including resources to help you write a business plan)
• Starting Your Business (including practical, legal, and financial issues)
• Managing Your Business (conceptual and practical advice about a variety of issues you're likely to face on a day-to-day basis)
• Exit Strategies (useful information about getting out of the business both when it has been successful and when it has not)
• Other Tools (audio, video, and written materials covering a wide array of issues)

There's also links to local SBA offices across the country, including Central Ohio, which contain information about local programming, resources, and success stories.

In addition, a related Business.gov website also published by SBA is worth a click.  Anita Campbell of Small Business Trends blog wrote about "Ten Ways Business.gov Helps Your Business" several months ago. 

I wholeheartedly agree with Anita's assessment of this website.  It has a tremendous amount of well organized information about governmental regulation and resources, as well as general information about a variety of concerns business owners may have.  In addition, one thing I thought was especially useful was the available links to state and local governmental regulation and resources.  See what there is for Ohio.  There's even a link to the Ohio Business Gateway which does a good job of aggregating information about conducting a business in Ohio in an accessible manner.

As Joel suggests, the SBA website (and the information available there), as well as Business.gov, are much improved from even a few years ago.  Check out all that these websites now have to offer.

N.B. - For those of you who think you saw this post before and then it was gone and now it's back, you're right.  I had a really bad day with the blog yesterday in which I accidentally managed inextricably to delete my biographical information, three draft posts (including a nearly complete one about franchising which is next up), and this post.  So basically I had to rewrite this entire post.   

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A statutory agent is the "official" representative of a corporation or LLC.  In conjunction with filing the appropriate paperwork with the Ohio Secretary of State to form a corporation or limited liability company,  the new business entity must appoint a "statutory agent".  Sometimes, this person is the attorney assisting in the formation of the business.  Other times, one of the principals of the business is named.  Occasionally, a company offers this service for a fee.  So what does it mean to be a statutory agent?  What are the responsibilities?

The statutory agent may be an individual who is an Ohio resident, a business entity organized or formed in Ohio, or a foreign corporation qualified to do business in Ohio which has an Ohio business address.  The statutory agent appointed must sign the appointment before it is filed with the Ohio Secretary of State and the appointment must contain an Ohio address.

Statutory agents are required in Ohio and every other State to ensure that individuals or companies with a claim against a business entity have someplace where those alleged claims can be presented.  Thus the primary obligation of a statutory agent is simply to act as a "contact person" for the business.  The statutory agent accepts "service" of legal pleadings, as well as other correspondence and documentation being directed to the company. In addition, the statutory agent is expected to pass what they have received on behalf of the company on to the company for it to handle.

The statutory agent has no personal liability for any claim being asserted against the company simply by virtue of being the statutory agent.  Nor does the statutory agent have any responsibilty to ensure that the company on whose behalf he or she has accepted service does in fact do anything to respond.  Once the statutory agent gives the company's representative the materials received on behalf of the company, his or her job is complete. 

The company can choose to replace the statutory agent with another at any time.  All that is required is that the company file the new appointment with the Secretary of State using the very simple form prescribed by the Secretary of State.  The filing fee is $25.00.  There is no need for the prior agent to resign or to consent to the appointment of the subsequent statutory agent.

A statutory agent can likewise make a unilateral decision to resign at anytime by completing and filing the requisite form with the Ohio Secretary of State.  There is no need to obtain the consent of the company.  The filing fee is $25.00.  The resignation takes effect sixty days after the form is filed with the Ohio Secretary of State.  Thus, individuals who were once principals of a company but are now no longer affiliated with the business should take the time to resign as a statutory agent in an abundance of caution.   

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Today I thought I would try to summarize some of the networking and other resources especially (although not necessarily exclusively) available to women who own their own business.  Because I have been active in  several of these organizations in Central Ohio, I want to particularly highlight some opportunties available locally.  If you know of others that should be included, please comment to this post. 

Women's Presidents' Organization (WPO) - a national organization with two local chapters in Central Ohio.  Membership is limited to companies with annual revenues of at least $2 million (or $1 million in the case of service-based businesses).  Chapter membership is limited in number and chapter members enjoy the benefits of an unofficial advisory board composed of other chapter members and a facilitator.

National Association of Women Business Owners (NAWBO) - a national organization with a local Columbus chapter luncheon meeting on the second Thursday of each month.  Membership is open to any woman having at least a 5% ownership stake in a company.  Each July, NAWBO presents its Visionary Awards to local women exemplifying business success.  (Click here for information about past winners.)  In addition, the Athena PowerLink program provides one recipient each year with a volunteer advisory board consisting of professionals such as lawyers and CPAs.

