Wisconsin Business Law Blog

The Dangers of Self-Representation in Court

John Bruce — Thu, 04 Mar 2010 14:11:38 -0600

Businesses sometimes seek to appear in court through their officers or other employees, and wonder whether this can be done.

The Wisconsin Constitution provides that any individual may represent himself/herself in court. Unless licensed as an attorney in the state, however, no person may represent another person, corporation, partnership, association or organization in court; doing so constitutes the unauthorized practice of law according to Sec. 757.30(2) of the Wisconsin Statutes..

A business may be represented by a duly authorized employee in small claims court, by statutory exemption. Otherwise, a nonlawyers' representation of a business in ccourt, regardless of its form (unless it is a sole proprietorship, of course) is punishable as a misdemeanor, and can constitute contempt of court.

It may also lead to the dismissal of an action commenced by the business represented by a nonlawyer, or default judgment against a business which seeks to defend itself through a nonlawyer. This is because the pleadings signed by the nonlawyer are considered fundamentally defective.

Can I Pay My Competition to Shut Down? (Co-authored with Todd Goodwin)

Tom Schober — Sat, 27 Feb 2010 11:18:38 -0600

In these tough times, lots of businesses have been closing. In fact, for the fist time in our many years of practice, we’re hearing clients tell us that there is not enough business for both them and their direct competition – that if things continue as they are, they will both go out of business. In fact, they’ve become somewhat friends talking about it. Then the idea comes to one of them: could I pay my competition something to get them to shut down? The answer generally lies in the federal antitrust

laws under the Sherman Antitrust Act, Clayton Antitrust Act, Robinson-Patman Act, and Hart-Scott-Rodino Antitrust Improvement Act and the respective adaptations that the various states have made of those laws. There may be other laws that apply as well, such as state unfair competition laws. The term “antitrust” laws is a bit misleading because it really doesn’t specifically deal with “trusts” per se anymore, but is more concerned with and more commonly known as "competition law.” The purpose of the laws was to avoid and break up monopolies and cartels which obviously hampered competition. Today, along with the other above mentioned acts, the laws are used more broadly to regulate unfair competition.

Without going into the many intricacies and specifics of the above federal statutes governing antitrust law in the United States, in general, the Sherman Act states:

Section 1: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.” See 15 U.S.C. Sec. 1

Section 2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . .]” See U.S.C. Sec. 2

Subsequently, Congress passed other laws to help regulate anti-competitive conduct such as (i) the Clayton Antitrust Act which forbids additional actions that were outside of the scope of the Sherman Act, such as exclusive dealing arrangements, tying arrangements, mergers and acquisitions that substantially reduce market competition and price discrimination between purchasers if it tends to create a monopoly, and (ii) the Robinson-Patman Act which prohibits anticompetitive practices where manufacturers used price discrimination against distributors who were on the same footing.

There are two basic categories of violations of the Sherman Act, 1) per se violations and 2) violations under the rule of reason. Discussion of the specifics of these categories as well as the above legislation is beyond the scope of this blog article, and involves much further careful analysis. Note that Wisconsin has adopted the federal antitrust laws in Wis. Stats. Section 133 et seq. However, state statutes are subject to federal pre-emption when in conflict with the above federal laws.

So the question arises: can one pay one’s competition to shut down? The answer is: “ certainly not directly in contravention of the antitrust laws or other potential laws governing the issue.” But are there other ways to achieve a similar result without violating any laws?

Consider these thoughts:

1. Buy the competition out; then close it yourself.

2. Buy the competitor’s debt and control the competition.

3. Buy the competition’s lease and control the competition.

4. Buy the competition’s supplier and control the competition.

Pros and Cons

Each of the above methods of avoiding the effects of the antitrust laws have a specific cost as well as certain risks and benefits. Buying the competition has a cost. Of course, if business is down, the cost may never be lower. There may be certain future costs that can’t be avoided: debts with personal guarantees, such as bank loans and leases. No one will sell without assuring that these will be eliminated. At least these costs can be calculated. There is also a risk that the public, especially the customer base, may see the future lack of competition as “your doing “ and may boycott your business or shift their business elsewhere in protest . Let’s call that “protest risk.” The big benefit is that you increase market share. You also avoid offering products or services at prices at which you cannot make a profit. This method is fairly safe legally and only really large businesses need U.S. Department of Labor approval to consummate such transactions (the “legal risk”).

