Articles Posted in Commercial Law

In the Internet Age, purported electronic signatures are becoming more and more common. They are the standard in certain areas of business law, like when one electronically “signs” a contract to engage in e-commerce. Real estate law, however, has always been more paper driven. While other areas have traditionally allowed for alternative contract forms like oral contracts, matters of real estate have traditionally required a paper contract. Recently, a California court decided a rare case dealing with the validity of an electronic signature.

California Court Decides Validity of Purported Electronic Signature

In this recent decision, J.B.B Investment Partners, LTD v. R. Thomas Fair, the First District Court of Appeals interpreted a portion of California’s version of the Uniform Electronic Transactions Act (UETA). The purpose of this law is to establish that electronic signatures and records are the equivalent of paper records and manually signed signatures for commerce purposes. In the case, a trial court had determined that Fair’s printed name at the end of an e-mail where he had agreed to settlement terms in a prior email from J.B.B. counted as an electronic signature under the UETA and under contract law. The appellate court disagreed and held that Fair’s printed name in the email was not a sufficient electronic signature to make the settlement agreement binding.

Businesses frequently enter into contracts, whether it is with employees, other businesses, or customers. It is easy to think that the power to contract gives a business the ability to set whatever terms it prefers for an interaction, so long as the other party agrees. However, state law puts some limits on the power of contracting. It is important to consult with an experienced business law attorney before adding new language to the contracts you use to be sure the terms will be enforceable down the road. One example of the laws you need to be aware of when drafting contracts has to do with non-disparagement clauses.

You Cannot Use Non-Disparagement Clauses in Consumer Contracts.

A non-disparagement clause can be extremely appealing to a small business owner. In this day and age, where potential customers rely heavily on online reviewing services, like Yelp, when making decisions about who to do business with, an unfair and unflattering review can sink a small business. To counter this problem, some businesses began including clauses in their contracts with consumers prohibiting the consumer from making negative statements about the company. However, California has now banned these clauses.

A typical commercial lease in California requires a commercial tenant to maintain and repair the leased property and not commit “waste.” For legal purposes, waste is defined as permanent harm done to real property by a person or persons in legal possession of that property, such that the property’s value is diminished. If the tenant breaches the maintenance requirement, the landlord may provide a notice of default. If the tenant does not cure the breach, the landlord may terminate the lease and sue to recover the cost of repairs for damage to the property. But, what happens if the tenant does not cure the breach, and the landlord does not terminate the lease or the lease has not expired? Can the landlord sue to collect the cost of repairs for damage to the property? A recent decision by the California Court of Appeals for the Fourth District answers this question.

In Avalon Pacific-Santa Ana v. HD Supply Repair & Remodel, 192 Cal. App. 4th 1183 (2011), the Appeals Court held that a commercial landlord could not recover from a tenant the cost of repairs for damages where the parties continued to perform under their lease agreement, which had neither expired nor been terminated. The facts of the case are instructive.

HD Supply Repair & Remodel leased vacant warehouse and office space from Avalon Pacific-Santa Ana, intending to convert the space into a retail facility. The 10-year lease was set to expire in 2017, but included an option to extend. After demolishing the office space, HD Supply stopped renovations because of the economic downturn. HD Supply unsuccessfully attempted to sublease the property. The property eventually fell into disrepair, was vandalized, burglarized, and became home to vagrants. Avalon sued HD Supply for breach of the maintenance and repair obligations of the lease and for waste; however, Avalon never terminated the lease and HD Supply continued to pay rent of $50,000 per month. The case proceeded to trial, where a jury found in favor of Avalon, awarding $677,000 in damages for breach of the lease and $561,000 in damages for waste.

A contract is an agreement between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. Contracts are widely used in commercial law and form the legal foundations for countless business transactions around the world. Common examples include construction contracts, purchasing contracts, employment contracts, merchandise supply contracts, as well as software licensing contracts. One of the most common provisions in a commercial contract is a forum-selection clause, or choice of law or forum clause. A forum-selection clause is a contractual provision that specifies where the parties to a contract will fight out any disputes that arise between them. The clause may refer to a particular court in a jurisdiction agreed upon by the parties; a particular kind of dispute resolution, i.e., arbitration, mediation; or, it may refer to both.

