Do You Know the Terms of Your Contract?

April 28, 2013,

When entering any contract it is important know the terms of the contracts. When dealing with real estate contracts, it also important to make sure that the property is capable of being used for your intended purposes. A seller is not responsible if you ultimately cannot use the space for your intended purposes as long as he or she did not lie to you or misrepresent the property in some way.

Take for example the case of Hong v. Somerset Associates. In this case, Thomas Hong and his partners, (Buyers) sued Somerset Associates (Sellers) for fraud and an unreasonable liquidation clause. The Buyers intended to purchase the property as a commercial investment and rent out residential units. It was learned after the paperwork was signed that the Sellers had withheld information regarding the possibility of a rent control ordinance being enacted in the area. The Buyers wanted the contract rescinded, which cancel the contract as if it were never created. This would also cancel the liquidation clause which requires any party which breaches the contract to pay the other person twenty five thousand dollars in damages.

In the first part of the case the court decided that there was no fraud. While this is information that could effect the desire to purchase the building, it does not make renting out residential units impossible. Therefore, the sale of the building for the intended purpose was still proper and the Buyers could still use it. Ultimately, the court found that the Seller did not actually do anything fraudulent.

In the second part of the case the Buyers focused on the liquidation clause, claiming that it was unreasonable and therefore should be invalidated. Historically in California, liquidation clauses were disliked and therefore severely limited when tested in court. However, California laws have been updated with basic requirements for liquidation clauses in different types of contracts. Therefore, at the time of this case, as long as the clause met the statutory requirements it would most likely stand. The law required things such having the liquidation clause at a certain size so that it was noticeable within a contract and requiring all parties or their representative to initial by the clause as proof that they read it. The purpose of the additional law was to make sure all parties are aware of the clause and its consequences. In this case the contract met all statutory requirements, therefore without a valid reason to break the contract, the Buyer was required to pay the Seller damages for choosing the break the contract.

Real estate contracts can be especially difficult to navigate because there is always a possibility, however small, that changes in the area could effect your business. Market changes will always effect your business, whether it is worth picking up and moving your business is really up to you. An attorney can review your contract with you and help you choose your best options. An attorney can also be a great resource before signing a contract to help you decide if the terms of your agreement. If you are the Sacramento area and in need of a real estate attorney, please contact our office.

See Related Posts:
When Does the Lease End?
Restrictive Agreements

What to do if your California Company is Suspended or Forfeited

April 21, 2013,

In California, a company can be suspended or forfeited by the Secretary of State (SOS) or the the Franchise Tax Board (FTB). The SOS usually suspends a corporation for improper filing. This usually occurs due to the failure to file the required Statement of Information and, when applicable, the required Statement by Common Interest Development Association. Under California law, a business is required to file a Statement of Information ever every year, or every other year. For your convenience, the business is usually sends a reminder post card about three month prior to the due date. You are also usually sent a delinquency letter if you miss the deadline, giving you and additional sixty days to get the statement filed, before your business is suspended. While the state does attempt to remind you of your filing date, it is still your responsibility as the business owner to submit your paperwork on time, and whether or not you have received the reminders has no bearing on this responsibility.

The FTB usually suspends a business either because the business failed to file one or more tax returns or the business failed to pay its balance. This balance can include the penalty incurred by not not filing your Statement of Information in a timely manner. This means a SOS suspension can also cause an FTB. Your business may be suspended by either the SOS, the FTB or both. It is your responsibility to check with both agencies when you try to revive your business.

If your business is suspended, it is important to revive it as soon as possible. You lose a lot of rights while suspended which can negatively effect your ability to both revive your business and run your business once revived. During suspension, the business loses its rights, powers, and privileges to conduct business in California. The business also loses the right to use its business name in California. This means that another business could register with the suspended or forfeited business' name, and the name would then belong to the other business. This would require the original business owner to register a new business name before it can revive its business. The business cannot initiate lawsuits, defend itself against lawsuits, or enforce its legal contracts. But other parties can enforce their terms in these contracts. Also, if the business enters contracts while suspended or forfeited, it can never enforce those contracts unless it obtains relief of contract voidability.

There are three ways to revive your business, determined by your type of suspension. If your suspension is by the SOS only, your business can be revived by filing a current Statement of Information with this office. A common interest development corporation must also submit a Statement by Common Interest Development Association together with the Statement of Information. If your business is suspend by the FTB only, you must contact the Board directly to determine how to revive it. Of you are suspended by both the SOS and FTB, you should first file a current Statement of Information with the Secretary of State and obtain a letter of proposed relief from suspension or forfeiture. Once you receive the letter from the Secretary of State, the business entity should complete an Application for Certificate of Revivor and submit the application along with a copy of the proposed relief letter to the Franchise Tax Board. The business entity will remain suspended by the Secretary of State until both the Secretary of State and Franchise Tax Board revivor requirements have been met. Information regarding the type of suspension can be obtained by ordering a status report.