The other ideas involve increased legal risk and share the potential of protest risk. However, oftentimes these provide the only feasible way to eliminate competition. Doing so, should be done with caution, as the penalties of violation of the antitrust laws are severe and as stated above may involve criminal prosecution. A carefully thought out plan should always be reviewed by legal counsel.

Obviously, this involves complicated legal strategy, and if you or a client of yours finds themselves in such a situation, consider contacting us, since we have had considerable experience with such issues and can help to reduce risk and maximize benefits.

Duties Owed To A Sinking Ship

Rob Sullivan — Fri, 26 Feb 2010 12:44:04 -0600

What duties do officers and directors of a closely held business owe the company’s creditors when the company is failing? Unfortunately, this has become a common question during these troubling economic times. The answer in Wisconsin appears to be bit different than other states at this point if the failing business is still a “going concern.” In Polsky v. Virnich, thecourt held that officers and directors do not owe a fiduciary duty to creditors unless the company is BOTH: (a) insolvent; and (b) not a “going concern.” The court is quite critical of the “going concern” element reasoning that officers and directors in a closely held business can easily keep a failing business “going” and then drain the insolvent company of all cash via bonues, etc… while the company is insolvent thereby enriching themselves who also happen to be the owners. This appears to be at odds with many other jurisdictions where the rule is that a duty is owed creditors when the company is merely insolvent.

The Changing Landscape of Wisconsin Noncompetes

Rob Sullivan — Wed, 24 Feb 2010 08:51:02 -0600

In Frank D. Gillitzer Electric Co.v. Andersen, a Wisconsin Appellate Court found that a provision in an employment contract that required an employee to repay certain training costs if the employee did not stay with the employer for four years after the training was completed did not violate Wis. Stats. § 103.465. This was the case even though there appeared to be no disagreement that the “separate” explicit noncompete portion of the employment contract was overbroad and did violate §103.465. This decision follows a the recent Wisconsin Supreme Court decision in Star Direct v. Dal Pra where the court appears to look more favorably about reading divisibility into employment contracts (as opposed to striking all restrictive covenants in an agreement containing an overbroad covenant). This holding brings up some interesting questions to consider when drafting or litigating noncompetes. What would the result be if the employer would set forth in the employment agreement that 10% of an employee's earnings during first 5 years of employment were really excess payments (or training costs) and if she leaves during that 5 year period, she owes the company 10% of her earnings during her employment?

Cloud Computing at LegalTech New York

Tom Schober — Tue, 02 Feb 2010 21:29:45 -0600

As most of my listeners know, I love to keep up with what's going on in technology, and even more so, if it's legal technology. While I couldn't be at LegalTech New York this week, I am watching the posts, tweets and articles written by the myriad of people who are attending. On such blog post discusses cloud computing and why we aren't quite "there" yet:

Social Media Policy in the Workplace

Tom Schober — Fri, 29 Jan 2010 12:13:27 -0600

Social media includes such Internet applications as Facebook, Twitter, LinkedIN, MySpace and blogging. When people started using such media, many thought it was purely for personal reasons and basically ignored its business implications. That is no longer true. In fact, with hundreds of millions of people using social media, it is rapidly the phone and even email as a primary form of communication.

Pope Benedict recently told Catholic priests: “for God’s sake, blog!” The Pope sees the need to use the Internet to communicate. In business, sales people have replaced expensive time on the road by providing webcast meetings with live audio and video. Getting a company’s news out, getting its product information out and just plain communicating with customers requires employees to use social media. So what can an employer do to assure that its employees use social media responsibly?

The first step is to be sure people understand the implications of using social media. Every online post becomes a permanent record of a person’s thoughts. So posting to the website “I Hate My Job” could expose an employee to all kinds of problems. Posting things about your employer or it products or the fight one has with a co-employee could do likewise. Be sure employees are adequately trained to know the problems with misuse of social media.