On December 3rd, 2013, the United States Supreme Court decided Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et al., 571 U.S. ____ (2013), which concerned the interpretation of a forum-selection clause in a commercial contract, and will have important ramifications for all commercial contracts. In Atlantic Marine, the Court reversed the Fifth Circuit Court of Appeal’s refusal to enforce a forum-selection clause in a commercial contract, holding that a forum-selection clause may be enforced by a motion to transfer under 28 U.S.C. § 1404(a), which provides that “[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought to any district or division to which all parties have consented.” The Court further held that when a defendant files a § 1404(a) motion to transfer, a district court should transfer the case unless “extraordinary circumstances unrelated to the convenience of the parties” support denial of the motion to transfer.

In the case, Atlantic Marine Construction, a Virginia company, under contract with the United States Corps of Engineers to build a child-development center, entered into a construction and labor subcontract with J-Crew Management, Inc., a Texas corporation. The subcontract included a forum-selection clause, providing that any disputes arising under the subcontract would be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division. When a dispute arose, J-Crew filed suit in the Western District of Texas. Atlantic filed a motion to dismiss. The court denied the motion, holding that 28 U.S.C. § 1404(a) is the exclusive mechanism for enforcing a forum-selection clause, and that the burden was on Atlantic to establish that a transfer was warranted, by establishing public and private interests. Atlantic then appealed to the Fifth Circuit for a writ of mandamus. The Fifth Circuit denied the writ and directed the District Court to dismiss the case or transfer it to Virginia. The Fifth Circuit held that the proper vehicle for enforcing a forum-selection clause is a motion to transfer under § 1404(a), not a motion to dismiss, and that the District Court improperly placed the burden on Atlantic to prove that transfer was appropriate where the contract specifically provided a forum-selection clause. The Supreme Court reversed, essentially holding that a forum-selection clause be given “controlling weight in all but the most exceptional cases.” The Court also clarified the proper procedural route when a party is seeking dismissal or transfer of a case filed in a court different than the one provided in the parties’ contract.

For years, California has been plagued by abusive lawsuits aimed at business establishments for alleged violations of the Americans with Disabilities Act (ADA). On September 19, 2012, California Governor Jerry Brown signed into law, Senate Bill 1186, which is an attempt to curb the abusive lawsuits based on the ADA and related state laws, requiring that places of public accommodation be accessible for persons with disabilities. The law went into effect in January of 2013.

Prior to the Bill’s enactment, unscrupulous law firms devised a scheme where they would send disabled clients to as many business establishments as possible until an ADA violation was found. Once a violation was encountered, the disabled clients would repeatedly visit the guilty business establishment to encounter the same accessibility violation. Under California civil rights law, each violation triggers a minimum statutory penalty of $4,000 The law firms would then send to the guilty business establishment/property owner/lessor a “demand for money” letter or the firm would file a lawsuit on behalf of the disabled client, requesting damages for each violation (“stacked claims”). Instead of fighting an expensive legal battle, the business establishment would quickly settle. In one notorious case, an illegal immigrant and convicted felon, who also happens to be a paraplegic, filed over 500 lawsuits against businesses, and earned $165,000 in settlements, for ADA violations.

The Bill has five main provisions. The first and most important provision of the Bill is that it ends “demand for money” letters from attorneys. Attorneys may still send letters to business establishments alerting them of potential violations, but the letter may not include a demand for money. The letter must contain several items, including, identification and location of the alleged violation; an explanation of how the alleged violation interfered with the disabled person’s access; and, the date of the alleged violation/interference. The law firm must send a copy of the California State Bar and the California Commission on Disability Access.