Reviving a company after suspension can become time consuming and expensive. If your company has been suspended, call our experienced attorney to help you navigate the process.

See Related Posts:
Business Formation Matters
Legal Issues for Start-Ups to Avoid

All Dreamers Welcome In Downtown Sacramento

April 19, 2013,

Dreaming of Opening A Business In Downtown Sacramento

Downtown Sacramento is the spot for entrepreneurs who bring innovation and development to the Sacramento area. Numerous unique and successful small businesses form the foundation of a vibrant and active downtown. The scope and breadth of small businesses in Downtown Sacramento truly enrich this vibrant downtown area and make Sacramento a wonderful place to live and work. Downtown Sacramento is filled with theater, art, culture, fashion and history. Kristina Reed recalls that "Being an active part of the innovation and growth of Downtown Sacramento was important to me when I selected Downtown Sacramento as the location to launch the Law Office of Kristina M. Reed in 2008. My passion is to provide entrepreneurs with quality legal services at rates that their emerging businesses can afford - helping someone's dream become a reality and grow into a successful business is the most rewarding service that I can provide to my community. "

The Law Office of Kristina M. Reed is proud and excited to take part in the latest opportunity for small business growth in Downtown Sacramento by providing legal services to the winner of the Dreamers. Welcome. Competition. "Helping entrepreneurs achieve their dreams by providing an innovative small business the foundation needed for success is the exact reason that I opened the Law Office of Kristina M. Reed" says Kristina Reed. Winners of this Competition receive a prize package worth $125,000 to open their businesses in Downtown Sacramento.

For more information on the Competition: Dreamers. Welcome. Competition.

Rules of Professional Organizations Can Protect You

April 14, 2013,

Most people are aware that there are laws and statutes in place to keep order in society. There are, however, many types of rules and regulations in place to protect the public. For example, there are regulations and cases which expand upon the law, adding information so it is clear when certain laws are applicable. There are also rules in place for specific professions, such as doctors and lawyers. These rules are also in place to protect the public.

Take for example the case of Nelson v. The Department of Real Estate. In this case, Allen Nelson (Nelson) was attempting to appeal a decision by the Department of Real Estate (DRE) which resulted in his real estate license becoming temporarily suspended. In the original case, the DRE filed an accusation against California Consolidated Financial Services, Inc. (CCFS) and Nelson, the president of the company. CCFS was a licensed real estate broker through Nelson Andrew of its business was finding borrowers and helping them find loans. CCFS charged an advanced fee for its services as well as a finding fee if it succeeded in securing a loan for the customer. Under the DRE's Business and Professions Code, a real estate agent or licensee is required to place advanced payments in trust accounts, and may only be accessed as it is earned. Breaking this rule is subject to license suspicion. Nelson, tried to claim that the demanded fees were not advanced fees. The fees were listed in the contracts as preparation fees, made with the purpose of providing payment to CCFS for the act of searching for loans and negotiating terms. For this reason, Nelson claimed the fees were not advanced fees.

In deciding the case, the court looked to not only the DRE rules, but also the actions and intentions of the parties. The court found that although the fees were titled as preparation fees, in effect they were actually advanced fees. Part of the reason for this finding is because of evidence from at least two CCFS clients where one client asked for a small loan and had straightforward collateral and the other needed a larger loan and the collateral was made up of multiple properties, yet the preparation fee was the exact same price. Once the court decided that the fee in question was in fact an advance fee, the next issue was whether the money was handled correctly. One of the DRE's rules regarding advanced fees requires an accounting for advanced fees be provided to a client. This account must explain when the money was used and for which services. The is to allow the client to understand what his or her money is being used for and to keep the real estate licensee honest. Due to the lack of information provide to clients, the court held that Nelson and CCFS improperly held advanced funds making the suspension of Nelson's real estate license proper.

Sometimes people you decide to work with do not give you all the information you are entitled to, causing you to waste time and money. There are many rules and regulations out there with the intent to protect you but you may not know where to look. This is where an experienced lawyer can be a great asset. If you are looking for an attorney in the Sacramento area, please contact our Sacramento real estate attorney.

See Related post:
Are You Working With People You Can Trust?
Business Formation Matters

When Does the Lease End?

April 7, 2013,

Commercial lease can be difficult to negotiate. Residential leases are usually for one year or less, while commercial leases are often created for longer intervals. A longer lease is important in a commercial setting for many reasons. While individuals can buy a home, many businesses are never in a position to purchase all the space they need for the business. There are costs and benefits for both sides to consider when signing a multiyear lease.