Consider putting a social media policy in place. Such policies should require that employees posting:

· clearly express that they represent the employee’s, not the employer’s opinions

· must be truthful, non-disparaging, respectful and in line with other work policies

· should not interfere with the employees’ other work responsibilities

· should ask questions of a supervisor, if any questions arise

This is an area where we get many questions and have assisted businesses in establishing appropriate policies. I personally am involved in several social medias and can be reached at www.twitter.com/tomschober, www.linkedin.com/in/tomschober, http://profile.to/tomschober, www.wisconsinbusinesslawblog.com and tgs@schoberlaw.com.

Insurance Coverage Denied: Now What?

John Bruce — Mon, 25 Jan 2010 17:38:55 -0600

When a business is sued, it should report the action to its insurance company, as soon as possible. Sometimes, an insurer will deny coverage of the claim, asserting that a certain exclusion in its policy is applicable, or other policy defenses.

In Wisconsin, however, this is not necessarily the end of the story. If there is any possibility that coverage may exist given the terms of the claim made against its insured, the insurer is required to provide its insured with a defense attorney at its cost, and seek a stay of the action while the court determines whether it owes coverage under its policy. It's failure to do so may result in it being held liable for the claim and its insured's defense costs, regardless of whether coverage actually exists under the policy.

If its failure to provide coverage, a defense, or seek a stay of the proceedings is the result of a deliberate attempt to avoid providing coverage it is obligated to provide, it could be liable for the amount of the claim, its insureds attorneys fees, and other damages resulting from its failure to take action. It may even be subject to punitive damages.

Businesses therefore should not simply accept a denial of coverage without question. The basis of the denial and the terms of the policy should be reviewed to determine whether the insurer should be defending the business and seeking a court determination regarding whether it has coverage. If it fails to do so, the business may bring the insurer into the action or commence a separate action to determine whether it is owed coverage and a defense under the policy.

Even when an insurer does what it should do, and seeks a stay of proceedings and a court determination, the business should consider consulting with an attorney to represent it in the coverage dispute.

Supreme Court OK's Corporate Election Spending

Tom Schober — Thu, 21 Jan 2010 15:27:24 -0600

For decades, the US Government and 24 states have had laws regulating corporate spending to support or oppose candidates running for office. In a most extraordinary US Supreme Court case decided on Thursday, January 21, 2010, justices overruled parts of a 63 year old law which prohibited businesses and unions from producing and running their own campaign ads.

The decision does not change the law prohibiting direct contributions to candidates or the requirment that anyone spending money on political ads must disclose who contributed toward such efforts.

President Obama spoke harshly of the decision, as did a number of other politicians, such as Bob Edgar, a former congressman from Pennsylvania. On the other hand, Senator Mitch McConnell of Kentucky priased the decidion as "restoring the First Amendment rights" of businesses and unions.

Two laws were dramatically altered: the Tilllman Act of 1907 and the McCain-Feingold law. While businesses and unions won't be able to directly contribute to candidates or their election committees, or coordinate their efforts with either, they will be permitted to spend money urging the support or opposition of candidates. Overruling some aspect of McCain-Feingold, such monies may be spent right up to election time. Expect to see a lot of new corporate and union funded radio and television ads this next election season, especially in the last couple of weeks before the election.

The case arose out of the 2008 Democratic primary, when a group called Citizens United made a movie criticizing Hillary Clinton. Federal Courts concluded that the movie was the equivalent of a long campaign ad, and therefore was subject to regulation as such.

The majority decision was the work of Justices Alito, Scalia, Thomas, Kennedy and Chief Justice Roberts. The decision has been seen as a significant blow to Democrats and a one-two punch after recently losing Senator Edward Kennedy's seat to a Republican.

Using Letters of Intent in Business Transactions

Tom Schober — Wed, 14 Oct 2009 13:35:17 -0600

As a business "deal" is coming together, the parties often wrestle over whether to start the documentation with a "letter of intent" (LOI) or simply proceed to the actual contracts. While different situations demand different answers to that question, here are some important considerations with respect to what may work best for you.

