Rush on Business : Iowa Corporate Lawyer & Attorney : Rush Nigut of Brick Gentry Law Firm : Serving Des Moines, Cedar Rapids, Davenport, & Sioux City

Mike Colwell of the BIZ recently wrote an excellent post on IowaBiz titled Partnerships a Guaranteed Divorce. Mike explains in his post that wise business people will always plan for the divorce. The end is inevitable, whether it's due to death, retirement, disagreement or other reasons.

Mike also linked to my recent seminar on Partnering that I delivered at the BIZ Raising Capital Seminar. It's long but provides many tips for business people interested in partnering with others. Like a good marriage, communication and planning are the key ingredients for a good partnership.

You can see many helpful business videos from the Raising Capital Seminar in the Post Event video section of the BIZ Website. 

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 I was busy reading an article on Why Lawyers Don't Run Startups (And Why Entrepreneurs Hate Lawyers) when I ran across a terrific lesson learned from the article's author, Steve Blank. 

In every company that gives you a contract there's someone who wants a deal. When you run into contract issues, call them first for advice.

In my experience, this is SO true. I'll often review and negotiate contracts for clients. Often, there are terms that are unacceptable and put the client at considerable risk if they were to give in on the terms. I'll always ask them to go back to the person who has the most stake at getting the deal done to find out if a compromise can be reached. Hint: It's rarely the lawyer on the other side of the table who could care less about the deal and cares much more about a brilliantly written contract that forever protects the other side from every possible liability. It doesn't always work, but more often than not, we are able to move past the stalemate.

As a part of the process, it's important for business people to communicate their overall strategy to their lawyer. As the article suggests, what are the short term consequences of signing a deal? What can screw you in the long term if you agree to the contract? What contract terms really matter to you? Many lawyers concentrate too hard on protecting their clients from EVERYTHING. When in reality getting a deal done on terms that you can live with should be your priority.

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Last December I wrote about how an employee wage misclassification case cost Oracle $35 million. The question about whether an employee is exempt v. non-exempt is often misunderstood by employers. Often, employers want to avoid paying overtime to employees.  So employers will play a game of Russian roulette by paying those workers a salary instead of hourly. 

Have you reviewed your employee wage classifications recently? If not, we recommend that you do so. We have found in our reviews that employers large and small often make mistakes in classifying the wages of their workers. Sometimes even companies with sophisticated HR departments make errors - just ask Oracle. And companies right here in Iowa make mistakes too.

A tremendous resource regarding employee wage classification found on the Department of Labor website at www.dol.gov. There's great information on the site about the tests used to determine whether employees are exempt or non-exempt . Don't wait for a lawsuit to review your wage practices. By then, the horse will be out of the barn and you'll likely find yourself paying a substantial settlement or judgment.

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A common thing I see from franchisees is that they include only the name of the franchisor in contracts as opposed to including the corporate or limited liability company name of THEIR franchisee business. Most of the time the names are different. For example, if I own a  "Subway" franchise but my corporate name is "Rush Nigut Enterprises, Inc.", I need to make sure I include my corporate name in any contracts. 

I have seen this happen way too many times to count. On one occasion a franchisee litigation client failed to include the name of his corporation in a contract. The court ruled that he was personally liable for the debt because he had not disclosed to the other side that he was signing in a corporate capacity. Including just the name of his franchise in the contract was not enough.

Also, always be careful to always to sign with the title of your corporation or limited liability company, (i.e. President, Vice-President, member, etc.). This will assist in giving the proper notification to the other side that they are dealing with a corporation or LLC and not an individual responsible personally for the debt.

Be sure to contact a business lawyer if you have questions about whether you're signing contracts properly.

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I often review contracts for clients that are doing business with companies from out-of-state. Inevitably these contracts will have a choice of law provision that says the laws of [insert state] apply. Clients usually take it for granted that a court will apply the laws of the state referenced in the contract.

But a recent post from the Austin Technology Law Blog points out that isn't always the case and we should consider those contract provisions we often never think about. The post discusses a contract involving truck drivers and whether the truck drivers were employees or independent contractors. The two state laws involved were Georgia and California. Georgia law had a rebuttable presumption that the drivers were independent contractors while California law would favor them being employees. The contract in question chose Georgia law and that's where the defendant had its principal place of business.

A driver filed a class action claiming violations of the Fair Labor Standards Act and California wage laws. You'd think Georgia law would apply and the drivers would be treated as independent contractors, right? Wrong! The court held that California law ultimately applied. 

