Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

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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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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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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Suppose your fellow LLC member starts a new business which competes with the LLC's business.  Can he or she do that?  Well the answer depends upon what state your LLC is organized in and what your Operating Agreement says.  It may also depend on how sophisticated the members are.

In Ohio, the default presumption is that fiduciary duty among members of an LLC, especially in what might be called a "closely held" LLC with few owners, exists and would prevent this sort of behavior.  However, Ohio courts have shown a willingness to allow parties to restrict or modify this obligation with the provisions of the operating Agreement itself. 

McConnell v. Hunt Sports Enterprises.  In Ohio, the key case is McConnell v. Hunt Sports Enterprises, 132 Ohio App.3d 657, 725 N.E.2d 1193 (10th App. Dist. 1999).  The case involved Lamar Hunt and Columbus' "Mr. Mac" who eventually became the majority owner of the Columbus Blue Jackets NHL hockey team.  It arose in the context of Columbus' efforts to attract a professional sports team.  McConnell and Hunt were both members of an LLC called Columbus Hockey League, LLC ("CHL") which was formed according to its Operating Agreement to "invest and operate a franchise in the National Hockey League". 

At some point along the way, Mr. Mac and some of the Columbus members of CHL, individually and not on behalf of CHL, went ahead and signed a lease and ownership agreement for an NHL team.  This group then filed a declaratory judgment against Lamar Hunt's entity to the effect that they had not violated CHL's Operating Agreement.  The Hunt group then counterclaimed alleging breach of fiduciary duty and seeking an injunction preventing the NHL from granting the franchise to Mr. Mac's group.  

Both the trial court and the Ohio Court of Appeals found that the Operating Agreement itself allowed competition and held that consequently no breach of fiduciary duty occurred.  Indeed section 3.3 of the Operating Agreement provided:

Members May Compete.  Members shall not in any way be prohibited from or restricted in engaging or owning an interest in any other business venture of any nature, including any venture which might be competitive with the business of the Company...  

The Court further explained:

In the case at bar, a limited liability company is involved which, like a partnership, involves a fiduciary relationship.  Normally, the presence of such a relationship would preclude direct competition between members of the company.  However, here we have an operating agreement which by its very terms allows members to compete with the business of the company.  Hence, the question we are presented with is whether an operating agreement of a limited liability company may, in essence, limit or define the scope of the fiduciary duties imposed upon its members.  We answer in the affirmative.

In reaching this conclusion, the Court considered existing caselaw which established a fiduciary duty in the close corporation context.  It harmonized these cases with its holding as collectively standing for the proposition that both close corporation agreements and operating agreements could permissibly limit the scope of fiduciary duties that would otherwise apply.  It also made it clear that "[i]n general terms, members of limited liability companiesowe one another the duty of utmost trust and loyalty." 

Recent Ohio Caselaw.  More recently, in All Star Land Title Agency v. Surewin Investment, Inc., 2006 Ohio 5729, (8th App. Dist.), the Cuyahoga County Court of Appeals held:

In the present case, a limited liability company is involved which involves a fiduciary relationship.  Normally, the presence of such a relationship would prevent direct competition between the members of the company.  However, here we have an operating agreement which, by its very terms, allows members to compete with the business of the company.

Delaware.  Delaware is even more accepting of a contractual waiver of fiduciary duty.  Section 18-1101 of the Delaware limited Liability Company Act specifically authorizes the restriction or even elmination of any fiduciary duty:

(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing....

(e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.

As explained by Francis Pileggi in his Delaware Corporate and Commercial Litigation blog post entitled "Chancery Gives Victory to 'Freedom of Contract'and Refuses to 'Find' Fiduciary Duties in LLC Agreement When Not Clearly Stated", the recent Delaware case of Fisk Ventures, LLC v. Segal underscores this willingness to accept the parties' contractual agreement that no fiduciary duty applies.  Francis believe this case will gather much attention in an ongoing discussion regarding whether fiducairy duties should differ between LLCs and corporations.

Virginia.  A recent post "Members of Virginia LLCs May Not Owe Fiduciary Duties to Each Other" on the Womble Carlyle Unfair Business Practices blog by Mike Holm explores two Virginia cases which found the absence of statutory provisions regarding fiducary duty in the Virgina LLC Act, as compared with their presence in the Virginia Partnership Act to be dispositive in determining that LLC members have no fiduciary duties towards one another.     

