Business Law Update: It Will Be a Merry Christmas For Some Startup Non-Profits.

Christmas has come early for some small non-profits seeking federal tax exemption under the 1023-EZ Application Process.

Back in September I posted on the Federal Government’s new process for a potentially quicker and more cost-effective way for small startup non-profits to gain 501(c)(3) Exemption. You can see that article here

As a recap, The IRS  came out this year with its IRS 1023-EZ form which would allow certain startup non-profits to apply for tax exemption online.

This is a much quicker process than filling out the lengthy traditional 1023 application, and submitting all of the required supporting documents.

You can review the instructions to the 1023 EZ form by going to the follow link.

In fact, before you complete the application you are required to review the instructions and go through the checklist.

The Application requires you to attest that you have gone through the checklist (although you don’t need to submit the checklist with your application).

Completing the checklist ensures that your non-profit is not automatically ruled out before you begin the application.

A few requirements before you can submit your application are:

1. Application is only good for 501(c)3 Exemption – if your business is claiming non-profit exemption under any other subsection, it has to go through the traditional 1023 application.

2. Your entity cannot be an LLC.

3. Your entity cannot be a successor to a for-profit entity.

3. Your entity does not expect to raise revenue of more than $50,000 each year for the first 3 years.

Assuming you pass this checklist, you need to have set up (but do not submit to the IRS) all of the traditional legal documents that are required under Michigan law (articles of incorporation, bylaws, board of director information, etc..)

After these steps have been completed, the application itself can be completed rather quickly.

The Big Question:

The big question among lawyers and non-profits has been – will this process turn out to be quicker than the traditional application?

Will non-profits receive their determination letters from the IRS any sooner as a result of filing the 1023-EZ?

I’m here to report to you, based upon my experience: “yes”

I had some skepticism, but can report that within a few weeks of completing the application process, a client of mine recently received its determination letter of recognition for tax exempt status from the IRS. Congratulations Grace’s Table! What a worthy cause. Grace’s Table is a ministry to teen mothers in Grand Rapids. It’s mission statement, in part:

is a resting place, an anchor, and a firm foundation for teen mothers and their kiddos. It represents safety and stability in the midst of uncertainty. Each week, the families are welcome to come share a meal with us Around the Table. Both simplicity and complexity exist in our time together during which we welcome Jesus to be a part…

What a fantastic Christmas gift for Grace’s Table and other startup non-profits who have applied through the 1023-EZ Application process.

They will be able to tell their donors that their year end gifts will be tax deductible.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Detroit’s Blight Removal: Opportunity For Social Entrepreneurs to Utilize Crowdfunding?

Today’s Detroit Free Press had an article about Detroit’s blight removal campaign – see it here

The article reports that through various avenues, including the Detroit Land Bank Authority:

“Detroit now demolishes 200 eyesores a week,“

The article goes on to report all of the challenges ahead for Detroit, including a vast amount of blighted properties still needing to be demolished, scarce trained workers, etc..

The article ends with a question: “But perhaps the biggest question confronting Detroit’s blight campaign is what to do with all the cleared land”

I answer that question with a question of my own (lawyers do that): could this be a viable avenue for local crowdfunding?

Are there groups of individuals, let’s call them “social entrepreneurs”, in Michigan who would come together to revitalize a community, one neighborhood at a time?

Maybe these entrepreneurs are investors who would be willing to work and live in the community they revitalize.

These investors wouldn’t need tens of thousands of dollars of their own funds to make a difference.

Michigan’s intrastate crowdfunding exemption (Michigan Invests Locally Exemption) limits these crowdfunding projects to a maximum of $2,000,000 per 12 months and investors are limited to $10,000 each (unless an accredited investor) – so the deal size is relatively limited.

I like Attorney Anthoni Zeloi’s proposed bill for Illinois, capping projects to $20,000,000, you can read his proposed bill, and rationale at his blog here

Could you imagine living in a neighborhood where you invested real money into, and could say:

“I helped build this neighborhood”

or

“I helped revitalize Detroit“.

Calling all Michigan Social Entrepreneurs to weigh in.