An interesting decision to say the least. The case points out it's important to consider provisions such as choice of law that are often not considered by the parties. Consider whether those provisions are written clearly and properly. I wonder whether it would have made a difference if the contract provision would have said the laws of the State of Georgia applied "without giving effect to conflict of laws principles"? The contract provision in question said only that the laws of the State of Georgia applied.

It appears the court in this case was determined to apply California law since Georgia law directly conflicted with a fundamental California policy. Just goes to show you how important some of these contract provisions can be and why it's so important to have agreements reviewed by experienced business counsel.

Click for the court's opinion: Ruiz v. Affinity Logistics Corporation

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I was quoted in this article from The Street entitled, "When The Parent Company Drags You Down". The article discusses the financial woes of some franchises including Quiznos and the impact on franchisees.

If your a franchisee caught in a system experiencing financial problems, my first piece of advice is to carefully review the terms of your franchise agreement to make sure the franchisor is meeting its obligations to you. Another expert quoted in the article encourages franchisees to organize and band together. Banding together can enable franchisees to gather information and gives leverage and bargaining power with the franchisor, vendors and suppliers and even help with trademark rights, said Brian Miller, CEO of The Entrepreneur's Source. 

If your franchisor is experiencing serious financial issues, it's also prudent to speak with a franchise attorney to get an understanding of your rights.

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Joe Kristan of the Tax Update Blog has a very interesting post on So What is the Right S Corporation Salary? The blog post discusses a recent 8th Circuit case where a West Des Moines accountant had to pay FICA taxes on about $91,000 of his earnings from his professional S corporation --rather than $24,000-- the figure he had used as his W-2 income.

I've talked on this blog in the past about how S corporation salaries must be reasonable. There is definitely an opportunity for S corporation owners to save on FICA and Medicare taxes but determining what the IRS will consider as a reasonable salary is difficult at best.

The Watson case is instructive though. Watson had set his salary as $24,000 and claimed that was all his accounting firm intended to pay him. The IRS determined that $91,000 was a more reasonable salary in his case and the 8th Circuit agreed. But keep in mind that Watson earned about $200,000 out of S Corporation distributions. So all was not lost as he avoided the 12.4% combined FICA taxes and 2.9% Medicare taxes on the difference. The case demonstrates there is some happy medium for the S corporation owner and proper planning can certainly help in saving on taxes. I've known others who have been challenged by the IRS and faired very well when setting reasonable salaries.

Joe Kristan states, in responding to a comment from me, that every case is different and that the relationship between a reasonable salary and overall compensation is certainly not linear. He says, 

No matter how fabulously successful the company is, the salary should match the job. Heck, if the founding shareholder cuts back his hours and hires professional management, his salary might go down as profits go up. 

It's best in these situations to get good advice from your tax advisor before setting a salary for your S corporation. And as we've said before, "pigs get fat, but hogs get slaughtered." 

For more information see:  8th Circuit Decision and District Court Decision

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Lawyers are not immediately recognized as the most creative souls on the planet but some of the best lawyers I know definitely have the the creative spark. I have seen many who were classic doodlers, photographers and painters. Some of them were also the most creative in the courtroom and ultimately very successful in winning cases. That's why I am intrigued by the Iowa Creativity Summit that is scheduled for March 1st at Drake University (Olmstead Center). Your registration includes dinner and two workshops led by best selling author Matthew E. May. The evening program begins at 5:15 p.m. and ends at 9:45 p.m.

This is a great opportunity for business leaders and employees to familiarize themselves with the creative process. As the program says, creativity isn't just for marketers or designers, it's for everybody. Even lawyers and entrepreneurs!

For more information on the program click:  Iowa Creativity Summit

For more information on Matthew E. May click: The Laws of Subtraction

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Jason Shinn of the Michigan Employment Law Advisor had a great post entitled "Is your company making this mistake when it comes to employees and intellectual property?" The post centers on a lawsuit filed by an employee of Marvel Entertainment who claimed he created the Ghost Rider character back in the 1970s. With the recent success of the movies, video games and promotional products, the value of the character has increased substantially and the employee wanted his share.

Shinn's post discusses how Marvel eventually won the lawsuit filed by the employee, but it wasn't easy, and the case took four years to litigate.

The importance of written agreements with employees and contractors that create intellectual property cannot be understated. A case I will never forget involved the sale of a business. At the 11th hour a contractor claimed to own all the intellectual property a business owner was trying to sell. No agreements existed between the business owner and the contractor. Fortunately, we were able to negotiate a reasonable figure that the contractor would accept to allow the sale to go through but the lack of an agreement did cost the business owner money and almost cost them the sale.

So I wholeheartedly agree with Shinn's advice:

In this regard, for companies that want to make certain they are the owner of a work - whether the work is created by an employee or independent contractor - the best advice is to require employees and independent contractors to execute an assignment and work-made-for-hire agreement at the outset of the relationship so that copyright ownership vest in the company.