The owner has the benefit of consistent rent for the duration of the lease and less often has to worry about the costs associated with finding new tenants. The building owner is also protect if the local real estate prices drop during the lease because the rent will not change. However, the owner may also lose money if local prices increase, because he will be unable to capitalize on it. The same issue, of course, applies to the renters as well. Also, having the ability to rent for multiyear terms, allows a business owner to make better decisions. The length of the lease may be a deciding factor regarding design decisions because at the end the lease you often have to revert the space to condition in which you received it. Some changes are just easier to remove than others.

Another factor that should be considered in a commercial lease is the possibility of the building owner selling the building. This can be an issue for the renter because depending on your lease and the goals of the new owner you could be kicked out sooner than expected which could harm your business. Take for example, the California case of Principal Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman. In this case, Vars, Pave, McCord & Freedman (VPMF) signed a five year lease for office space (the lease) in an office building owned by 16030 Associates (the landlord). She the end of the lease, VPMF chose to renew it for another five years. During the second lease, the landlord sold the building to Principal Mutual Life Insurance Company (Principal), the defendants. Within a year after the building was sold, VPMF decided to leave the office space. The issue in the case is whether there is a valid lease between VPMF and Principal.

In the lease signed by VPMF, there was an attornment clause. Attornment is the act of a tenant by which he agrees to become the tenant of the property's new owner. When a lease obligates a tenant to attorn to a new landlord in the event of a foreclosure, the terms of the attornment provision will govern how that is to occur and its effect on the existing lease. This case is complicated because even though the firm agreed to enter a new lease with a new landlord, the firm and the original landlord also agreed that the firm's lease would be automatically subordinated to any future encumbrances, which, by operation of law, end the lease in the event of foreclosure.

The court found that Principal was a third party beneficiary to VPMF's contract with the first landlord. A third party may qualify as a contract beneficiary where the contracting parties must have intended to benefit that individual, an intent which must appear in the terms of the agreement. The purpose of the attornment clause was to benefit any future owner, which in this case is Principal. A third party beneficiary may enforce a contract at any time before it is rescinded. If rescission has not occurred according to the statutory procedures, but the contract is instead terminated for some other reason, a third party beneficiary may still enforce the agreement. In this case the lease was never rescinded. It ended by operation of law, but the attornment clause was specifically designed to take effect upon the lease's end by foreclosure. Therefore, VPMF was required to sign a new lease with Principal as long as it was for the same terms as the original lease.

Before signing a contract, it is important to review it carefully. All agreements are a delicate balance between what you need and how much you are willing to pay for it. A business attorney can help you find the terms most beneficial to you. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.

See Related Blog Posts:
Who Is Responsible for Property Damage Under a Commercial Lease?
Commercial Real Estate -- Letters of Intent

Restrictive Agreements

March 30, 2013,

Building a business is not easy. It takes a lot of time, energy and money. But if you are lucky, you end up with a successful brand that stands for quality. At some point, you may want to sell your company, allowing it to live on and grow with someone else. If you do plan to sell your business, there are a lot of things to consider.

Take for example the old California case of Mahlstedt v. Fugit. In this case, C. A. Fugit sold his orchard heating business to J. F. Mahlstedt. For five thousand dollars, Mahlstedt received all salable goods used in the business, all machinery used in the business, patents for e heater and items used in advertising. Mahlstedt also received current customer information and promised to keep prices similar. Fugit also promised to refrain from entering into the orchard heater business as a manufacturer or owner in whole or in part, for a least ten years or to act as a salesman or representative of any orchard heater company. This case focuses on the last promise.

About four years after selling his business, Fugit partnered with Mr. Fabrey, who also manufactures orchard heaters in the same area as Mahlstedt's orchard. The created the Fugit-Fabry Company and advertised that the company was prepared to furnish replacement parts for orchard heating systems already installed or new systems. This use of the Fugit's name to sell heaters, prompted Mahlstedt to sue Fugit for failing to comply with the sales contract.

Fugit claimed that the ten year restriction in the agreement was invalid because it did not contain a location restriction. Most states do not like restrictive agreements, therefore they are held to strict requirements to make sure they are fair for all involved parties. Restrictive agreements require a reasonable time frame, locale and area of expertise. In this agreement the tries agreed to the time, ten years, and the area of expertise, manufacturing orchard heaters but not the local. The court decided at since the company sold was based in Los Angeles county, the contract to be limited to that territory, making the contract valid.