Using a LOI has the advantage of usually being much less costly, quicker and simpler to draft. While it usually only sets forth the basic terms of an agreement, it is usually not a binding contract, except for certain provisions, such as confidentiality provisions that are intended to protect both parties and take them back to their respective starting points without damage, should the deal fall through.

On the other hand, sometimes the nature of the persons involved, the complexity of the transaction or other factors may make negotiating a LOI a very difficult and time consuming event by itself. In these situations, it may be best to spend the time and effort negotiating the actual contract, thus just going through the difficult negotiation process in these instances once, rather than twice.

One of the most unusual, but extremely common, things I find in transactional work is that the contracts are being negotiated right up to closing. Both parties are proceeding on the deal as if things are going to close. Both are putting in lots of time, money and effort. Both seem "committed" to the deal. In these instances, I find it is often hard for each party to think of all the things they would really want negotiated and put into the contract until they are actually putting things together for closing. As they do so, the contract is literally being formed and drafted. The only thing that keeps this from going on forever is the fact that the parties or the facts have established a "magical closing date" that basically tells both of them: "We are going to close at this place and time. All contract changes must be negotiated so we can sign the contract and close then and there." As you can see, in these cases, having a LOI in place provides a basic outline from which to negotiate and act and without it, getting to a contract and closing may be all but impossible.

David Willis, a Texas attorney, recently wrote an article about using LOI's in Texas, although it is pretty much applicable in most jurisdictions. He points out that most LOI's are non-binding agreements which contain 4 items:

Basic Terms and Method of the Transaction
An Exclusivity Clause
A Confidentiality Clause
A Closing Date

I'd recommend reading his article to get an understanding of how these terms interact.

Finally, I'd like to point out that the smaller the transaction in economic terms, the less legal time a client can afford to pay for to get the deal done. In these cases, not only is it advisable to try to avoid having to negotiate both a LOI and a contract, it may require using standard form "asset purchase agreements" or "stock purchase agreements." Some states, like Wisconsin, have well tested forms developed by bar associations or realty groups which cover such agreements. The Wisconsin bar has developed the WB-16 and WB-17 entitled "Offer to Purchase Business with Real Estate" or "Offer to Purchase Business without Real Estate" respectively.

Wisconsin Makes Covenants More Employer Friendly

Tom Schober — Mon, 12 Oct 2009 15:53:21 -0600

For over 50 years, Wisconsin has been deciding cases related to covenants not to compete in working relationships under Wisconsin Stat. § 103.465. On July 14, 2009, in an opinion authored by Justice Michael J. Gableman, Wisconsin’s Supreme Court changed the way that statute will work, much to the benefit of employers. Here’s what they did.

Wisconsin Stat. § 103.465 was enacted in 1957. It was designed to protect employees from unscrupulous employers who would require employees not to compete, even if such requirement were not necessary to protect the employer. Such actions could have the effect of enslaving an employee who felt he had no possible employment available, except that which would violate a covenant, once signed.

The statute reads as follows:

103.465 Restrictive covenants in employment contracts. A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.

Until recently, it was generally assumed that for restrictive covenants in employment agreements to be valid, they must all be valid or they would must all fall together. It prohibited a court from redrafting covenants not to compete by "blue-penciling" those provisions which may be invalid and making them valid. For example, if an agreement were for 20 years, could a court say that the agreement is valid, but only for a shorter term, or say, two years, and thus rewriting such provisions to the extent they are valid?

In the case of Star Direct, Inc. v Eugene Dal Pra, 767 N.W. 2d 898, 2009 WI 76, decided this past July 14, the court came to a conclusion that such agreements may stand in part and may fall in part. Here’s how the court came to that conclusion.

Dal Pra had three covenants with Star Direct, his employer:

a business covenant, stopping him from stealing business in a particular area,
a customer covenant, stopping him from stealing certain customers, and
a confidentiality agreement, stopping him from disclosing certain confidential information.

Dal Pra had been a route salesman for Star Direct in the very competitive industry of supplying convenience stores.