What do you think?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Michigan Business Law Update: Bill Presented to Gov. Aimed to Help Remove Employment Barriers

I previously reported on House Bill 5216 which would give incentives to Michigan businesses for hiring convicted felons back into the work force. Yesterday, the final Bill was passed by the legislature and was sent to the Governor for signing. See article from the Mining Journal

Also, if interested in some details of the enrolled bill, see the most recent Bill Analysis from November 21, 2014 here

Grand Rapids Business and Non-Profits Support Removing Barriers to Employment

As I’ve previously stated,

There are a number of great companies who reach out to support putting Michiganders with certain barriers to work.  Goodwill Industries of Greater Grand Rapids lead by CEO Kathy Crosby does a fantastic job of equipping this demographic and putting them into long term employment. Mel Trotter Ministries has placed over 100 individuals in their shelter into full time employment in 2014.

Some West Michigan companies who do a great job of reaching out to hire/place those with employment barriers are Proos Manufacturing and Fabricating lead by CEO Amy Proos and Cascade Engineering lead by (former) CEO Fred Keller. Others include Lacks Enterprises, Kentwood Office Furniture and Express Employment Professionals of Grand Rapids lead by Janis Petrini  to name a few.

HB 5216

This new law would seemingly reward such companies for their good work, by limiting their liability for such actions as “negligent supervision of employees” or other claims for person or property damage claims.

You can check out the text of the final enrolled bill here

Hopefully, this new law would also give incentive to other great companies through out Michigan to hire employees who are otherwise qualified but their only barrier is a felony conviction.

questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Michigan Crowdfunding Law Update: Viable Tool for Social Entrepreneurs?

I had a client come in yesterday  – a local restaurant owner. A startup business.

– quick comment – 

Gotta love local start up businesses. I love their value in being an active part of a local community – their entrepreneurial spirit –  willingness to take risks.

– Ok – back to where I was going…

One of the client’s concerns was (like every startup business) cash flow.

Question: If you are a startup local business where do you get funding?

It can be a challenge going to a commercial lender without having any track record of success and asking them to loan you money to start up a business. (Especially if you are restaurant).

Crowdfunding could be the answer.

The Michigan Invests Locally Exemption (MILE Act) MCL 451.2202a 

For local small business startups, the MILE Act could be the answer.

It allows any Michigan resident to invest up to $10,000 in a locally owned business seeking to fund a project up to $1 million ($2 million with audited financials). If the investor is an “accredited investor” that investor is not limited by the $10,000 cap.  I wrote an article about the MILE Act back in March for Grand Rapids Area Professionals For Excellence, you can view that article here.

Also, for more information, you can check out the State of Michigan’s Frequently Asked Questions Page

What I love about Crowdfunding.

What I love about crowdfunding can be illustrated in Charles Best‘s company DonorsChoose. Charles spoke today at the Grand Rapids Economic Club – great event! It isn’t every day a speaker gets a standing ovation. To date, Donors Choose has raised over $291,000,000 directly for specific needs in classrooms all over the U.S.. What an impact!

After the event, Charles Best gave every attendee a 50 dollar donation to give towards a school need.  I donated to Mrs. Sanchez’ 2nd grade class  at Stocking Elementary in Grand Rapids. Feel free to donate as well!

The whole concept of Donors Choose is for schools who have legitimate needs to connect with donors who care. Donors Choose “gets around the gatekeepers” (e.g. – government, foundations, knowing the right people, etc…)

This is what I love about crowdfunding.

Crowdfunding gets around the “gatekeepers” to connect worthwhile projects to “investors” who care about a project. Investors who care about a community.  This is particularly true of Intrstate Crowdfunding Exemptions – a pre-requisite is that both the investor and the business need to be Michigan based. What potential to impact a local community!

To learn about some local West Michigan businesses utilizing crowdfunding, check out these: Pilot Malt House,  Loquidity, LLC.

The Current State of Crowdfunding in Michigan.

There have been changes in the crowdfunding landscape since I posted back in March. Other states have enacted Crowdfunding Laws. Most of them have closely mirrored earlier states’ legislation.