The next issue to be decided was whether Fugit was allowed to let Fabry use his name to sell in their new business. The court already concluded that Fugit sold his goodwill in his store to Mahlstedt because, in California, when a person sells the contents of a store and agrees not to engage in the same business in the same city as long as the purchaser continues in business, the contract is construed as carrying with it the good will of the business. Good will is essentially the reputation of the business. When a person transfers good will they may also transfer with it, the right of using the name under which the business is conducted. These, however, are two separate things. Therefore while the transfer of good will may be assumed, to transfer a name you must explicitly state it. In this case, the transfer of the name was not a part of the sales agreement. Accordingly, the court found that Fugit was allowed to use his name in business with Fabry as long as he does not solicit business on behalf of he company and is not in any way connected to the part of the business manufacturing and distributing heaters.

Restrictive terms in contract can be difficult to properly. Court do not like them and are wary of anything that may seem unfair. A business attorney can help you write a clear contract. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.

Business Formation Matters

March 23, 2013,

When starting a business, one thing that you need to think about is the type of business you would like to create. The most commonly known type of business is a called a corporations, but there are also other other types of businesses such as partnerships. And within each type of business, there are subsets, such general partnerships versus limited partnerships. Each title comes with a different set of responsibilities and liabilities. That is why it is important to look at each business options and figure out which options are best for your needs. Once you decide on a business type, you need to register it properly. An improper registration, can cause problems such as making you personally liable for your business transactions when that was not your intent or it can allow clients and vendors to cancel contracts. While there are some mistakes that are minor and fairly easy to fix, it will still be time consuming and often costly.

Take, for example, this California case where an improper registration almost cancelled the partial sale of a company. In this case, Howard and Jane Farnsworth bought John and Velma Dawson's interests as limited partners in Nevada-Cal Management, Ltd. ("Nevada-Cal"). Nevada-Cal is a limited copartnership made up of bother limited and general partners. The Farnsworthes sued Nevada-Cal because after they purchased the Dawsons' shares, they learned the limited partnership was not properly formed. Because the partnership was improperly formed, the Farnsworthes believed that the sale of the limited partnership interests were invalid, and therefore wanted their money back.

Under California law, at the time of this case, all companies were required to have a permit before they could sell security, which included partnership interests, without a permit. There were exceptions in place, but specifically for properly formed general and limited partnerships. In deciding this case, the judge not only looked to the relevant laws in place, but also to the intent of the writers of the law. The judge found that the purpose of the law was to protect the general public against scheming companies, not an individual in a private sale. In small sales, individuals have the ability to ask questions directly to the seller, or its representatives. When companies make securities available to the public, the public only has the public filings from the previous year and whatever the company divulges in the investment packet. If someone has a specific question, it is not guaranteed it will be answered. Requiring permits is one more way for the public to find out more information about a company on its own. Because of this, the judge decided in favor of the Dawsons, finding a permit unnecessary and making the sale valid.

Doing it correctly the first time is always best. Having an attorney with experience creating businesses can help with that. An attorney can help you decide which type of business is best for your needs and register it properly. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.

Related Links:
Legal Issues for Start-Ups to Avoid
Questions to Ask Your Startup Attorney

Are You Working With People You Can Trust?

March 16, 2013,

Having a real estate agent can make transactions easier. People often use an agent to do the research for them. Agents can take your goals and limitations for a property and create a list of properties that you are likely to be interested in. This can save you a lot of time in your search for the perfect property. Unfortunately, a real estate agent, like anyone else, can also take advantage of you.

Jennifer and Guy Worthington found themselves in this situation and chose to sue their realtor, Thomas Polander ("Polander"). The Worthingtons sued their realtor for four real estate transactions, in which they believe their realtor intentionally gave them incorrect information so he would receive a commission. In the first and second transactions, the Worthingtons bought two investment homes from Polander and trusted him to find a tenant for each home. In both transactions, the tenants Polander chose ultimately could not make the monthly payments and had to be evicted from the properties. In the third property transaction, the Worthingtons bought property through Polander which they could not afford to maintain, under the promise that Polander would find a tenant to rent it out and take over the payments. Polander was unable to find a tenant which caused the Worthingtons to lose the property through foreclosure. In the final property sale, Polander claimed he was selling the Worthington property but after the paperwork was signed the Worthingtons were not given the title to the property; instead it went to a nonprofit, Fresh Start Foundation, which was controlled by Polander. In each transaction the Worthingtons lost money due to their trust in Polander as a real estate agent.

At first the case was brought to arbitration. The arbitrator found for the Worthingtons on all four transactions. The arbitrator found that Polander was in a position where his opinion was trusted and taken at face value and that he did not maintain expectations. After winning the case, the Worthingtons found out that Polander was unable to pay the damages.