Florida.  In Florida, Fla Stat. Section 608.4225 sets forth a number of fiduciary duties for members of limited liability companies.  In addition, pursuant to Fla Stat. Section 608.423 prohibits elimination fo the duties found in Fla. Stat. 608,4225, but does allow the operating agreement to

      1. Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and

      2. Specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;    (c) Unreasonably reduce the duty of care under s. 608.4225;    (d) Eliminate the obligation of good faith and fair dealing under s. 608.4225, but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;

 California.  In California,  in a manger-managed LLC, a manager owes members the same duties as a partner does to a partnershiop and to the other partners under Cal Corp. section 17153.  According to Cal Corp Code section 17005, "[t]he fiduciary duties of a manager to the limited liability company and to the members of the limited liability company may only be modified in a written operating agreement with the informed consent of the members."  No similar specific provision appears to exist with respect to the obligations between members.

Other States and Resources.  For discussions of the law in other states, visit:

• Illinois - "The Illinois Limited Liability Company Act After a Dozen Years - What Guidance have the Courts Gven Us About LLS in Illinois" by William Knee.
• Tennessee - "Getting Your fair Share: What Are the Fiduciary Duties When one member Takes a Piece of the LLC Pie?" by Richard Spare.  See also a more recent post on "Delaware LLCs for Tennessee Lawyers?" by the same author for an exhastive comaprison of the differences in philosophies between Delawar and Tennessee with respect to LLCs.
• Wisconsin - "The First LLC Case" by Joseph Boucher and George Kamperschroer

And for those really wanting to get into detail on a slightly different related topic, check out Miller, "What Fiduciary Duties Should Apply to the LLC Manager After More Than a Decade of Expermimentation?", 32 Iowa J. Corp. L. 565 (2007).

Analysis.  I like the Ohio approach of very strong presumption of a fiduciary duty among LLC members, especially in "closely held" LLCs.  When only a few owners are involved and are engaged in the day-to-day running of the company, there seems to be little rationale for varying the standard of care owed one's fellow owners by virtue of the form of business entity chosen. 

For more sophisticated LLCs,  I suppose a case can be made for allowing members to decide among themselves what level of loyalty and care they want.  However, what about publicly traded LLCs or privately held LLCs in which some members are individual investors who responded to a private placement memorandum?  In this case, it seems hard to me to explain why the form of entity chosen will determine the level of loyalty and care owed these perhaps less sophisticated members.  

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Above the entry to Hutchins Hall (in which my alma mater University of Michigan Law School is ensconced) is carved Oliver Wendall Hollmes' famous quote to the effect that "the life of the law has been experience, not logic".  A "Watch Your Language"  ongoing series in the new Ohio Real Estate Blog would add that if you want the experience to lead to law supporting the result you prefer, it's important to take care in the language you choose to document your business relationships. 

• Here's a welcome to the new Ohio Real Estate Blog being published by attorneys at the Cleveland based law firm of Kohrman Jackson & Krantz, PLL.  Kohrman Jackson & Krantz is also home to Jon Hyman, author of the Ohio Employers Law Blog which has been providing useful information and knowledgeable commentary about labor and employment law for  more than a year.  (Hopefully, Jon can mention to his colleagues that not including dates on blog posts is really annoying.) 

The first installment in the Watch Your Language series suggests "Say What You Mean, Precicely [sic], or a Judge will Decide What You Meant - #1 (Watch Your Language with 'Repair Clauses' in Commercial Leases)".  The second installment further advises "If the Form Does Not Fit, You Must Alter It - #2 (Watch Your Language [and Intent] with Letters of Intent".  Together, these posts again make the point that if the life of the law IS experience, one important aspect of framing and influencing that experience is being clear in defining the consensual business relationship.

• I have previously posted on the potential perils of a "do it yourself" approach to legal documentation, pointing out that every legal document can be written from a variety of perspectives.  If you're a commercial landlord, you'd probably prefer a lease slanted towards your interests rather than the tenant.  Perhaps even more importantly, an agreement regarding the sale and purchase of a business will typically be drafted much differently from the seller's perspective than from the prospective buyer's standpoint. 

Why Saying What You Mean Matters in Commercial Landlord-Tenant Relationships.  In his post regarding the wording of commerical lease repair clauses, Stephen Richman  uses object examples from caselaw to illustrate that even little things can make a difference.  In one instance, the result turned upon the grammatical difference between "i.e" and "e.g" with the language at issue providing "the landlord is responsible for structural repairs only, i.e. air conditioning, bolier, wiring and utlity replacements, provided tenant keeps up maintenance."  Because "i.e" means "that is" while "e.g." means "for example" and the roof was not listed, the court ruled that the tenant was not obligated to make repairs to the roof.