Since January, there have been few local businesses to utilize the MILE Act in Michigan. Currently, Michigan has only a handful of registered portals, and only 1 project that was successfully funded using the MILE Act.

Why the lack of funded projects?

A few reasons come to mind:

  • The MILE Act is still new, and relatively unknown as a viable funding source.
  • Although not as cumbersome as securities registration, there are still several forms to file and hoops to jump through, and ongoing compliance with LARA.
  • Most importantly – there is a general lack of guidance on how the MILE Act is implemented.

The MILE Act provides that the Administrator (LARA) may enact rules to implement the Act, but currently no rules have been implemented. As relayed to me, rules have been proposed, but still need to go through the administrative rulemaking process of public hearing and comment, and then ultimately legislative review. These rules will help both investors and startups navigate this new landscape of Intrastate Crowdfunding. Some states have proposed rules, which provide some guidance to other states, like Michigan.

Conclusion: 

The MILE Act is a viable option to connect investors who care about their community with local startup businesses who seek to revitalize and play an active role in their community. Particularly investors who traditionally did not have access to invest (as non-accredited investors), and to business startups hindered from access to start up funds by “gatekeepers”

State legislatures and regulatory bodies are currently working to provide more guidance on implementing the crowdfunding exemption.

My take: there is plenty of room for good start up businesses (with a sound business plan) who want to make their local community a better place. The MILE Act could be a useful tool.

Questions? Comments?

Email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

October 24th Court of Appeals Decision: The Non-Compete Lawsuit Involving 5 Hour Energy.

Happy Thanksgiving!

This Case was too interesting to pass up writing about.

I have posted a series on covenants not-to-compete and a friend and fellow lawyer (Eric Guerin, Varnum Law – check him out, great business/real estate litigator) sent me this recent unpublished Michigan Court of Appeals decision involving the makers of 5 Hour Energy Drink  and their failed attempt to enforce a covenant not-to-compete against a competitor, “Eternal Energy“.

The Case: Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., No. 315519, 2014 WL 5408963, (Mich. Ct. App. Oct. 23, 2014)

A. Synopsis:

As the Court of Appeals states, this case “primarily concerns plaintiff’s business dealings and contracts with two entities, defendant K & L Development and defendant Liquid Manufacturing.” Id.

Innovation Ventures engaged Defendant to bottle its 5 Hour Energy Drink. Innovation later ended its relationship with Defendant, in order to bottle its own product.

Innovation retained another Defendant to consult in the marketing of 5 Hour Energy Drink, and then terminated its business relationship after two weeks.

Both Defendants (bottler, and consultant) decided to come together and compete with 5 Hour Energy. After an extensive lawsuit involving multiple counts, amended pleadings, discovery, Plaintiff’s claims were dismissed!

B. Facts: (they are admittedly relatively complex)

Parties:

  • Plaintiff, Innovation Ventures, LLC, – the maker of “5 Hour Energy”
  • Defendants Liquid Manufacturing, LLC, K & L Development of Michigan, LLC, and Peter Paisley and Andrew Krause, the presidents and owners of Liquid Manufacturing and K & L Development.

i. Innovation Engages Liquid to bottle 5 Hour Energy

  • On May 18, 2007, plaintiff entered into a manufacturing contract whereby plaintiff hired defendant Liquid Manufacturing to bottle 5 Hour Energy.
  • In June 2010, plaintiff terminated its agreement with defendant Liquid Manufacturing, and the parties entered into an agreement to formalize the termination and to formalize plaintiff’s exercise of its option to purchase the equipment that defendant Liquid Manufacturing used to bottle plaintiff’s product. Id. pg 1.