The Worthingtons then filed an application with the Department of Real Estate ("DRE"). The DRE has a recovery account which is used to make payments in unsatisfied judgments. However, the DRE only makes payments in the case of fraud. The Commissioner of the DRE reviewed the facts of the case and the previous arbitrator's decision. The Commissioner found that the arbitrator only found fraud as the basis of the Worthingtons fourth property sale, therefore the Commissioner would only allow payment pay for the damages from that transaction.

The Worthingtons then brought the case to trial court in an attempt to appeal the DRE's findings. After reviewing the previous cases, the trial court found that fraud was an underlying issue in all but the third property sale. Therefore, it overturned the findings by the Commissioner for the first and second sale, which allowed the Worthingtons to receive more money from the recovery account. The case was once again appealed to an appellate court, and the appellate court agreed with the trial court.

Litigation can be long and complicated and the appeals process is not always clear. Arbitration and state agency hearings are lesser known ways to get a case resolved, and in some cases are a requirement for getting your case heard. This can be a term in a contract or a general law in a statute that you may not know about. An attorney can help you bring your best case forward in any forum. If you have a real estate issue and are in the the Sacramento area, call our experienced Sacramento business attorney.

See Related Posts:
Background Checks for New Start-Up Employees
Who Is Responsible for Property Damage Under a Commercial Lease?

What Happens to the Property in a Failed Real Estate Transaction?

March 9, 2013,

Contracts are cancelled all of the time. While it is not ideal, it is important know the potential outcomes for a breached real estate contract. Real estate contracts are different from other types of contracts because all pieces of real estate are treated as unique. This means if you were attempting to purchase real estate and the court finds that the seller breached the contract, instead of monetary compensation for the breach you can ask for the contract to be enforced and the sale completed.

Take the case of Troy Shadian, co-owner of Real Estate Analytics, LLC ("REA"). REA attempted to purchased investment property from Theodore Tee Vallas ("Vallas"). Vallas's father handled aspects of the Vallas properties except for signing contracts. REA negotiated with Vallas's father and when a deal was formed, Vallas signed the agreement. REA and Vallas agreed to an escrow date but REA asked to move it on two occasions. The first time, the contract was amended to take the new escrow date into account. The second time, the date was only agreed to orally by Vallas's father. In the time leading up to the third escrow date they regularly met and the father behaved as though the escrow extension was ok. Two weeks before escrow was supposed to close, Vallas's father contacted everyone involved and cancelled escrow and the entire contract. This led REA to sue Vallas in superior court for specific performance of the real estate contract.

To obtain specific performance after a breach of contract, a plaintiff must generally show: (1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. Under California law, there is a presumption that a monetary damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts routinely grant a plaintiff's request for specific performance. In some cases the presumption is conclusive, but in the case of commercial real estate there is a rare possibility that damages are acceptable. But it is the responsibility of the defendant to prove it.

The superior court found that because the plaintiff intended to use the property for investment purposes, monetary damages was enough. REA appeal the case and the appeals court overturned the superior court's findings. The appeals court found that the property was unique not only because of its physical attributes and location, but also because of its investment potential and the reasonableness of the agreed-upon contract price. Also, the appellate court found that the superior court did not get enough evidence from Vallas proving that money would be an adequate remedy.

All of these matters are quite complicated and having an attorney on your side can make the process easier to navigate. If you have a real estate issue and are in the the Sacramento area, call our experienced Sacramento business attorney.

Related Links:
Commercial Real Estate -- Letters of Intent
Questions to Ask Your Startup Attorney

Who Is Responsible for Property Damage Under a Commercial Lease?

February 27, 2013,

If you run a small business, such as a retail store or restaurant, it's important to understand all terms of your California commercial lease. Do not treat a commercial lease like you would an apartment rental agreement. For one thing, you have to consider issues of liability that might arise if your inventory or equipment become damaged.

Consider the case of Linda Xiang, owner of Geolin Trading, Inc., in El Monte, California, which leased commercial warehouse space from Kenny Luc. Just over two years into the lease, a sprinkler system installed in the warehouse went off after coming into contact with a rolling door. Geolin employees were unable to shut off the sprinklers, and the resulting flood destroyed over $422,000 worth of inventory. Geolin and Xiang then sued Luc for negligence and breach of contract.

Before this incident there had been no reported problems with the warehouse's sprinklers. And in fact, Luc had the system inspected at his own expense about a year before the flood took place. After the flood, Geolin hired its own inspector, who offered a professional opinion that (1) the sprinkler should have been further away from the door that hit it and (2) the sprinkler valves should have been accessible to Geolin employees to prevent flood damage.