The recent Ohio decision of Atelier District, LLC v. Parking Company of America, Inc., 2007  Ohio 7138, 2007 Ohio App. LEXIS 6258 (10th App. Dist.)  further emphasizes the need to "say what you mean."  Both parties were sophisticated business entities in this case which ultmately proved to be a half million dollar (i.e. $500,000 plus) mistake for the tenant when the Court of Appeals upheld the trial court's judgment in favor of the landlord.

At issue was language in an Addendum to a lease which obligated the tenant to "make improvements" to parking lots "which shall include development, paving, demoliton and fencing, such improvements to be more particularly described in Exhibit B".  Exhibit B set forth "cost estimates" for the improvements, but did not indicate any cap on the amount the tenant would have to pay to effectuate the required improvements.  Neither the Addeddum nor Exhibit B described the "improvements" to be made in any detail.    

The tenant argued that there was no "meeting of the minds" because it thought "paving" only meant that an "asphalt overlay".  It also tried to blame the landlord and other outside factora for the tenant's failure to fulfill its obligations under the Addendum.  However, the Court noted that "[b]ecause [the tenant] assumed the responsibility to obtain any required licenses or permits, it bore the risk that the government would delay in issuing them....  [The tenant] agreed to complete the lot improvements pursuant to the 'Improvements' provision and Exhibit B without including any 'cap' or 'maximum' on the amount it must spend to complete the improvements."

Choosing the Right Words.  All right >> so you're convinced that using just the right language is important in any document dealing with a legal relationship.  But does that really mean it has to be long and virtually impossible to understand (even by another lawyer, or for that matter even a few years later by the lawyer who drafted it in the first place)?  Ken Adams, a professor at the University of Pennsylvania Law School who writes the terrific AdamsDrafting blog focusing on contract drafting, doesn't think so.  He is seeking submissions of a form contract a company uses on a regular basis for his class to redraft.  

• More information about the Penn Law Contract Redrafting Project
• Description of results of 2007 Penn Law Contract Redrafting Project involving a master services agreement used by a financial services company 

In his other Watch Your Language post on letters of intent,  Stephen Richman focuses on whether a letter of intent is binding and offers tips for ensuring that it does not accidentally become binding.  

And, finally Findlaw.com offers a Do's and Don'ts: Contract Terms checklist offering useful guidance to anyone trying to document a legal transaction, as well as several other useful tips. 

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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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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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Nina Kauffman over at the Making It Legal blog just wrote a terrific post using an object lesson to explain exactly why deciding to go forward in a deal "without getting lawyers involved" isn't always the bargain cost-saver envisioned.  Long story short, the "victim" aka buyer didn't ask to see financials, didn't verify the arrangements existing with the landlord, and didn't verify the seller's ownership interest before swapping her hard earned money for a business that turned out not to be the cash cow promised by the seller.  Now she has discovered that the consequences of trying to save money by keeping lawyers out of the transaction are neither pleasant nor inexpensive.

While it is certainly true that this erstwhile buyer could have done all these things without a lawyer and perhaps avoided her unfortunate fate, using a lawyer to assist with the purchase of a business minimizes the likelihood that an important detail pertinent to whether you even want the business will be overlooked.  It can also ensure that the deal is structured in the manner which is most advantageous to you from a tax and basic business perspective.  Although many deals do proceed without a hitch with nary a lawyer in sight, the only one which really matters to you is the one you're doing.  So it all comes down to how much of a gambler you really are; if you're lucky, all will be well, but if you're not, the results can be far more devastating than just a minor disappointment in the road of life.   

Business people sometimes think they can substitute the form documents easily available on the internet, or in self-help books found in the local retail book store or on Amazon, for a trip to the lawyer.  I certainly understand the motivation behind hoping the form downloaded for free will work just fine if you change names, dates, and maybe a few other things.  On my Blogroll, I have even included some websites with what I consider to be generally dynamite forms.  Forms, however, must be utilized responsibly.   

Unfortunately, making sure you have the right document and the right language for your particular situation is very much like making sure you have the right tool for the job when it comes to home repair or any other task.  If you need a screwdriver,  trying to use a hammer is unlikely to lead to optimum results.  To get a flavor for this, check out Ken Adams of the Adams Drafting blog which focuses on all the different ways subtle variances in the language used can change meaning significantly.  Lawyers have the education and experience to understand and make the proper choices.  Do you?  