  • The Termination agreement contained nondisclosure and non-compete provisions, but permitted defendant Liquid Manufacturing to produce a list of 36 “Permitted Products” on the equipment that was formerly used to bottle plaintiff’s product; that permission could be revoked for violation of the Termination Agreement. Plaintiff agreed, though, to give defendant Liquid Manufacturing 30 days to cure any violation of the agreement. Id.

ii. Innovation Engages K&L to Help Market 5 Hour Energy

  • In 2008, Plaintiff and Defendant K&L entered an oral agreement with defendants, defendants to act as consultants “to help design, manufacture, and install certain beverage production and packaging equipment for plaintiff.”
  • On April 27, 2009, plaintiff and defendants Krause and K & L Development entered into a written agreements, including a confidentiality and non-compete agreement” Id.
  • On or about May 10, 2009, less than two weeks after the signing of the Agreements, plaintiff terminated the parties’ business relationship. The Parties entered into a “Termination Agreement”

And The Plot Thickens…

iii. K&L and Liquid Join Forces to Make: Eternal Energy

  • On September 10, 2010, defendant Eternal Energy LLC, which produces a liquid energy shot known as “Eternal Energy” was formed by the owners of Liquid Manufacturing and K&L Development to compete with 5 Hour Energy.
  • On May 9, 2011, defendant LXR Biotech was formed;  Defendant LXR Biotech markets and distributes Eternal Energy in approximately 2–ounce bottles, which is approximately the size of 5 Hour Energy bottles. Id. pg 2.
  • On September 20, 2010, ten days after the formation of defendant Eternal Energy, defendant’s CFO contacted plaintiff’s counsel, and requested that Eternal Energy be added to the list of Permitted Products that defendant Liquid Manufacturing could, pursuant to the Termination Agreement, produce.
  • In an e-mail dated September 21, 2010, plaintiff agreed to include it. (this would later be fatal to Plaintiff’s case)
  • On January 27, 2012, plaintiff sued Defendants, alleging breach of confidentiality agreement, non-compete agreements, as well as  tort claims for the disclosure of its confidential information.

Essentially, Plaintiff claimed that Defendant wrongfully obtained Plaintiff’s confidential information, and the Defendants used the information in marketing Eternal Energy, and by representing to Wal-Mart that defendant previously bottled 5 Hour Energy for plaintiff. Id.

After several amended complaints and extensive discovery of documents, (aka “loads of attorney fees”) Defendants filed a motion to dismiss. The Court granted the  motion and dismissed all claims. Plaintiff appealed. The Court of Appeals affirmed – found in favor of Defendants.

C. The Court of Appeals Ruling

Some of the rules of law cited by the Court are worth particular mention.

i.Parties are free to contract!
“As a general matter, courts presume the legality, validity, and enforceability of contracts.” Coates, 276 Mich.App at 507.
ii. Non-Compete Agreements will be narrowly enforced.
However, “noncompetition agreements are disfavored as restraints on commerce and are only enforceable to the extent they are reasonable.” Id. See also Thermatool Corp v. Borzym, 227 Mich.App 366, 372; 575 NW2d 334 (1998).
“Thus, a restrictive covenant must protect an employer’s reasonable competitive business interests…” Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., supra page 5.

iii. What is reasonable business interest?

In order to be reasonable, “a restrictive covenant must protect against the employee’s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill.” Id. citing  Coates v. Bastian Bros, Inc, 276 Mich.App 498, 506; 741 NW2d 539 (2007).
  • “preventing unfair competition is…prevention of fair competition is not. St Clair Med, PC, 270 Mich.App at 266. Id at 7.
  • Protecting the goodwill that a party has built up with clients is a legitimate purpose. Id.
  • Just because Defendant acknowledges in the Agreement “I acknowledge that these restrictions are reasonable” (I admit, I have used this language before) – doesn’t mean a court will enforce it. It is up to the Court to decide what is reasonable, not the parties. Id. citing Rory v Continental Ins Co, 473 Mich 457 (2005).

D. The Court’s Ruling on Innovation’s Non-Compete.
The Court held that the language of the non-compete was too broad, unreasonable, and therefore unenforceable.

Even if the Language is Too Broad, Won’t the Court reform the language to make it reasonable?

Plaintiff made the argument, shouldn’t you simply strike the unreasonable language, and make it reasonable?

The Court of appeals said – No!