To be enforceable, the court indicated that five requirements must be met The covenant must:

be necessary to protect the employer;
provide a reasonable time limit;
provide a reasonable territorial limit;
not be harsh or oppressive, as to the employee; and
not be contrary to public policy.

The court first looked at whether each covenant was enforceable under the facts. Then it considered whether each covenant was reasonably necessary to protect Star Direct’s interests. The court found the business clause unenforceable as overbroad. It held that the other two covenants were enforceable.

The court then went on to determine two other key issues: 1) whether the enforceable clauses were reasonably necessary to protect Star Direct and 2) whether the three clauses were divisible, thereby permitting any to stand if even one failed. It is this issue relating to divisibility that makes this case unique and changes much standing law.

In order to make its finding, the court had to determine that the word "covenant" in the statute does not mean all the language in a restrictive agreement that has the effect of restricting an employee. It instead concluded that "covenant" refers to each separate "provision" in a restrictive agreement, thereby giving a court the ability to find some covenants enforceable and reasonable, and others not, thus permitting the "blue-penciling" of the elimination of the unenforceable provisions without destroying the entire restrictive agreement.

The troubling words of the statute read: "any covenant… imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint." The court distinguished a number of prior cases by pointing out that when an entire agreement was determined to be invalid, it was based upon the individual provisions being "textually linked." What does that mean?

The court says: "The foundational inquiry for determining whether a covenant is divisible is whether, if the unreasonable portion is stricken, the other provision or provisions may be understood and independently enforced." That depends on the facts. In this case, there were three separate covenants, not referencing or relating to each other.

So what can you do to create a covenant that will stand up to such a test? First, draft each covenant as a separate section, and better yet, as a separate agreement. Second, do not use language that inter-relates them, such as common penalty clauses or cross references. Finally, make sure that each covenant is reasonable and complies with five essential requirements set forth above.

Check the Status of Proposed Zoning Changes before Incurring Costs on New Business

John Bruce — Sun, 04 Oct 2009 15:10:08 -0600

A recent Court of Appeals case, Town of Cross Plains v. Kitt's Korner, Inc. 2008AP546 illustrates the risk involved in opening a new business on the assumption that a possible change in zoning will not effect its operation if the business is already up and running.

In that case, an adult entertainment business was opened on a parcel which, at the time it commenced operation, was zoned in such a fashion that such a business was not a prohibited use. The owner of the business naturally incurred costs in the start up of the business. The owner was aware of the fact that an ordinance amending the zoning to prohibit such a business on the land in question was coming up for vote, but apparently believed that his expenditure, and the actual operation of the business for a period of time prior to any adoption of the proposed ordinance, would create a situation in which his business would be "grandfathered in" even if the amendment to the zoning ordinance was adopted.

Although the law does recognize that, in certain fairly rare circumstances, expenditure of funds based on a reasonable reliance that zoning will not be changed can create vested rights which will not be impacted by zoning changes, the Court of Appeals held in this case that there could be no reasonable reliance because the owner was aware of the pending vote on the ordinance amendment, but chose open the business regardless. Expenditures made were made despite the fact that the owner new that zoning prohibiting the business was contemplated and could be adopted.

When opening a business, it would be prudent not only to review current zoning, but also to inquire whether any modifications in zoning are being considered.

No Right to Jury Trial under Wisconsin's Family and Medical Leave Act

John Bruce — Sun, 13 Sep 2009 16:18:38 -0600

In a recent decision, Harvot v. Solo Cup Company, 2009 WI 85, the Wisconsin Supreme Court determined there is no right to a jury trial under Wisconsin's Family and Medical Leave Act.

The Court rejected the argument that a jury trial should be provided in Wisconsin because it is available under the Federal Act, noting that the Wisconsin Act is different in several respects from the Federal version. It noted that the Wisconsin Act does not expressly provide for jury trials, and held that such a right cannot be implied. Finally, it determined where no jury trial is provided for by statute, a constitutional right to a jury trial exists in Wisconsin only as to causes of action recognized in the common law prior to adoption of the Wisconsin Constitution in 1848.

Employers faced with a civil action for damages based on Wisconsin's Family and Medical Leave Act therefore will not have to face a jury, which may be more influenced by emotion and sympathy for a plaintiff than a trial judge.