It is important for owners and operators of commercial real estate to stay current with applicable laws and ordinances, including the Nonresidential Building Energy Use Disclosure Program (the “Disclosure Program”). The Disclosure Program — better known as Assembly Bill 1103 or AB 1103 — requires owners, brokers, and property managers of commercial real estate, i.e., “nonresidential buildings in California,” to disclose energy use or “benchmarking data” to potential buyers, lessees, and financiers prior to the sale, lease, or financing of a whole building. The purpose of the Bill is to promote energy efficiency in California.

AB 1103 requires nonresidential building owners and operators to input energy consumption and other building data into the Environmental Protection Agency’s ENERGY STAR Portfolio Manager System, which generates an energy efficiency rating for the subject building. Ratings are from 1 to 100, with 100 being the most energy efficient. A building achieving a score of 75 or higher can apply for ENERGY STAR certification. ENERGY STAR Portfolio Manager is an online tool created by the EPA and used to measure and track energy and water consumption, as well as greenhouse gas emissions. It can be used to benchmark the performance of one building or a whole portfolio of buildings.

AB 1103, passed in 2007, was scheduled to go into effect on September 1, 2013, for buildings of 50,000 square feet or more, however, this summer, the California Energy Commission announced that it was delaying implementation of the program until January 1, 2014, because of ongoing technical issues with the Portfolio Manager tool. Beginning on January 1, 2014, the owners and operators of commercial buildings are required to disclose to potential buyers, lessees, and financiers, the building’s energy data and rating of the previous year. The Implementation Schedule is as follows:

The Law Office of Kristina M. Reed has a strong reputation for providing results-driven client-focused legal services to individuals, property owners, investors, entrepreneurs, small to medium sized businesses, real estate agents and brokers, and property management firms. The law firm has been located in Downtown Sacramento since 2008, and has been an active part of the growth, revitalization, and redevelopment of that area. The firm provides small businesses and entrepreneurs with quality legal services at rates affordable to new businesses.

The Law Office of Kristina M. Reed is committed to small businesses and entrepreneurs, and a champion for the growth and revitalization of the Downtown Sacramento area. In keeping with these goals, the firm, along with other local businesses and organizations, recently sponsored the 2013 Calling All Dreamers Competition, an annual competition with the goal of fostering Sacramento’s entrepreneurial spirit and cultivate the next dreamers in Downtown Sacramento. Beginning in April, applicants submitted their businesses concepts for the competition. A panel of business experts selected eleven semi-finalists based on the following criteria: creativity, sustainability, and entrepreneurial passion. The panel then selected five finalists out of the eleven semi-finalists. The panel ultimately selected Andy’s Candy Apothecary as the winner. The candy store will carry packaged candies from around the world and well as locally-made handmade candies. Andy Paul, the founder of Andy’s Candy Apothecary, received a cash prize of $10,000 as well as free rent and business support services, including 10 hours of business and real estate related transactional legal services provided by the Law Office of Kristina M. Reed.

While starting and running a new business requires passion, it also requires confidence and a strong foundation. The Law Office of Kristina Reed provided Andy’s Candy Apothecary with a strong foundation, and we can help your small business as well. Many small businesses pay little attention to the legal side of their business, which can prove detrimental. An attorney experienced in assisting small businesses can help your business make key foundational decisions about the structure and organization of the business as well as developing strategies and making deals that will make your business successful. We can also help draft employment agreements and ensure that your business is in compliance with all relevant ordinances, such as zoning ordinances. Hiring an experienced lawyer up front to help your small business get off the ground can save you from headaches down the road. It can help protect you against expensive lawsuits brought by employees, customers, and suppliers.