Courts may reform a noncompetition agreement if it is found to be unreasonable. See, e.g., Hopkins v.. Crantz, 334 Mich. 300, 304; 54 NW2d 671 (1952).
Here, the Court said – Plaintiff, you have given us no argument as to which provisions are reasonable, and how we could enforce them, or how we could reform it, so you have abandoned this argument.
oh, and by the way, “We have found no authority stating that a court must reform an unreasonable non-compete provision.” Id.
E. Other issues that resulted in the case being dismissed.
Innovation granted a 30 day window to cure any default – Defendants cured default within 30 days.
Defendant requested Eternal Energy be on the list of Permitted Products – Plaintiff agreed.
F. Take Away:
  • Courts acknowledge the right to enter into non-competes (freedom of contract)
  • Courts will narrowly enforce the terms, since restraint on trade is disfavored
  • If your non-compete language is too broad, the courts will not always take the initiative to reform the language to protect a legitimate business interest – it is up to the business (and their counsel) to demonstrate what is a “reasonable business interest” to protect.
  • Take notice in any contract whether you provided an opportunity to cure.
Questions? Comments?
email: Jeshua@dwlawpc.com

Business Law: Non-Competes Part III

Ok, here is my third Blog Post in so many weeks on covenants not-to-compete.

If you read my last blog post on non-compete agreements, you will recall that I mentioned that non-competes are unenforceable against lawyers.

You might ask the question: What happens when law firms attempt to bind their attorneys to non-competes? 

I’m glad you asked.

See the ABAJournal article that came out today:  “Lawyer is reprimanded for including noncompete provision in associate’s contract”  here
What’s most interesting is the lawyer’s comment – that he wasn’t going to really enforce the non-compete.

Well, of course he wasn’t. Can you imagine a Judge hearing that case? The Judge knows the law, and would sanction the lawyer for bringing the lawsuit to enforce a covenant not-to-compete.

The lawyer’s answer really underscores a broader point: in general, many businesses will have employees sign non-competes that they never intend to enforce – simply in hopes that it deters the employee from attempting to compete.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Business Law Update: First Jimmy Johns now ServiceMasters: Non-Competes Against Cleaning Crew?

Yes, indeed. In my previous article it was Jimmy Johns holding the sandwich delivery workers to a covenant not to compete, now its Servicemaster holding its cleaning crew.

The ABAJournal reported today on the article, “Cleaning worker who got new job with $3-an-hour pay raise faces possible suit over noncompete pact” you can see it here

As the article reports: Benny Almeida admits he saw a noncompetition provision in paperwork he signed when he got a $15-an-hour cleaning job with ServiceMaster of Seattle earlier this year.” The article was first published in the Seattle Times

The Seattle Times also hits on the Jimmy Johns non-compete fiasco that I previously posted about.

The columnist writes: It’s hard to conjure what intellectual property or trade secrets are at stake in making the Turkey Tom. Or in wet-vaccing carpets. It’s one thing to make engineers or lawyers sign noncompetes. But cleaners?

(as a side note, you won’t see any enforceable non-competes in the legal industry in Michigan, but that is besides the point)

When Will You see a Court uphold a non-compete?

When the Court sees that the Employer is attempting to protect its legitimate business interest.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Latest Headlines: Fraud and Abuse in Real Estate Investment & Banking

Headline News today – Fraud and abuse in real estate and banking.

 

Today a press release was issued from The Office of the Comptroller of the Currency (OCC)  assessing $950 million in fines against three national banks for “unsafe or unsound practices related to their foreign exchange trading businesses.”

You can see the press release and the supporting consent orders here

According to the Press Release, “The fines against Bank of America…; Citibank…; and JPMorgan Chase…, follow multiagency examinations and investigations of the banks’ activities in the global [foreign exchange] market.

 

The OCC indicates in its allegations that:

“The foreign exchange (“FX”) market is one of the largest and most liquid markets
in the world. The FX market enables participants to buy, sell, exchange, hedge,and speculate on currencies”

Further,

“the Bank’s “spot FX traders” participated in multibank chatrooms on instant messaging platforms until it prohibited such communications in January 2013. While participating in multibank chatrooms, some of the Bank’s G10 spot FX traders discussed engaging in potential misconduct with traders from other banks or market participants.”