An Invalid Restrictive Covenant does not Necessarily Render other Restrictive Covenants Unenforceable

John Bruce — Mon, 10 Aug 2009 12:02:04 -0600

In a recent decision, Star Direct, Inc. v. Del Pra www.wisbar.org/res/sup/2007ap000617.htm the Wisconsin Supreme Court determined that where an employment contract contains restrictive covenants which address separate specific interests of employers, the fact that one of those covenants is overbroad and therefore illegal does not necessarily render other covenants unenforceable.

The contract in that case contained provisions restricting the employee from engaging in business similar to that of the employer, restricting him from contacting past and present customers of the employer, and requiring the employee to hold certain information derived from the employer confidential. The court determined that the covenant restricting the employee from engaging in similar business was overbroad, but that the other covenants addressed separate legitimate concerns of the employer which would remain enforceable. Therefore, those covenants are divisible from the invalid covenant.

The decision is significant, as it seems to be based on a new construction of Wis. Stats. Sec. 103.465, which by its terms indicates that where one portion of a restrictive covenant is invalid, other portions are as well. It is not unusual for restrictive covenants to be prepared in such a fashion that they jointly address various concerns. The decision emphasizes to the need to carefully draft restrictive covenants so that they separately address identifiable employer interests and are not intertwined to the extent that invalidity of one results in the invalidity of others.

Another Hazard of Doing Business with Government

John Bruce — Fri, 31 Jul 2009 15:24:43 -0600

According to Section 19.36(3) of the Wisconsin Statutes, the records of those entering into contracts with government constitute public records, and therefore open to public inspection upon request, subject to specific exemptions set forth in the law. As governments generally, and particularly local governments, look more and more to private contractors to perform or assist in performing public services, businesses that enter into such agreements must be aware of the ramifications of this statute.

This statute has not been construed to apply to any record of a public contractor, but rather to records which are specifically related to performance of the contract. As those records are deemed public records, they should not be destroyed except in accordance with the law (normally, public records are to be retained at least 7 years). Also, since such records are, in effect, presumptively open for inspection by the public, businesses which contract with government must understand that a public records request applicable to such records may be used as an informal discovery device by parties seeking to make a claim against the business or the government.

No reason need be given for a public records request, which may be made verbally or in writing. Denying access to a public record can result in action through the local District Attorney's office, or action by the requestor to compel production. Successful requestors are entitled to recover their attorneys fees.

Thus far, the contracting government has been held liable when a contractor wrongfully refuses access to a public record. Absent a change in the law, it is not likely the contractor will be held to be a legal custodian of records. However, savvy municipalities and their attorneys may want to include in any contract provisions by which the contracting business agrees to comply with the law, and also indemnifies and holds the government harmless from any claims under the law.

Businesses entering into contracts with governments for services which may be considered performing or assisting in the performance of public services should give careful consideration to the possibility that their records may be open for public inspection, unless an exemption applies, what records may be available, and how their contracts with government may be impacted by Section 19.36(3).

Consider Keeping Minute Book for your LLC

Todd Goodwin — Mon, 13 Jul 2009 15:00:01 -0600

Similar to the required practices of maintaining a Corporation, it is a good idea to keep the important documents and minutes recording important transactions and happenings of an LLC in a minute book, to be maintained at the main business office and at the office of your attorney who can then remind you to annually file your annual report and update your minutes.

Statutory requirements for Wisconsin LLC's are less than that of a Wisconsin corporation. However, it is important to note that pursuant to Wisconsin Statutes, a LLC is required to file an annual report, keep certain written records, including copies of the LLC's tax returns, records of the LLC members, the value of each member's contributions to the LLC, records of the times at which, or the events upon which, any additional contributions are agreed to be made by each member.

The minute book would be an appropriate place to keep much of this information. In addition, even though "formalities" such as annual meetings are not required of LLC's, following such formalities can be important to help protect the limited liability benefits provided by the LLC law in Wisconsin. For example, maintaining an LLC minute book is one of the things you can do to help ensure that the "limited liability veil" is not pierced. When the courts "pierce the limited liability veil", they assign liability to individuals for actions that the limited liability company performed. It is not uncommon for plaintiffs to name individuals associated with a corporation or LLC as defendants in any litigation against a LLC or corporation.