Forms are a Jumping Off Point, Not the Destination.  Forms are just that - forms.  They are merely a place to start to save the time and expense of drafting from scratch on every occasion.  When I download forms or entire documents used in actual deals from oncle or docstoc, or Findlaw, or anywhere else (and I do that a lot), I rarely, if ever, use them in exactly the same form as downloaded. 

I use downloaded forms as a skeleton to be fleshed out by language from other forms and documents, together with specific language and provisions pertinent to the particular deal that I create myself.  I also delete significant portions of the document downloaded as not relevant or appropriate for the deal before me.  While many deals may be similar, every transaction really is just enough different to require some tailoring of draft documents at my disposal.

Why doesn't the same document work in every deal?  Why can't you just use the lease or Asset Purchase Agreement your buddy got his lawyer to draft or you found on the internet? 

For starters, contract, employment, and especially real estate, law differs in important ways from state to state.  New York may require certain language not necessarily favorable to employers that Ohio does not and which an employer in Ohio may not wish to include at all.  Each state's courts may have reached slightly different interpretations of certain legal concepts and principles which can affect the meaning, and sometimes even the validity, of particular contracts.  Do you as a business person really want to spend the time to determine if the document you got from your friend in Michigan is really going to work the same way here in Ohio?  An Ohio lawyer already knows these details and understands how to apply them to your Ohio transaction.

In addition, documents drafted from the perspective of one party to the transaction are generally not as beneficial to the other.  For example, from a landlord's perspective, there are certain provisions in a lease that should be included which the tenant would prefer to leave out.   Even if you are using a form from "your side", your bargaining position may be different from that of the original party in that position.  While it is theoretically possible to draft a contract or other document neutrally so that it is completely "fair" to both sides, in reality, contracts are generally written in such a way to benefit one side somewhat more than the other.  How great the disparity is often a function of the relative bargaining position of the parties.  An attorney is able to assess your role (and relative leverage) in the transaction and determine the most appropriate language to be used as a consequence.  

• EXAMPLE from an Asset Purchase Agreement - Compare the following three ways of describing the assets being purchased, each of which has a slightly different meaning.  Choosing the right version for your particular deal is crucial.  Having a lawyer on your side can help.

The purchased assets being acquired by the Buyer as a result of this Agreement and the transactions contemplated hereby shall be acquired by the Buyer on an "AS IS, WHERE IS" basis and in their then present condition, and Buyer shall rely solely upon its own examination thereof.

Except as set forth on Schedule 3.5, [to the best of Seller's knowledge and belief], the Assets, including all machinery and equipment, are in good state of repair, in sound operating condition, ordinary wear and tear excepted, and have been given regular maintenance in the ordinary course of business.  

[To the best of Seller's knowledge], All of the facilities of the Seller and its equipment and other tangible assets are in good condition and repair (ordinary wear and tear excepted) and workable, usable, and adequate for the uses to which they have been put by the Seller in the ordinary course of business, and none of such facilities, equipment, or other tangible assets (exclusive of obsolete items no longer used in the Seller's business) is in need of other than routine maintenance or repair

The Ohio State Bar Association also offers some additional considerations why consulting an attorney can be helpful.  Among other advantages is the confidentiality afforded by the attorney-client privilege which may not exist to the same extent with other professionals such as CPAs. 

For some similar thoughts along the same vein with links to still others making the same point, visit Rush Night's posting on the subject on his Rush on Business Blog.

A Final Point.  Some clients think they're helping me by bringing me someone else's form to "fix" for their deal.  Mostly, you're NOT, helping me that is.  I DO have my own forms that I'm used to and know how to tailor to your deal; it will probably take me longer, not less time, to use the form you bring me than my own form.  This is because I already know where I've put certain important language and the sections that typically require modification from one deal to the next; with someone else's form I have to read it especially carefully to make sure it has the same provisions.  It's a little like finding your way to the bathroom in the dark in the middle of the night; most of us can navigate this journey just fine in our own home, but may have difficulty when staying as a guest somewhere unfamilar.

So that's my little commercial on how I and other lawyers actually do add value to your business transaction.  Can a business person get to the same place without a lawyer?  Sure, but if you really wanted to know that much about the Law, you'd probably have gone to law school in the first place.