 

 

Skeptical of big banks? I don’t see why…

 

In other news…

 

The DOJ sentenced a  commercial real estate developer and mortgage broker  to serve 121 months in prison today for his role in a $50 million securities fraud scheme. You can check out the press release here

Apparently, the developer “solicited investors to provide funds for the development …falsely told investors who purchased notes through the program that they would receive a lien on a specific piece of property, and that the lien would be in first position.”

In reality,  “he never provided investors with a lien, and instead conveyed a lesser interest that did not allow investors to directly foreclose on the property to protect their investment.”

The developer will be ordered to pay restitution along with serving his sentence – I feel bad for the unwary investor caught up in that deal, I wouldn’t hold my breath about getting paid back…

 

Yikes, bad stuff!

 

Takeaway here: Real estate backed financing can be complicated, and can easily lend itself to fraud and abuse.

 

Investors: It’s important to vet  opportunities out through your counsel!

 

Questions? Comments?

email: Jeshua@dwlawpc.com

www.dwlawpc.com

 

Real Estate Law News: Example for Wary Landlords and Property Owners

Here’s a profound truth those in the real estate industry will readily acknowledge:

Owning and Managing Real Estate is challenging.

 

I hear it from my Property Owner clients. I experience it when I am involved in negotiating in landlord/tenant disputes.

 

Some of the pitfalls property owners have to watch out for are illustrated in a recent Federal government press release.

The Department of Justice issued a press release concerning a lawsuit settlement reached with Landlords over Discrimination Charges brought by the Federal Government. You can review that press release here

 

According to the press release, the Federal government alleged in its complaint that the Landlords “discriminated on the basis of disability by refusing to grant a reasonable accommodation to waive a $1,000 pet deposit for a tenant with mental disabilities who needed a dog as an emotional support animal.”

Other allegations:

  • “the defendants refused to grant a waiver of the pet deposit despite numerous attempts by the tenant to provide documentation of her disability and her need for the emotional support animal.”
  • “The complaint also alleged that the defendants retaliated against the tenant after she filed a complaint with the U.S. Department of Housing and Urban Development (HUD).”
  • “Defendants’ policies constituted a pattern or practice of discrimination in violation of the Fair Housing Act because they allowed reasonable accommodations for specially-trained service animals but precluded reasonable accommodations for emotional support animals.
  • ” Defendants also refused to consider accommodation requests unless tenants had their physician complete forms that threatened penalty of perjury and threatened to require the physician to defend the information provided in court.”

 

Obviously these are serious allegations (which according to the Settlement Agreement, I presume are not admitted by the Landlords)

When reviewing the terms of the Lease as alleged by the government, they seem pretty terse. However, I wonder;  how many standard leases contain those or similar provisions?

The language could have been drafted by the landlords themselves, or it could very well have been drafted by a lawyer trying to protect his client from as much liability as possible

 

 

Strictly talking about the allegations of the unreasonably burdensome lease language, there are some lessons to be learned for landlords, property owners, managers, real estate investors.

 

Two takeaways from this news headline:

 

1. It is worth having your lawyer review your standard leases to make sure they are legally compliant and don’t have the potential to steer you into liability in the event a tenant has a grievance.

Although, your lawyer’s review of your lease won’t protect you if you take retaliatory action against a tenant with a grievance (but this goes without saying, I hope)

 

2. If you lease out “residential” property as opposed to commercial, you are under much more stringent regulations. You should make sure that everything, including what you charge the tenant for, and how those charges are incurred, are lawful.

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

 

 

Starbucks Lawsuit Highlights Legal Concerns for Startup Businesses

I saw this article yesterday about this lady who sued Starbucks over a “coffee maker dispute”. The ABAJournal reported on it today as well

That’s not the part that interested me.

She sued Starbucks and after years of litigation she finally settled.

For $250.

Although interesting, that’s not really the most interesting part to me.