Don't wait until it's too late. That's a mistake you don't want to make.

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A false advertising lawsuit has been filed against Brett Bros. Sports International, Inc. by an Iowa man. The President of the company is none other than Hall of Famer and legendary baseball player, George Brett. The lawsuit, filed in the United States District Court for the Southern District of Iowa seeks class action status and more than $5 million in damages according to the Complaint filed on February 6, 2012.

The allegations center on the alleged health and/or performance benefits of the necklaces that many young athletes seem to wear these days. The lawsuit alleges that Brett Bros. falsely claims its necklaces "help relieve stiffness in the shoulders and neck, eventually stabilizing your whole body, as well as help recovery from sports fatigue, restore important ion balance, and improve concentration and focus."

The Plaintiff, who purchased his necklace at the 2011 College World Series, says he didn't receive any of these benefits after relying upon the endorsement of George Brett.

This isn't the first time the sports performance necklace and bracelet industry has come under attack. Last year, it was reported that Power Balance entered into a $57 million settlement and declared bankruptcy.

The lawsuit against Brett's company specifically alleges that the company violated the Iowa "Private Right of Action for Consumer Frauds Act" (Iowa Code section 714H).  Filing a class action pursuant to the statute requires approval from the Iowa attorney general's office. The Complaint indicates that such approval has been obtained. A successful lawsuit under the statute would entitle the named Plantiff and the class members to damages, costs and reasonable attorney's fees.

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I am pleased to announce that I now have a Rush on Business You Tube Channel where I'll post short videos on various aspects of business and franchise law. I have a few videos posted so far and I'll add content weekly.

New videos include:

Should You Include Your Spouse When Forming a Small Business LLC?

Where Should Iowa Residents Incorporate or Form an LLC for their Small Business?

If there is a topic you think would be interesting, please let me know!

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Jon Hyman wrote on his Ohio Employer's Law Blog that the NLRB has issued a 2nd report on social media as protected concerted activity.  If you are an employer considering discipline or termination of an employee resulting from social media activity you need to be very careful. Jon points out:

This report underscores that employees’ use of social media to discuss the workplace and work-related issues, and the impact of business’s social media policies on those discussions, remains at or near the top of the NLRB’s priorities. Because the NLRB is taking such an interest in this area, employers act at their peril if they discipline or discharge an employee for social media activities, or roll out a social media policy, without the advice and input of counsel well-versed on these issues.

Bottom line:  Discipline of employees making disparaging comments about your company through blogs, Facebook, Twitter and other sites could land you in trouble. You should read the report of the acting NLRB general counsel. It's one thing to have rules that prohibit plainly egregious conduct through the use of social media but be VERY cautious if have rules trying to curb what employees can say about your company. 

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Over the last 5 years that I have been writing this blog, there haven't been many Iowa business lawyers who write a blog on a regular basis. But when I was looking at Mike Colwell's Startup Models site, I noticed a new blog from business lawyer Chris Sackett of Brown Winick called BizB4Law.

Chris wrote a post I wish I had written called I Like Clients Who Don't Like Lawyers.  Chris says,

This post, of course, runs the risk of offending lawyers, but I suppose the whole premise is that lawyers need to get over themselves and think like the business people who are their clients.

Well said. It's a super post. Check it out.

If you're working on a business plan or financial model for your startup business, be sure to check out Startup Models too. It could save you a lot of time, expense and effort.

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I had the opportunity to attend the Forum on Franchising in Baltimore this past month. The Forum Chair, Joseph Fittante, was recently interviewed by BlueMauMau on the state of franchise law which I thought was important to share.

Fittante commented that he is seeing more high stakes litigation. In his experience the number of litigation cases are decreasing but more of those cases are going longer than before. (That's my experience as well by the way, so if you are a franchisee looking to end an agreement or recover damages, you can expect a strong fight from the franchisor).

Fittante also mentioned the significance of the KFC case decided by the Iowa Supreme Court. The Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state. Fittante expects that more states will look to raise additional revenues through similar taxation methods or through the misclassification of franchisees as independent contractors v. employees.

Finally, Fittante also said he doesn't believe we will see a federal franchise relationship law that governs the franchisor-franchisee relationship but that will continue to be controlled by state law. He has a point that it's nice to know what the rules are rather than have ambiguity which happens when state laws vary so widely. 

Overall, I was impressed by the presentations at this year's Forum. Hats off to Fittante and many others for their hard work!

