Making It Legal:

The best way to handle a lawsuit is to avoid getting into one.  Rare is the small business that has the funds set aside to pay for the lawyers (and possible judgment) of a lost case–heck, these companies often can’t afford to pay their owners a regular salary!

So how do you keep lawsuits off your back?  Attorney and syndicated columnist Cliff Ennico has his top 5 tips, which include:

1. Have a limited liability business entity.
2. Get insurance and keep it updated.
3. Disclaim legal liability in your contracts (but check with your attorney to make sure they’re worded properly).
4. Transfer assets out of your own hands (mind the timing of this, though).
5. Say “sayonara” to high risk customers.

It’s said that more than 40 percent of all marriages in this country end in divorce.  So there’s a not-insubstantial likelihood that your business could be affected by divorce . . . even if you’re not the one divorcing.  Here’s today’s query:

Q:  My partner’s ex-wife is suing him for a large amount. Can it affect our business if my partner doesn’t pay on the due date? Also, I am thinking of buying the business from my partner. What are things I need to ask and sign?

A:   There is a possibility that your partner’s ex-wife’s lawsuit could cause a problem for your business. Among other ways, if she gets a judgment against your partner, she may be able to collect against your partner’s assets . . . and his ownership of the business is one of his assets. Make sure to review your partnership agreement (if you have one)–many of them provide that if the stock (or ownership interest) of one of the owners becomes subject to a lien or judgment, it triggers a buyout by the corporation (or other owners).

If you choose to buy out your partner at this time, you’ll want to consult with an accountant to get a fair value of the business, determine the price you’ll pay and how much time you’ll have to pay it. You’ll also want to speak to an attorney to make sure that your purchase/sale transaction doesn’t somehow get embroiled in your partner’s litigation. Look for certain safeguards in your purchase and sale documents (often referred to as “indemnification”) where the partner will protect you and the company in the event that the wife widens her litigation net to include you.

Above all, get it in writing and be aboveboard in handling the transaction. The last thing you need is the wife poking around in your transaction (and possibly voiding it) with the allegation that you didn’t offer fair value or that it was a “sham” you and your partner cooked up to stiff her out of her rightful due.

A written contract doesn’t have to be filled with legal mumbo-jumbo in order to bind your business. That was a hard lesson learned by a Missouri company, in the case of Baum v. Helget Gas Products, Inc.

In the Baum case, the prospective employee (Baum) took copious notes during his interview, including descriptions of salary, benefits and the length of his contract. He wrote “Contract With Helget Gas Products St. Louis Mo. Market” across the top and handed it to the Helget manager, who signed it. When Helget fired Baum a year later, Baum sued and won, saying he had a three-year contract. The court agreed.

The moral of the story: Don’t sign anything employee-related without first running it by legal counsel or HR. What the Helget manager could have done is to make a copy of Baum’s notes and tell him that they’d be provided to corporate counsel, who would draw up the appropriate documents in accordance with company policy.

A sad tale of woe crossed my desk.  Seems that, a couple of months ago, an unsuspecting entrepreneur from Mexico bought into a U.S. franchise to import products to Mexico. She sent her 25 percent deposit (many thousands of dollars) to reserve the franchise for her city, but the franchisor cannot get the documents that she requires to import the franchisor’s products. According to the agreement she signed, the 25 percent is nonrefundable . . . but can she recover anyway because the mistake was not her fault?

The short and obvious answer is: It depends.

Franchises are strange and furry creatures. They involve a lot of regulation and disclosure to establish them. They also require a certain degree of rigor in creating the business model to ensure consistency in the franchise results. Whether or not “Melinda” can recover her money depends on the actual wording of the franchise agreement. It also depends on the laws of the state that governs her agreement (often called “governing law” or “jurisdiction”).

Contract principles generally provide that if there’s a problem or mistake that the parties weren’t aware of at the time they signed the agreement, it’s not fair for one or the other to be SOL. Courts may allow the contract to be “rescinded”–like a “do-over” in kickball. Everyone goes back to where they were when they started–no lost points, no gained advantage. But now you have to factor in the cost of an attorney to bring this claim for you.

Because franchise laws vary from state to state, it’s always advisable to consult an attorney who specializes in franchises in the state where the agreement is decided. And do it BEFORE you sign the paperwork, so that you know the risks of getting involved in this venture, and what your recourse will be if problems arise.

For companies with employees, there’s a new rule in town (at least, in Chicago’s federal court): Under the Pregnancy Discrimination Act, women cannot be fired from their jobs for needing time off for infertility treatments.