Commercial Leases vs. Breach of Contract and Negligence
The lease between Geolin and Luc contained two key passages. The first said that by taking over the premises, Geolin acknowledged the warehouse was in "good order and repair" and that it was Geolin's responsibility, not Luc's, to make any necessary repairs. This includes any repairs to the sprinklers. The second key clause said Luc was not responsible for any damage to Geolin's property that might occur on the premises. Based on these two provisions, a trial court ruled for Luc on summary judgment and dismissed Geolin's lawsuit. justice.jpg

On appeal, a three-judge panel of the California Court of Appeals agreed that Luc could not be held liable for breach of contract. California law generally only holds a landlord responsible for dangerous conditions that cause personal injury, not damage to property. For example, if the warehouse itself was physically damaged or deteriorated to the point where a Geolin employee suffered a physical injury, the landlord might be responsible no matter what the lease provides. But when it comes to personal property like business inventory, California law leaves it up the landlord and commercial tenant to work those issues out for themselves.

Even the lease, however, does not shield a landlord from damage arising from negligence. In this case, the Court of Appeals said there were still questions to be resolved about Luc's conduct. Specifically, whether he was negligent in not moving the sprinkler further away from the door and in not providing Geolin with ready access to the shutoff valve. Thus, the case may go to trial on Geolin's negligence claim, but not on breach of contract.

Protect Your Property
The above case--which should not be considered a statement of binding law--illustrates just one potential pitfall of commercial leasing. These are complex transactions that require the services of an experienced Sacramento business attorney. Whether you're a small business owner looking to protect her personal property or a landlord seeking to avoid costly litigation, it's essential to engage a competent attorney before entering into any commercial leasing arrangement.

Related Links:
Extending a Commercial Lease in California
What Should your Commercial Lease Include?

New Patent Laws May Affect Startups

February 24, 2013,

files.jpgThis year is set to be a banner one for anyone interest in intellectual property and related issues--including many start ups. That is because on March 16th, the U.S. will switch to a "first to file" system pursuant to the America Invents Act (AIA). This will apply to all patent applications filed on or after that start date.

As discussed in a helpful TechCrunch primer on the situation, this is a change from our current "first to invent" system. In the old system while filing was obviously important, rules made it more likely that one who invented something first, even if they didn't file first, to ultimately obtain the patent.

New Law
What does this mean? Essentially, the idea is straightforward: the first inventor to file a patent application for an invention will be awarded the patent. This is the case regardless of whether another actually invented the item first. In other words, filing in a timely manner because much more important than ever before.

Importantly, there is one exception to this general rule built into the law. The "first to file" concept does not apply where an inventor makes a public disclosure of his invention before the first patent application is filed. The public disclosure itself does not end the matter. To take advantage of this exception the inventor must still file a patent application within one year from the date of the disclosure.

This exception is incredibly important, because it is intended to act as a limit on "patent trolls." In other words, even though filing increases in importance, it still may not be possible for outsider to swoop in and steal a patent, just because they beat an actual inventor to the office. So long as the inventor made some public disclosure--a press release, even a blog post--then they still may be protected so long as they file within a year.

Therefore, it may be easiest for business start-ups concerned with how this law might affect them to consider that there is basically two paths to "win the patent race." The primary method, as implied in the law, is to be the first to file a patent application. The second is the be the first to publicly disclose the invention. But even then, it is not necessarily that simple. That is because even if you file first, it won't matter if someone made a public disclosure within a year. Alternatively, even if you make a public disclosure, it won't matter is another had already filed by time you disclosed.

While the general change to a "first to file" system may seem logical, it will undoubtedly have significant changes on how the process works. For one thing, it will make it critical for many companies--particularly those in competitive sectors--to file as early as possible

Secure Legal Help
Needless to say all intellectual property issues are quite complex, and with laws changing frequently, it is impossible for any business, including start-ups to navigate these complex waters on their own. For help on any number of legal issues affecting start-ups in our area, please contact the Sacramento business attorney at our firm for tailored guidance.

Continue reading "New Patent Laws May Affect Startups" »

Questions to Ask Your Startup Attorney

February 13, 2013,

A helpful post from Venture Beat recently touched on what all start-up owners should consider when choosing a business lawyer for their operation. Of course, choosing an attorney is a personal matter and at the very least you must be able to see yourself interacting with this person on a frequent basis. If you do not hit it off or simply cannot envision working well with the attorney, no matter what their background, you should look elsewhere.

business2.jpgBut so long as you can hold a conversation with the legal professional and can envision a working relationship, what else matters? The article asks some questions worth considering.

Who will actually be working on your legal matter?
You may have a great conversation with one person only to learn later that someone hidden in a cubicle is actually doing most of your legal work. There are a wide range of firms and organizational structures. From the outset, you should talk with the actual person who will be providing advice and handling the actual legal matter for your company. There are too many high-quality legal professionals to not have direct contact with your attorney.