Women for Economic and Leadership Development (WELD) - Columbus-based organization entering its fifth year of existence which is dedicated to providing women with the tools and opportunities for growth and development economically and in the leadership of civic, community, and business organizations.  Meets monthly for breakfast or dinner on the second Wednesday of every month.  Distributes a Women You Should Know calendar annually highlighting women in the Central Ohio area who have demonstrated leadership qualities, but are not as well known as their achievements should warrant.  Annual keynote event featuring a national speaker each May.

Business and Professional Women (BPW) - a national organization with a local Columbus chapter meeting on the second Thursday of each month.  Mission is to achieve equity for women in the workplace through advocacy, education, and information.

eWomen Network - national networking organization for women with a local Columbus chapter.  I haven't been to any meetings of this group, but I've heard good reports. 

Women's Business Enterprise National Council (WBENC) - National organization offering the opportunity for qualified women-owned businesses to be certified as a WBE (Woman's Business Enterprise) by completing a lengthy application.  WBE certification is probably most useful for companies wishing to contract with major national companies with diversity initiatives.  

Women's Initiative for Successful Enterprising (WISE Women) - local educational series offered by Columbus State and the Ohio Small Business Development Centers dedicated to empowering and strengthening the business growth efforts of all women business owners by meeting them at their growth level need.

And finally, mainly because it's a lot of fun in addition to being a helpful resource for gaining a skill useful in the business world.....

Executive Women's Golf Association (EWGA) - Consists of more than 20,000 members in 120 local chapters across the United States and Canada dedicated to providing opportunities for women to learn, play, and enjoy the game of golf for business and for life.  The Columbus Chapter holds its opening Kickoff event of the season on Wednesday, March 12, 2008 beginning at 6 PM at the Dublin Marriott near Tuttle Crossing Mall.   The organization has activities for golfers of all skill levels, from beginners to advanced competitition.  If you've ever thought about trying golf out for business or just for fun, come to the free Kickoff reception and see what it's all about. 

>> Various industries may also have various networking groups available to women.  And there may certainly be other organizations of which I am not aware.  But these are the ones I've tried and found useful.   

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Your best salesperson has just left for your major competitor.  Although you are fairly certain she didn't take any company documents or written customer lists, you are equally sure that she knows EXACTLY who your best customers are and the most effective way to contact them.  You always meant to get an Employment Agreement, complete with noncompetes and confidentiality provisions, signed up with this employee, but somehow never quite got around to it.  So what now?  Is there anything you can do?

Well, last week the Ohio Supreme Court brought joy to the hearts of procrastinating employers everywhere in the state when it ruled that the use of a memorized customer list by a former employee to the detriment of his one-time employer constituted a trade secret protected under Ohio's Uniform Trade Secrets Act.  In Minor & Assoc. v. Martin, 2008 Ohio 292, a unanimous Ohio Supreme Court upheld a trial judgment in favor of the employer in the amount of $25,973 even though the employee had no employment agreement and was not subject to any noncompete or confidentiality provisions.  The Public Information Office of the Ohio Supreme Court issued this summary of the decision.

Issue Presented. The new Employer Law Report blog [welcome to the blogosphere], in a post prior to the issuance of the decision, framed the dilemma facing the Court as "creating what in  most cases would be a non-solicitation prohibition of an indefinite term" and a ruling that "could open the doors to the creation of de facto non-competition/non-solicitation agreements for which neither employers nor employees bargained."  As seen by the Ohio Supreme Court itself, the positions of the parties were as follows:

Martin asserts that a client list memorized by a former employee cannot be the basis of a trade secret violation and that the appellate court's decision in this case overly restricts his right to compete in business against AMA.  He also argues that AMA should not have the right to control the use of his memory and that AMA had the opportunity to protect its confidential information by way of an employment contract, which it did not do.

 

AMA counters that public policy in Ohio favors the protection of trade secrets, whether written or memorized; that the definition of a trade secret should focus on the nature of the information and the potential harm that its use would cause the former employer; and that no meanigful difference exists between a written and memorized client list.  

Decision.  This decision resolved a split in Ohio appellate courts.  Despite initially framing the issue somewhat more broadly, the Ohio Supreme Court chose to focus on the extremely narrow issue of whether the fact that the client list in question was memorized took it outside the protection of the Uniform Trade Secrets Act, codified in Ohio Rev. Code Chapter 1333.  After noting that the majority view made no distinction "between information that has been reduced to some tangible form and information that has been memorized" and recognizing that protection of trade secrets involves a balancing of public policies, the Ohio Supreme Court held:

the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee.  Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.  It is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one's memory, or in any other medium.  

In somewhat interesting dicta, the Ohio Supreme Court hastened to add:

Every employee will of course have memories casually retained from the ordinary course of employment.  The Uniform Trade Secrets Act does not apply to the use of memorized information that is not a trade secret pursuant to R.C. 1333.61(D).