As reported in the Wall Street Journal online, the ruling involved “a secretary who was laid off after taking time off for in vitro fertilization, then asking for more [time off for a further procedure]. Without ruling on the merits of her case, the court last month set a precedent by giving Ms. Hall a green light to sue her former employer for pregnancy-related bias.” Apparently, the plaintiff had been singled out for absenteeism as a result of seeking in vitro fertilization treatments.

For now, the decision applies only in Indiana, Illinois and Wisconsin, as it’s the first time a case like this has made its way to a formal (public) court hearing. However, other jurisdictions could pick up on it and adopt it in their own.

Writer and humorist Ambrose Bierce (1842-c1914) once wrote of litigation: “[It is] a machine which you go into as a pig, and come out of as a sausage.” The sentiment still holds true today.

The New York Times reported on a recently released study of civil trials, which indicated that plaintiffs who settled their cases before trial ended up recovering more ($$$) than those plaintiffs who took the case through trial. In other words, proceeding to trial ended up being a mistake for the majority of plaintiffs surveyed. It was a mistake for only 24 percent of defendants. As reported,

In just 15 percent of cases, both sides were right to go to trial–meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.

According to the study’s co-author, Robert Kisner, “the vast majority of cases do settle– from 80 [percent] to 92 percent by some estimates.” So, depending on which side of the fence you’re sitting, make sure you accurately assess your chances for success. After all, half a loaf is better than none.

Damaged corneas were probably not what Victoria’s Secret had in mind when it designed its cheeky (ha, ha) little “low-rise v-string” (part of the “Sexy Little Thing” line). According to a lawsuit brought by a California woman last month (see Today show interview), the thong flew apart and struck her in the eye. She declined to state her damages, but her attorney declares, “It’s a matter of consumer protection.”

When you have stopped snickering and snorting (hey . . . I sure did), realize there is a lesson here. When placing products in the stream of commerce, you never know when you’re going to hit a rock. All the more reason to make sure you have the right insurance in place and that you’ve shielded yourself by operating as a corporation, LLC or other limited liability entity.

It probably passed unnoticed by most people, but the Supreme Court handed down a decision recently that raised more than just a few eyebrows in the legal community.

In the case of CBOCS West v. Humphries, a black manager at a Cracker Barrel restaurant filed suit under the Civil Rights Act of 1866 (now codified at 42 U.S.C. Section 1981), alleging he was fired after complaining about discrimination against other black mid-level managers. Whereas some civil rights statutes explicitly prohibit retaliating against an employee who is trying to assert his or her rights, Section 1981 was silent. It prohibits discrimintation on the grounds of race in making contracts, but says nothing about retaliation as a prohibited form of discrimination. So the narrow question before the court was: “Can someone bring a race retaliation claim using Section 1981?” The court’s answer was yes (by a 7-2 margin).

The result is surprising for a couple of reasons. First, it seems to run counter to the increasingly conservative trend of court decisions. In fact, just last year in Ledbetter v. Goodyear, the court faced an employee complaint of discrimination. The plaintiff employee had 180 days to bring a claim of sex discrimination to the Equal Employment Opportunity Commission. She claimed that there was a repeated pattern of unfair evaluations and (lesser) pay raises that existed for a period of time. However, since many of them predated the 180-day period, the court held that she could no longer base a claim on them. Based on that strict reading of the statute, civil rights activists were concerned about the decision-making trend of the court. The Humphries decision takes a much more liberal approach.

The second reason it’s surprising (sort of in line with the first) is that the majority decision seemed to weigh the legislative history of the Civil Rights Act and similar statutes more heavily than case precedent. Sure, the court found cases on which to hang its collective hat. But the approach taken to arrive at the decision was not one normally associated with a conservative court, which would tend to look at the strict language of the law: “Does the language specifically allow a claim? No. If that’s the case, it’s for Congress to pass a law amending it, not for the court to imply a right of action.” Rather, the majority decision took the position that it is presumed that federal civil rights statutes prohibit retaliation whether they say so explicitly or not. See the wiki on the U.S. Supreme Court for a cogent analysis of the history of the case and the arguments before the court.

In practical terms, what does this mean for employers? Quite possibly, that they’ll see a rise in retaliation claims. An effective way to prevent them is to ensure that your company has an employee manual outlining the appropriate procedures for airing grievances and proper training for managers in dealing with these kinds of claims.

This week, I received a frantic call from “Rosie,” who had been referred by a colleague of mine. She plunked down a huge chunk of change (well into the five figures) to buy a day spa from the current owner. The seller told her he wanted to get out of the business because he wanted to retire. Of course it generated more than enough to meet its expenses, he cooed. It’s a great business, terrific location. The seller didn’t want to get lawyers involved: “They always complicate matters.” Rosie wanted to do the deal without laywers, too– it’s cheaper that way. So she bought it–the business… and the seller’s lines about the health of the company.