Plaintiffs do this to make the court determine if the veil can be breached, in which case the individuals can be held personally responsible. If the limited liability veil is intact, the court will not be able to hold individuals responsible in legal actions against the LLC. If the individuals are held personally liable, it could cost them greatly.

Some of the questions that may be asked by the courts when deciding whether to "pierce the veil" are: (i) Did the owners commingle business and personal bank accounts? (ii) Was the business undercapitalized? (iii) Did the owners fail to procure reasonable amounts of insurance? (iv) When signing documents, executing checks, or executing other contracts, did the owners signify that they were signing on behalf of the LLC? (v) Do all of the business documents (invoices, checks, etc.) have the letters "LLC@ on them?"

Documenting major transactions (including all transactions between yourself and the LLC) in an up-to-date minute book, as well as holding and recording regular members meetings (even though said meetings are not required by state statutes) should help in the process of protecting your individual assets from actions commenced against the LLC.

Contemplating Group Health Coverage Post Sale of Business

Todd Goodwin — Mon, 13 Jul 2009 14:35:41 -0600

A common, but important, mistake that business owners make when selling their business is failing to adequately investigate what their and their spouse's health coverage will be after the sale of the business. Obviously, many prior owners will sell their business before they are eligible for Medicare leaving them facing the high costs of obtaining private individual insurance if their spouse is not covered under another group plan.

Commonly, as a potential solution, the prior owners will negotiate to stay on with the new owners as consultants under a consulting agreement or as employees under an employment agreement with the proviso that they be added to the new owner's group health plan until the prior owners are eligible for Medicare or some other pre-negotiated timeframe.

The new owners under an agreement will simply add the prior owners onto the new owner's group health plan thinking that the prior owner, now consultant or employee, will be covered. However, (i) most group policies will not provide health coverage for consultants and (ii) most group policies contain provisions which require the employee to work a minimum number of hours per week to be eligible for benefits. Many prior owners are under the false assumption that if their employment agreement or consulting agreement says that they are covered that they don't have to worry. That is not the case.

It is important for both the buyer of a new business and the seller to contemplate early on in the deal negotiations the need for the Seller's health coverage post closing. It also very important to discuss in detail with the new owner's group health provider what coverage is available and what the specific requirements are to make sure that the prior owner has coverage.

Think First Before Getting Into an LLC

Tom Schober — Thu, 09 Jul 2009 12:37:09 -0600

Think first before getting into an LLC. While the LLC has become the entity of choice, there are plenty of reasons to avoid them and consider the use of other forms within which to operate. This article will expose and arm you with the 10 best reasons for you to consider avoiding LLC’s.

LLC's are not unique. When LLC’s first came into vogue about 20 years ago, everyone – attorneys, accountants, bankers, insurance experts – all said that LLC’s would change the business world. In those 20 years I have attended dozens of business seminars related to the type of entity within which to do business. I’ve asked the experts what you can do with an LLC that you couldn’t have done with the already existing entities, such as an S corporation. I have never gotten a good answer