Her lawyer is asking the Court to award legal fees in the amount of $175,000.

Yikes.

 

I can’t help but look at this article and have it remind me of what I hate about litigation.

Don’t hear me wrong, I understand the lawyer’s rationale given in the ABAJournal article-  taking contingency fee cases are sometimes though only way many consumers can prosecute their claims.

 

My thoughts go to a more general problem with litigation:

the overall effect of litigation tends to be, at the end of a long protracted lawsuit, the lawyers are the ones who win.

Not the clients.

 

When lawyers are doing their job advising their clients on how best to manage a business dispute, hopefully (and most often) lawyers are advocating for the client’s best interest. Often times, but not always, this approach results in lawyers advising their clients against filing a lawsuit.

 

So this is a good transition into the main reason for writing this article: – One problem that small businesses and startups run into (besides cash flow, of course):

Typically, businesses don’t know what legal services they need. “they don’t know what they don’t know”

 

So, sometimes they can end up engaging a law firm that doesn’t have their best interest in mind.

 

Case Example:

A business client (Client) came in a few months back. He had a business dispute with a customer (Customer) claiming it was owed  a large sum of money.

My Client had the ability to resolve the dispute with his Customer.  Unfortunately, the Customer engaged a law firm to represent it, that almost stopped the case from settling.

The other lawyer jumped in and his first action was drafting a lawsuit and encouraged Customer to file a lawsuit against my Client. He continued to advise Customer to file suit at every step of the way.

 

Thankfully, this lawyer did not get in the way of the parties from settling. This was primarily because the parties met individually apart from their lawyers and settled. (I might have given my Client this idea).

 

How unfortunate though.

When parties to a dispute resolve their dispute despite the involvement of their legal counsel, that is a problem.

In the event that case went to trial, the only outcome that would have been different, is that each side would have paid tens of thousands of dollars to their attorneys. I am fairly confident the outcome would otherwise have been no different.

 

In that instance, the lawyers would have been the winners.

 

So, businesses are left with the question, how do  you engage the law firms who have your best interest in mind?  Because, lets face it, any lawyer you meet that wants your business is going to tell you they have your best interest in mind.

 

I read a good article that offers good insight to what truly matter (and don’t matter) to businesses looking to retain outside legal counsel. The article provides insight from three in-house legal counsel to big business. See Above The Law blog – “13 Things That Keep General Counsel Up At Night” See that article here.

 

In-house counsel see the good, bad, and ugly, of engaging outside legal counsel.

 

As the general counsel see it, things that  a business will scrutinize over about a prospective law firm:

  •  Unreasonable Firm Billing Demands
  • Turnover and Attrition in Law Firms
  • Lawyers as Lousy Businessmen
  •  The Cost Of Litigation

The general counsel expound on this point:

“There are two motivations of outside lawyers that are misaligned with clients’ incentives: (1) The billable hour and (2) The fear of being accused of ‘not leaving any stone unturned.’ … Rather than create efficiencies, the advent of eDiscovery has jacked up discovery costs. Thus, we insist on arbitration and mediation, including the ‘English Rule’ on cost-shifting. Further, we also insist that parties justify discovery requests.”

“Establishing a fixed cost at the outset prevents outside counsel from ‘going down every rabbit hole.’”

“We cap deals and stay in constant communications with the firms to prevent overlawyering and churning documents.”

 

Things that don’t matter to these general counsel:

 Law Firm Rankings.

As the general counsel explain:

“We pay no attention to them. Great firms will have some terrible lawyers and vice versa.”

“We are looking for a relationship. Individuals are more important.”

 

Take away

In sum, businesses should be concerned if they engage a law firm that attempts to push them into pursuing a lawsuit without first trying other cost-effective means to resolve the dispute. Although sometimes an immediate lawsuit is the necessary route (e.g. – enforcing a covenant not-to-compete against a former employee actively trying to steal clients), lawyers should have their clients’ best interest in mind.

If you are considering what to look for engaging law firms – in-house counsel are a good resource. They see the good, bad, and ugly of outside legal counsel.

 

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com