Several months ago, we featured two articles about California’s ride-sharing startups. Ride-sharing companies, such as uberX, Lyft, and FlightCar, are in the business of providing vehicles-for-hire. Using apps and other online programs, the companies connect those in need of rides with non-professional drivers driving their own cars. Beginning in late 2010, the California Public Utilities Company (CPUC) issued cease and desist orders against all three ride-sharing companies for operating unlicensed charter party services, and the City of San Francisco followed up by suing FlightCar, alleging that it was undercutting rental car companies at the airport by acting like a rental car company, but ignoring the regulations that govern them. This past August, California became the first state to legalize ride-sharing companies when the CPUC issued a proposed set of rules that would grant state licenses to the ride-sharing companies and allow their vehicles to remain on California roads. The proposal creates a new category called the Transportation Network Companies and requires a ride-sharing company to apply for a license to operate in the state.

uberX Appeals Effort to Regulate It

Fast forward several months: This past Wednesday, attorneys for Uber Technologies, Inc., which runs uberX, filed an appeal — or an application for rehearing — challenging the CPUC’s power to regulate it, contending that uberX is a technology company, not a vehicle-for-hire services and that the CPUC does not have jurisdiction over technology companies that do not provide transportation services. uberX argues that it does not have to comply with the CPUC’s requirement to obtain a license because “it operates no vehicles and does not hold itself out or advertise itself as a transportation service provider.” Rather, it merely developed a software and mobile application service, which simply connects the transportation service provider with those persons seeking transportation. uberX does not own, lease, or charter any vehicles for the transportation of passengers and, therefore, should not be required to obtain a license to operate in the state of California.

Last week, in a victory for startups and their investors, California Governor Jerry Brown signed into law Assembly Bill No. 1412. The new law temporarily quashes a move by the state’s tax board to levy up to $120 million in back taxes and penalties on entrepreneurs and small business owners.

History

In 2008, the California legislature passed a tax exemption that allowed small-business investors in the state to exclude from their taxable income, 50 percent of their gains from the sale of qualified small-business stock. The exemption was known as the Qualified Small Business Stock exemption. Last year, the California Court of Appeals ruled that the exemption was partially unconstitutional because it “[favored] domestic corporations” and thus was facially discriminatory, in violation of the U.S. Commerce Clause. The appeal’s court ruling gave California’s Franchise Tax Board the authority to collect retroactive taxes assessed on small business owners that took the exemption in tax years 2008-2012. Some estimate that the total amount levied would have been around $120 million. Knowing that investors would be upset about the retroactive tax, California Business Defense organized a coalition of entrepreneurs, attorneys, and lawmakers, in an effort to reverse the Board’s decision to reinstate the tax.

Last week, we reported about an important event for startups: Title II of the Jumpstart Our Business Startups Act or JOBS Act took effect last Monday and it lifted the ban on general solicitation, allowing startups to publicly advertise that they are seeking investments. General solicitation means “to publicly advertise the opening of an investment round in a private company by utilizing mass communication.” As reported by Forbes magazine, “under Title II of the JOBS Act, entrepreneurs will be permitted to publicly advertise that they are fundraising for their businesses, something that was previously illegal for the past 80 years under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933.” As promised, this week, we will discuss several important steps startups must take to comply with the regulations of Title II if and when they choose to generally solicit their fundraising efforts.

Under Regulation D Rule 506(c), the rule allowing for general solicitation, the first thing you must do if you are a startup choosing to engage in public fundraising or general solicitation is ensure that only accredited investors are permitted to enter the funding round. This requirement differs from private fundraising, which is regulated by Regulation D Rule 506(b), and which allows you to have in your funding round up to 35 non-accredited investors with whom you have had a pre-existing relationship.

So what is an “accredited investor?” According to Regulation D Rule 506(c), an “accredited investor” is one generally having earned $200,000 for the past two years, or $300,000 if married, or having a net worth of $1 million not including a personal residence. Of course, it is not as easy as simply asking a potential investor if they meet this threshold. The JOBS Act requires startups to verify the status of investors and provide official documentation to confirm that each investor meets the “accredited investor” threshold. Because some investors may not feel comfortable providing such personal information (including tax returns, relevant bank statements, brokerage account statements, credit reports etc.) directly to startups, the SEC has allowed third-party services to undertake this necessary due diligence. This service protects a potential investor’s proprietary information and also relieves the startup of the burden of verification. A third-party service can be a registered investment advisor, a broker-dealer, an attorney, or a certified public accountant.

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