(continued) to that question, because there is no good answer. Anything you can do with an LLC you can also do with another entity.
People don’t even know what LLC stands for. I’ve heard experts, even attorneys and accountants refer to limited liability companies as "limited liability corporations." Aren’t all corporations "limited liability?" LLC stand for "limited liability company," by the way.
LLC terminology is not standard. Owners are "members." The LLC can be "member managed" or "manager managed." An owner can "dissociate" from an LLC. LLC’s don’t have bylaws. The relationship between LLC members is set by state statute that varies greatly from state to state. This creates a formula for mistakes to easily be made when experts advising the LLC use incorrect terminology, thinking the others understand them, when in reality, they are each understanding something different.
People think LLC’s don’t have to keep records. Since when is it ever good business practice not to keep good records. This thinking just gets people into trouble.
Non-attorneys set up many of the LLC’s, often making mistakes in the setup. Many states have made LLC setup something that can easily be done online. While that seems to make sense, many untrained people have set up their own LLC’s, thinking that’s all they have to do to enter the business world, not even considering the numerous licenses and permits that may be necessary as well as the way owners relate to each other.
The 80-20 rule applies to LLC’s in an unusual way. At the point that LLC’s made up 20% of all business enterprises, LLC’s comprised 80% of the business problems I ran into. This came about for a number of reasons, including inconsistent terminology, lack of record keeping and insufficient legal history to rely upon.
There is insufficient legal history relating to LLC’s. While LLC’s have been around some 20 years, most states have had the corporate form since their inception, going back 200 years or more. Since case law makes up a huge amount of the law related to how an entity operates or how the entity’s owners relate to each other, the huge amount of corporate law definitely gives that type of entity a vast edge over the LLC form.
You can’t merge an LLC and a corporation without tax problems. Most successful existing entities are corporations. Growth often occurs by way of merger. So if you are likely to some day consider a merger, it helps to be of the same type of entity that you may merge with.
There are no standard LLC documents. Whereas corporations have pretty standard articles and bylaws, no parallel exists for LLC’s. Nearly every LLC has unique articles of organization and very few have consistent operating agreements. That means that each time a problem comes up, the experts will have to read and understand all the documents relating to the LLC, since there is very little boilerplate.
LLC's cost more to maintain than other business entities. While LLC’s may have a very small entry cost, the cost to deal with ongoing operational problems and the fact that they have non-standard documents requires attorneys to spend much more time maintaining LLC clients than other business clients. While that’s good news for attorneys, it is very bad news for owners of LLC’s.

While LLC's have their place in business, think about the above 10 points before you jump into your next LLC!

Governor Vetoes Proposed Change in Property Tax Law Regarding Assessment of Leased Property

John Bruce — Thu, 02 Jul 2009 17:59:00 -0600

The Wisconsin Supreme Court in the case of Walgreens v. City of Madison ruled that in assessing the value of leased commercial property, an assessor must take into account the actual rent and terms of a lease applicable to the property in determining its value under the income approach. The lease is question in that case imposed rents significantly below market rates, and the City of Madison had argued that market rates were to be used in assessing the property. The Budget Bill as adopted by the legislature would have in effect "reversed" the Wisconsin Supreme Court's decision, making market rental rates applicable.

Governor Doyle has used his veto power to veto this portion of the Budget Bill. Therefore, the court's decision will stand. This will allow lessors and lessees of property to structure creative lease arrangements without fear that the lease terms will be disregarded in determining the property's assessed value and, therefore, the property tax to be imposed.

Owners of Commercial and Industrial Property May Still Qualify for Favorable Property Tax Status

John Bruce — Sun, 28 Jun 2009 15:00:19 -0600

One of several provisions of Wisconsin's 2009 Budget Bill unfavorable to business has been amended in the Senate's version of that Bill.

The Bill had provided that owners of property zoned for commercial, industrial or residential purposes would no longer qualify as agricultural property, and therefore no longer be entitled to favorable "use value" assessment for property tax purposes. Owners of such property which remained undeveloped would lease it to farmers for production of crops until it could be sold for commercial or industrial purposes. While in use for agricultural purposes, Wisconsin law allowed the owners of such property to take advantage of favorable tax treatment based on its agricultural use. The Assembly version of the Bill had provided that such land would not be deemed "agricultural property" even if used for agricultural purposes.

The Senate amendment would allow owners of such land to continue to qualify for favorable property tax treatment while waiting to sell or develop their property.

Further Proof that Noncompete Agreements are Unique

Rob Sullivan — Thu, 25 Jun 2009 10:31:59 -0600

The court battle between IBM and Dell over the employment of former IBM M&A chief David Johnson provides even more evidence that Noncompete Agreements are highly unique contracts that often lead to some highly unique arguments in litgation. It appears Mr. Johnson is arguing that because he “intentionally” signed the noncompete on the wrong line, it is not valid. In other types of transactions (and maybe this one too) this type of admission would most likely lead to a misrepresentation, fraudulent inducement, or similar common law claim that could open up a party to significant liability.