>>Unintended Consequence.  Jon Hyman of the Ohio Employer's Law Blog sees the decision as an expansion not only of trade secret protection, but also the class of employees against whom noncompetes can be enforced.  While that might initially appear to benefit employers wanting to protect sensitive information, Jon adeptly points out that this may also complicate matters for employers hiring former employees of competititors.  Just asking these new hires whether they are subject to noncompetes or confidentiality provisions and ensuring they've brought no documentation with them may no longer be enough.  

For some of the other thorny questions raised by the decision, read Kevin Griffith's post in the Employer Law Report Blog.  In particular, Kevin wonders whether the "simple knowledge that the Al Martin clients were in need of pension analysis services would have trumped the publicly available information  [obtained through Google] to preserve the protection of the trade secret."  He also agrees with Jon that employers hiring employees from competitors may now have addditional hurdles to that decision.

Issue Not Addressed.  I agree with Jon and Kevin that the decision raises troubling questions for employers considering hiring one of the employees of the competition.  However, one of the  things I find most interesting about the decision is what WASN'T ADDRESSED, namely the scope of what constitutes a "trade secret" in the first place.  While Martin briefed this issue, it apparently was never raised in his memordandum in support of jurisdiction so the Ohio Supreme Court made it clear that this issue was not before it, in essence assuming without deciding that the customer list in question was in fact a trade secret.

To really evaluate what this decision means for the future, I think you have to go back to the Franklin County Tenth Appellate District Court of Appeals decision, 2006 Ohio 5948 , which spends considerable time on this particular question.  It notes that "[a] customer list is an intangible asset that is presumptively a trade secret when the owner of the list takes measures to prevent its disclosure in the ordinary course of business to persons other than those the owner selects."  The Court of Appeals then goes into some detail about the measures taken by the employer in this particular instance:

the trial court determined AMA's client list was an intangible asset that AMA acquired by devoting considerable time and resources over a 20-year period.  The trial court also concluded AMA took sufficient precautionary measures to assure the client list remained confidential, including (1) informing its employees that its client information was confidential and was not to be made public; (2) circulating a Computer Usage Policy that reminded its employees the client names and associated information were confidential, were not to be made public, and were not to be removed from the confines of the office; and (3) securing client information from those entering AMA'a office....

 

the trial court, through its magistrate, found that although a browser could enter an individual client's name into http://www.freeerisa.com/ and obtain the client's contact information, a browser could neither independently obtain a compiled list of the clients AMA serviced nor determine which clients needed third-party pension plan administrative services....

 

The evidence demonstrates AMA spent considerable time and energy compiling its client list and used adequate measures to protect the client information from its competitors.  Because the evidence reflects no readily available means by which someone outside the employ of AMA can specifically identify AMA's clients and readily determine which clients need third-party pension plan administrative services, AMA's client list is a trade secret under R.C. 1333.61(D).            

What is perhaps even more interesting is the Court of Appeals take on the "tension between a company's right to be protected against unfair competition and an individual's right to the unhampered pursuit of livelihood."  Because the request for injunctive relief had been withdrawn, the Court of Appeals felt that it was not called upon to resolve this tension and explicitly states that "the trial court's judgment does not enjoin defendant from contacting AMA clients in the future but only requires defendant to compensate AMA for past monetary damages."  In addition, the Court of Appeals rather tantalizingly takes note of "the constantly changing nature of business information and the relatively short period of time during which such information can be deemed sufficiently relevant to warrant trade secret status." 

So what I'm wondering is how would this all come out if a former employee of a start-up business (which never really had a chance to implement precautinary measures to protect customer lists) moves to a more established competitor with a customer list in his head largely consisting of customers this employee brought into the former employer, especially if a few months go by between the time the employee leaves the start-up and starts working for the established corporation. 

Bizpointers.  So what does this all mean for the mobility of key employees and the effect on businesses?

• If you're an employer concerned about protecting customer lists and other sensitive information, you are certainly in a stronger position than before, especially with respect to information being carried around in the heads of key employees.  However, you can't just assume that you're now covered as far as trade secret protection.  DO take the time to implement at least some precautionary measures emphasizing the confidentiality of this information with employees.  Formal written policies would be best, but even customary office practices will help.  And, yes, having employment agreements, noncompetes, and/or confidentiality agreements for key employees is still a good idea.  

• If you're an employer considering hiring away some of the competition's best people, the recruiting process may have gotten more complicated.  You still need to ask about noncompete and confidentiality agreements, but now even if the prospective employee isn't subject to one, there could be trouble down the road.  If you really want to be safe, consider having these individuals work in other capacities within your company for a few months.

• If you're an individual considering making a move across the street, understand that the process may now be more complicated, even if you are not subject to a noncompete or confidentiality provision.  Go easy on contacting customers of your old employer for the first few months at your new position.