How do fees work?
It is cliche to state that fees shouldn't be the main concern. And it is well known that picking any service for the price alone can lead to bare bones quality. But at the same time, it is naive not to assume that price does not matter. Of course it matters, and as a startup it is critical to get good value for every dollar spent, including on legal fees.

There is no right or wrong answer to fee arrangements except to say that they should be transparent. Understand from the beginning how things will work and exactly what services will be provided. Clarifying at the outset may prevent significant complications down the road.

Has the attorney worked with other start ups before?
Legal experience matters. While the lowest fees can likely be secured by the youngest attorneys, there is a lot to say for paying for past success. Like any profession, there are incredibly diverse skill sets between attorneys working in different areas. That might even mean different skills between those working with early-stage startups as compared to more "mature" companies. A lawyer who has worked with those in a similar position to your business is a tremendous asset. As the VB article suggests: "Look for a lawyer that understands the inception-to-launch process."

Do they understand your industry?
This one is a little more specific than others, but it is certainly helpful if the attorney actually understands the specific of your industry--or at least is familiar with the basics. Legal principles as they relate to businesses generally apply to all, no matter what the industry. But that does not mean that any business attorney is fine. If they can relate to the specifics of your needs, then the more tailored legal help you will receive.

For help on any of these issues in the Sacramento area, please consider contacting our start up attorney today.

Continue reading "Questions to Ask Your Startup Attorney" »

Background Checks for New Start-Up Employees

February 10, 2013,

The prime objective of a start-up is to get work done quickly. In doing that, most of the time they do not execute an appropriate background verification and criminal check before hiring the resources. This could be extremely hazardous and might lead to various legal issues. This acts as a blemish to the reputation of the company and might lead to a cancellation of the business license. But at the same time, companies must be incredibly careful about how they go about this process.handcuffs.jpg

Understanding the Law
Perhaps most importantly, local companies should be aware that the Equal Employment Opportunity Commission recently released guidance on businesses using arrest and conviction records in the hiring process. This is a common practice, and many startups may have assumptions about how the law does or does not apply to these matters. At the very least it is critical to be aware of the basics of the law and how they might apply to you.

For example, per the new EEOC guidance, an employer may be treading on thing ice when a criminal background check treats an employee differently due to his or her protected status. This may occur mistakenly, and there may be situations where a protected group is screened out because of the criminal background check regardless of the business necessity.

It gets even more complex. For example, the EEOC guidelines make clear that arrests and convictions are different and must be treated as such. To be clear, an applicant may be denied because the conduct underlying their arrest make them unfit for the position. But a mere arrest, without a conviction, should not be relied upon as strongly. There may not be a black and white rule that always works, and startups should be careful about how they approach the issue. Alternatively, if an applicant was convicted of any crime, it may be a more acceptable reason to deny employment. But even then, it is best practices to have individual assessments, even among those who were convicted previously. Ensuring that the specifics of any applicant are considered in every case is an important way to assure that the law is followed and you are not setting yourself up for potential legal challenge down the road.

What about Credit Checks?

Beyond one's criminal background, there are also clear rules regarding use of credit checks to determine possible employment. Per the Fair Credit Reporting Act an employer must make a written disclose, in writing, that the background check may include in-depth information about his or her "character, general reputation, personal characteristics, mode of living, criminal history, driving history and work history." On top of that the employer must also be timely in their actions--disclosing the intention to obtain the report within three days. Of course, it also goes without saying that employers must be vigilant about protecting an applicant's personal information against unauthorized access or use.

Act Prudently to Protect Your Business
The above offers only a cursory look at the issues related to background checks for employment purposes. It is intended only to reinforce the idea that employers must be careful about how they use background checks, when they do so, and why. In all cases, employers should discuss the matter with a business attorney before taking any actions so that no improper information is included in the background check. Limiting the information available will help ensure that no improper information is considered during the hiring process.

Legal Issues for Start-Ups to Avoid

February 3, 2013,

If you scour the web for information on "tips for start-ups" you will find an endless number of bullet points, lists, and helpful summaries. Interestingly, in the majority cases the items most often messed up, done poorly, or forgotten about relate to legal matters. For example, as a Venture Beat post discussed recently, many different legal matters are continually botched by those with great ideas and the best of intentions.

Perhaps it should not be surprising that many start-ups make legal mistakes, because most focus is on the product or service about which they are passionate. Many of the administrative and organizational details get short shrift. Add the fact that many startups seek to cut corners and avoid paying for professional help, and it is easy to see how so many legal errors are made. But it remains critical for all those hoping to make it in the long-term to get serious about avoiding the most common legal pitfalls. For example, some of the obvious ones discussed in the VB post include...