Turns out, there was very little the seller told her that was true, smooth operator that he was. And Rosie fell for it, hook, line and sinker. What didn’t she do?

• She didn’t ask to see the financials to verify his rosy (no pun intended) reports.
• She didn’t ask to see the lease for the premises to verify arrangements with the landlord.
• She didn’t ask to see the corporate documentation, verifying the seller’s ownership of the company.

Rosie wants out, but getting her out of this deal now is like trying to get milk out of the coffee when you realize you should have had cream. She can’t afford proper legal help because she sank her money into the deposit and on shoring up the ailing business.

As Twilight Zone creator Rod Serling would say: “Offered for your consideration.” Rosie rushed into the deal without guidance from an attorney or any other professional advisor. For whatever her reasons, she had to have this particular business now. For want of spending a few thousand dollars to make sure she got good advice and had seasoned experts watching her back, Rosie is now facing the possible loss of tens of thousands of dollars (that is, a perfectly good down payment that could have been put to better use), additional tens of thousands to get the business up and running (which should already have been up and running), and tens of thousands in possible litigation fees (to either sue the seller or be sued by the seller should she choose to walk away).

So I ask you: When you do the math, is it worth it not to get lawyers involved?

In a recent round of litigation concerning online content hosts, the online complaint site Ripoff Report won a defamation (and trademark) lawsuit filed in Florida by a Colorado company.

According to the site, the Ripoff Report is a worldwide consumer reporting website and publication by consumers, for consumers, to file and document complaints about companies or individuals. Apparently, it provides users with pre-programmed categories, or labels, for classifying their posts. The defendant, Whitney Information Network, became riled when it discovered that the posts complaining about it had been tagged with labels such as “corrupt companies” and “false TV advertising,” in addition to the more banal (and benign) “seminar programs” and “trade schools.”

The Florida federal district court relied on Section 230 of the federal Communications Decency Act, which protects content hosts from liability for the comments and information placed on the site by users. Even though the Ripoff Report site provided the “categories,” the court found that that was not sufficient to move it out of the realm of mere host (where it is protected) and into the realm of content provider (where it would be more vulnerable).

To learn more about the case, see Wendy Davis’s article in Online Media Daily.

Much as I swore I would not begin Chanukah/Christmas shopping before Thanksgiving (I am blessed with Jewish family and Catholic in-laws, so I get it from all sides), I did. The lure of the catalogs I received in the mail, and avoiding the lines, the stress and the rush, were too great. After sifting through dozens of catalogs and circling items, I spent a good few hours online and made all my purchases. I haven’t received everything yet, nor have I wrapped it, but I’m done with shopping already!

So I say now. What happens if something arrives that doesn’t meet my specifications? Or wasn’t what I ordered? Or was broken? Or, contrary to the enticing photo in the catalog, simply wasn’t “all that” in person?

Many large businesses post their return policies on their websites. Many small businesses don’t have one, and therein lies the danger. Massachusetts attorney Michael Goldstein examines what it takes for you, as an “injured” purchaser, to be able to sue an internet retailer in your home state. One significant factor is known in legalese as “jurisdiction.” Has the shabby seller established a business presence in your state? Or made a concerted effort to attract customers from your area? If so, you may be able to haul them into court in your neighborhood.

On the flip side, if you’re the internet retailer, the last thing you want is to get hauled into court in every little town and vale across the country. If someone is going to be so dissatisfied that he or she wants to sue, you want this to happen in your backyard so that you are spared the expense of schlepping all over the place. That’s where having website terms and conditions come into play. They make it clear where disputes will be resolved–it’s a condition of the privilege of purchasing from your site.

Most purchasers don’t even focus on those terms when making a purchase. But they’re there. Usually introduced by language such as: “Welcome to BlahBlahBlah.com. The Company and its affiliates provide their services to you subject to the following conditions. If you visit or shop at BlahBlahBlah.com, you accept these conditions.” If you purchase from that site, you agree to resolve disputes wherever the retailer chooses. Consider the following: Amazon.com (Washington state); Sephora (California); Target (Minnesota); Office Depot (Florida–OK, not exactly for holiday presents… but you get the point).

Why not provide your business with the same leverage and protections? For other website terms that you might want to consider, see my own Words to the Wise newsletter article (just released last week!) at Wise Counsel Press: “‘Attention Internet Shoppers: Your Website Terms and Conditions.” It’s free to subscribe, and you’ll receive a special report, Top 10 Legal Pitfalls, just for doing so!