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A business owner needs to raise money. He comes up with an idea to "sell" a portion of his equtiy in the business. A prospective investor listens to the business owner's pitch and likes the idea. He decides to invest nearly $20,000 in the business in exchange for ownership. The problem? Nothing is in writing, yet the investor has given the money, and there is nothing that documents whether the "investor" is entitled to ownership, whether it was a loan or perhaps even a gift.

I can't tell you how many times I've seen something like that happen. It must happen to others as well because business advisor Mike Colwell recently wrote on a similar topic. It seems incredulous to me that someone could part with that kind of money without assurances in writing but I have seen it happen between friends and complete strangers alike. Why does this occur?

I think it boils down to trust. Most people are just too trusting. They believe things will work out and many don't want to confront or offend the other person. Or, they're just plain stupid (but I prefer the trust angle). So by all means trust your partner but make sure to get it in writing BEFORE you invest the money.

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One of the things I love the most is providing proactive educational workshops to companies and other organizations.  Due to the ever-growing interest in the topic, I am pleased to announce that I am now offering a new legal training workshop for businesses, large and small, regarding social media. A custom workshop will be designed for your business to cover the following topics:

• Overview of Social Media, New Developments and the Future
• The Use of Social Media in the recruiting and hiring process
• Balancing Employee privacy v. Employer's Business Interests
• The risks and benefits of Employees using Social Media in the workplace
• What every supervisor needs to know about the use of social media
• How (or whether) to discipline employees for Social Media use
• Social Media and its impact on Litigation
• Social Media Train Wrecks
• Summary of Social Media Case Law Developments 
• Drafting the Social Media policy 

To tailor the presentation specifically for your organization, we will send you a questionnaire in advance regarding your organization's and employees' use of social media and your existing policies and procedures.  Every company is different and the presentation will be designed to address your organization's specific issues, size, level of understanding and industry. Like other forms of employment based training, not only can social media legal training help you in the event you get pulled into litigation, but even more importantly, it can help prevent costly litigation and the loss of employee productivity.

Social media presents unprecedented opportunities and challenges for your business. It is essential that your executives, supervisors and employees stay informed about this ever-changing and important topic. For more information on social media legal training workshops and fees, please feel free to contact me at rush.nigut@brickgentrylaw.com.

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Franchisees generally want an exclusive territory that is protected from encroachment by other franchisees or the franchisor's company owned stores. Unfortunately franchisees are often under the mistaken belief they have an "exclusive territory" when they really don't.

You must consider whether the franchisor has reserved rights that could cause encroachment or competition from the franchisor, other franchisees or even other companies the franchisor may acquire in the future.

Further, franchisors may have a Web site where it conducts online retailing but franchisees are not permitted to conduct online retailing themselves.  Do you really have an exclusive territory if the franchisor conducts sales online? If the franchisor's online sales are significant, it could potentially divert customers away from the franchisee.

So don't gloss over the territory provisions in the FDD or franchise agreement. If you are told that you have an exclusive territory when meeting with the franchisor's representatives you better make sure that is actually the case.

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I advise business owners to seek the advice of an accountant when they are forming a corporation - particuarly if they have multiple businesses. A recent post from accountant Joe Kristan on IowaBiz shows why as a Michigan couple ended up with a $16 million problem in Tax Court.

As the saying goes, "An ounce of prevention is worth a pound of cure."

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Our new startup company, Notifyworks, Inc. has officially launched its Web site today. You can check it out at www.notifyworks.com. The site also contains a blog which will cover client relations and legal technology issues.

Notifyworks is a software system that allow you to set up proactive notifications to clients that are timed to automatically go out in advance of important dates and deadlines.

Be sure to check out the video on our home page and whatever you do, "Don't be Dick!"

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Once a mainstay of this blog, I have not written about employment law for quite some time. Since my franchise law practice has grown over the past few years, I've left it to Matt Brick from Brick Gentry to handle employment law issues in the office.  On the blogging side there are many great employment law blogs to follow including Daniel Schwartz of the Connecticut Law Blog and Jon Hyman of the Ohio Employer's Law Blog. Their blogs are terrific resources for anyone interested in employment law.

Another employment law blog that has come on the scene is the Iowa Employment Law Blog written by Patrick Smith of Des Moines. I've known Patrick for years and his blog is also one you can trust for up-to-date content on employment issues.

But the reason I am writing on employment law in this post is because all employers should definitely be aware of a new National Relations Labor Board (NLRB) rule that requires nearly EVERY private sector employer to post notices about their rights to unionize.  While there is some debate over whether the NLRB has the right to require the postings, the rule will go into effect on November 14, 2011. The failure to do so could result in an unfair labor practice. I am sure this would be quite the surprise for most small (or even large) businesses.

For more information, see the postings by Jon and Patrick on the topic.

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