Lean About "Due Diligence"
Even something as simple as picking a name may come with legal ramifications. For example, many a business has chosen an identity only to discover later that ***oops*** its already taken. If any steps had already been made with the names, this errors requires starting over and potentially wasting time and money. In the worst cases--when the problem is not identified until later--it may actually result in a lawsuit.

The lesson: do your due diligence and research ahead of time. There are online databases to examine this information and ensure you get off on the right foot.

Choosing the Wrong Entity Structure
Besides a name, one of the most important early decisions is figuring out the entity structure to operate as. Mountains have been written about the different options and the reasons to chose one or the other. But the decision is so important that it is worth reiterating. As previously mentioned, there are several common entity structures, including sole proprietorships, partnerships, Limited Liability Corporations and C-Corporations.

Each entity has strengths and weaknesses, but in most cases it comes down to taxation and liability protection. Sole proprietorships and partnerships come with single taxation but little liability protection. If there is a risk of any sort of liability--and in virtually all cases there is--then it might be worthwhile to give serious thought to more sophisticated arrangements.

The C-corporation, which is the most common corporate entity, is the old-fashioned structure for the largest entities. While it comes with liability protection, it also means that the income is taxed twice--once on the corporate level and once on the individual level.

The Limited Liability Corporation (LLC) is a hybrid of the Corporation and partnership, and the seemingly "best of both worlds" that it offers makes it attractive to many. LLCs are relatively new, and as such, there is less certainty with some of the more complex legal issues involved. However, the fact that they may offer single taxation as well as liability protection means all startups should at least speak with a legal professional and determine if it makes sense for them.

Mixing Funds
If your start up moves beyond the sole proprietorship or partnership phase, then it is critical to understand the basic protocols to ensure the "entity" and your person are separate. Most notably, do not co-mingle business assets with your own. "Co-mingling" may lead to claims that the business entity protection does not apply. Usually you only discover this when you are actually facing liability--the exact moment when you have much to lose.

Playing Fast and Loose with Intellectual Property
Copyrighting, trademarking, or patenting your work is not something only for those in a select few business. These legal principles apply to many different start ups, even those who might not assume so from the outset. It is impossible to get into too much detail about intellectual property rules here, but the bottom line is: talk to a professional about it. Leaving it to chance or pushing it off the deal with later is a recipe for disaster.

The above list is just the tip of the iceberg as it relates to basic start up mistakes. Don't let your ideas and enthusiasm wither because of legal malfunctions. In our area, contact a Sacramento start-up attorney today to learn more.

Key Discussion Points for Founder's Agreements

January 26, 2013,

Starting a new business is an incredibly exciting adventure. While there are countless different issues that need to be handled beforehand, there is one area that is often neglected: delineating the relationship between different founders. In the rush to advance the business itself, there may be cut corners as it relates to ensuring those involved in a venture have safe, secure legal understandings between one another. 5351289407_f6b5e459f3_m.jpg

For this reason, founders of a start-up enterprise must be vigilant about memorializing various items in a Founder's Agreement. This is an absolutely critical initial step that should obviously be created in conjunction with a legal professional.

What is included in a Founder's Agreement?

Capital Structure
Perhaps most notably, the "initial capital structure" of the company needs to be settled upon right away. Potential shares must be allocated equitably based on initial contributions. This is not necessarily as easy a calculation as it sounds. While in hypotheticals it always breaks down evenly by percentage contributed, it is often difficult to determine projected contributions. For example, while one founder may provide more capital initially, the team could be under the assumption that all will ultimately contribute equally. This might counsel toward equitable distribution of shares. But everything in equal pieces is not the only option, and alternatives might be worked out depending on expectations. All of this must be determined on top of items likes buyback rights, restrictions on share transfers and so forth.

Ensuring Long-Term Commitment
One issue that commonly comes up in these agreements relates to essentially enforcing long-term commitment by the founders via forced "vesting." In other words, if a founder holds unvested shares, they are only earned over time. If for whatever reason those shares are not earned, then are bought back. By voluntarily having founders' share subject to vesting, the founders are incentivized to remain connected for their own maximum benefit.

This is a somewhat complex aspect to Founders Agreements, but in general, it should be noted that there are different ways to handle vesting issues. The vesting can be based on a specific time or a specific business achievement or "milestone." Determining what is right for your business depends on the founders specific concerns. If commitment for the long-haul is desired, then a time based system might be appropriate (usually a period of years). However, if the business is suited for achieving very clear objectives, then it might make sense to base the scheme on achieving some notable goal. In fact, a combination of time-based vesting and performance-based vesting might best meet your needs.

Don't Go It Alone
Figuring out these issues from the outset it one of the most important things that any new startup will encounter. It is important not to cut corners but instead focus on getting the legal help you need to do it right. In the Sacramento area, please contact the our business attorney for the guidance you need.