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The central legal document in the purchase and sale of any business is the Purchase and Sale Agreement. It fleshes out the details behind the key points mentioned in the "letter of intent" and contains the procedures needed to meet or carry out the respective requirements of buyer and seller. Although, customarily, the purchaser is responsible for providing the initial draft, sellers should not assume that the provisions of the Purchase and Sale Agreement (sometimes referred to as the "PSA") require little of their attention.

If an attorney has not yet been consulted for assistance with the transaction, NOW would be an excellent time to remedy that. PSAs vary considerably and, depending upon whether viewed from the perspective of buyer or seller, some language will be more beneficial than other. In addition, provisions appropriate in one deal may actually be harmful in another. For a more in-depth look at the overall process and documentation involved in the purchase and sale of a business, view my seminar PowerPoint presentation Buying and Selling a Business - Legal Insider's Practical Guide. To read my blog post about choosing whether to structure the transaction as an "asset" or "stock" deal, click here .

Regardless of how the transaction is structured, perhaps the most important, and often the most intensely negotiated, part of the PSA to both sellers and, especially, buyers are the "Representations and Warranties", sometimes simply referred to as "Reps and Warranties". A seller's representations and warranties are essentially assurances from the seller and/or seller's shareholders about the nature, scope. and condition of the business. As such, they operate in tandem with a prospective purchaser's due diligence activities, but should definitely not be viewed as a substitute for that. Because liabilities come automatically with the purchase in a stock/equity deal, reps and warranties are particularly important in those transactions. When the deal is largely or entirely seller-financed, a seller's representations and warranties may become somewhat less important because the buyer will have the ability to offset remaining payments due against any problems; however, even here the content of what is said still matters.

For prospective purchasers, there are three main reasons for focusing on a seller's Reps and Warranties:

• Due Diligence. Reps and warranties are often utilized as a device for obtaining disclosure of crucial information about a company and its business and financial affairs. In this way, they can help aid and organize other due diligence activities. In addition, reps and warranties can also help reduce any transitional "learning curve" after the purchase by providing the buyer with much useful information about how the business operates.
• Exit Hatch. Reps and warranties can also serve as a basis for terminating the transaction if due diligence activities of the prospective purchaser reveals false or inconsistent information prior to Closing
• Damages. Reps and warranties establish what is being bought by providing a detailed depiction of the comapny and its business/financial affairs as it will exist at Closing, thus giving the buyer some assurance that the buyer's expectations of what is being purchased will in fact be that. If the reps and warranties turn out not to be true, that can give the buyer the right to refuse to pay the balance of the purchase price or to demand indemnification from the seller.

From a seller's pont of view, the main reason to pay attention to the "reps and warranties" they are asked to make is that it may affect their abilty to receive the full purchase price bargained for if the reps and warranties prove to be incorrect in any way. Depending upon how the agreement is written, this can be true even if the seller didn't know a particular rep and warranty was incorrect.

So what seller reps and warranties should be included? It depends on the individual transaction, but generally all or most of the following will be included;

• Organization and Good Standing - Seller is properly formed from a legal standpoint
• Authorization; Enforceability - Corporate resolution or other appropriate company or shareholder/owner action authorizing the sale has been taken and nothing else must be done for the deal to be enforced against the seller
• No Violation - Seller is not prohibited from selling by any agreement with any other party or any court order
• Title to Assets; Permitted Encumrances - Key provision for both buyers and seller because it defines what is being sold and its value after taking into account debt to creditors.
• Condition of Assets and Facilities - Extent of specificity will reflect s buyer's areas of concern. materiality and knowledge qualifiers may be appropriate, but should be carefully evaluated.
• Financial Statements - Essentially intended as assurance that Buyer can rely upon the accuracy and completeness of financial statements provided by the seller during the due diligence period. Which financial statements and whether they must be "audited" or merely "reviewed" financial statements depends upon factors such as availibility, relevance to the buyer's commercial valuation of the acquisition and the burden and expense to the seller which the buyer wishes to impose and the seller is able and willing to bear
• Environmental Matters - pertinent when real estate is involved
• Customers and Suppliers - References key contracts and provides assurances that they are valid and enforceable
• Litigation - Provides assurance that except as disclosed on a schedule, the company is not involved in any pending or threatened litigation
• Taxes - promises that taxes are paid current or reserved for in the financial statements
• Compliance with Law - Company is not in violation of any state, federal or local law

In a typical tran