• And one more thing....  If you're considering selling a business with confidential customer lists and other trade secrets and ensuring that key employees stay with the company following the change in ownership is important to the value of the business, recognize that this new decision by the Ohio Supreme Court may mean you can assign some additional value to the business that a prosective buyer may be willing to pay. 
  • To the extent it just got harder for competitors to hire top employees, the buyer can be more assured of retaining the employee base and the extra value associated with that continuity.   
  • In addition, if the seller of a business can be prevented from using "customer lists" that are in his/her head, there is a value to that.  This is particularly true when the seller has operated a business for many years and has long-time customers who have become friends.  (In other words, the seller did not review a customer list, repeat the list to himself over and over until he/she got to the car, and then scribbled the list frantically before leaving his former employer's parking lot).  Apparently, under this decision, the seller may NOT solicit, contact or use that knowledge to compete with the buyer--even when the buyer did not protect himself by negotiating a non-compete/non-solicitation agreement, at least for some period of time.  When negotiating an asset purchase transaction, this decision might be relied upon to create value and designate some sum of the purchase price to this intangible asset.  Hat tip to my colleague Chris Pettit here at Lane Alton for suggesting this possibility.       

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Suppose you want to incentivize and reward motivated employees, but you've read my earlier post on The Ugly Truth About Giving Others (Especially Employees) a Piece of Your Business and you have been become understandably concerned about giving up even a sliver of ownership in the company.  What can you do?  One answer may be to offer some sort of "mirror" or "shadow" equity which allows participating employees to benefit from the growth of the company in the same way they would if they were truly equity owners, but lets you avoid some of the control and fiduciary duty issues that might arise if they really were.

Years ago (and often still), these sort of plans were often called "phantom stock" plans, a term I suppose many found slightly offputting.  After all, if it's "phantom", how can it be real and why would anyone want something not real?  So sometimes they came to be called "stock appreciation rights" or something similar.  In any event, the terms which may now be coming into vogue are "mirror equity" or "shadow equity" -- which does have a fairly nice ring to it.

Importantly, for both the company and the participating employee -- unlike the grant of actual ownership equity in the form of stock or membership interests -- with "mirror/shadow equity", there are NO tax consequences for either party until the employee actually receives a cash payment under the plan.  For the participating employee, this may be more beneficial than receiving actual restricted equity which cannot be sold for a period of time, but nevertheless counts as income upon which taxes must be paid. 

Essentially, "mirror equity" allows participating employees to have the benefits of equity ownership by granting them deferred compensation based upon such factors as longevity of employment and the financial performance of the company over time.  In many respects, it can operate in much the same way as a 401(k) program does with the same sort of vesting schedule decisions for the employer, i.e. it can be a gradual progressive vesting or a "cliff" schedule requiring a period of time before vesting occurs.  And, unlike a 401(k), the employer can selectively choose to allow only certain employees to participate and can grant differing amounts of mirror/shadow equity to various employees based on their particular performanace  and value to the company.  Thus, there is a great deal of flexibility and customization which can be included in whatever program the company decides would be advantageous.  

Here's how it works.  Participating employees are granted a "unit" of some kind whose value is tied in a specified way to the actual value of the company.  This might be exactly equal to a share of stock in the company or it might be tied to some other financial benchmark such as net income.  As the actual value of the company increases, so too does the value of the mirror/shadow equity. 

Depending upon the format of the plan, participating employees earn bonuses based on positive financial performance of the company according to the benchmark metrics selected.  The plan can provide for payouts annually, after a certain period of time, or tied to particular events such as the employee's retirement or the sale of the company.  Often, the value of any dividends declared is also added to the participating employee's mirror/shadow equity account.  Payouts may be made in installments or as lump sums.  Click here for a discussion of a specific example of how this might work in practice.   

Thus, from the participating employee's standpoint, they receive much of the financial benefit of actual ownership without having to expose themselves to the less rewarding "risk" aspects of actual ownership, including the possibility that there may be no buyer on the open market for ownership interests in a smaller privately held business.  From the owner-employer's standpoint, deserving employees crucial to the growth and success of the business are able to share in the financial success of the business, but ultimate control over the direction and future of the company has not been sacrificed.  In addition, payouts could also be conditioned upon compliance with applicable noncompetes or confidentiality provisions.

The one downside for both parties is that depending upon the complexity of the plan, benchmarks, and formulas selected, recordkeeping  and accounting may require some sophistication.  In addition, the Internal Revenue Service recently issued Section 409A regarding some valuation considerations that must be taken into account.  Click here and here to learn more about this.   

Overall, mirror/shadow equity provides an excellent way to reward and incentivize employees in a beneficial manner to owners.  Employees can enjoy the economic benefits of ownership while owners retain control of the company.

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