Pennsylvania adopts comprehensive laws governing limited liability companies

On Nov. 21, 2016, Pennsylvania Governor Tom Wolf signed Act 2016-170 into law, enacting sweeping reforms to the state’s statutory law pertaining to limited liability partnerships, general partnerships, limited partnerships and limited liability companies. The changes to the law as it relates to LLCs should be of particular interest to many business owners throughout the Commonwealth, as the LLC is the most popular corporate form, and the most suitable for many businesses.

“Generally speaking, the effect of the law is to streamline and harmonize Pennsylvania corporate law as it applies to different types of entities, thus eliminating some of the confusion that had previously existed among the different statutory sections that had previously governed entities in Pennsylvania,” says John M. Hickey, an attorney with Semanoff Ormsby Greenberg & Torchia LLC.

Smart Business spoke with Hickey about what this law change could mean for businesses.

When do the changes become effective as they pertain to LLCs?

The act is fully effective against all LLCs on April 1, 2017. Prior to that date, the law applies to:

  • LLCs formed on or after Feb. 21, 2017.
  • LLCs that elect to have the law apply sooner.

Why is the LLC designation desirable for most business owners?

In three words: protection with simplicity. The LLC affords its members the same protections of the corporate form without the added baggage of corporate formalities and corporate double taxation. Consider that one of the primary reasons business owners incorporate is to protect themselves from personal liability, and the LLC does just that —LLCs offer the same protection from personal liability that a corporation offers. Also of importance is the tax structure of the LLC. An LLC is considered a ‘pass through entity,’ which means that the members of an LLC are only subject to a single layer of taxation, much like any individual paying personal income tax. Further, an LLC is inherently flexible. It can either be managed by its members, or managed by a manager appointed by the members. There is no need for any periodic meeting of the members.

In a corporation, shareholders are subject to ‘double taxation’ — once when the corporation receives revenue, and again when that revenue is distributed to the shareholders. Further, corporations must hold meetings of the shareholders and periodically elect directors to carry out the functions of the corporation.

What are some of the changes made by the act to the law governing LLCs in Pennsylvania?

By adopting the act, Pennsylvania becomes one of the first states to have adopted the latest version of the Uniform Limited Liability Company Act. These uniform acts are developed by scholars and professionals as model acts for states to adopt and employ, and are meant to encourage consistency and quality in the law between states. The effect of the act is essentially two-fold, in that it both clarifies existing principles of law and establishes new rules applicable to LLCs and their members. With regard to an LLC, the act sets forth specifics on formation and governance, duties owed by members and managers to each other and persons dealing with the LLC, authority and liability of members, the treatment of interests in the LLC, and dissolution. Another big change includes a clarification regarding the duties owed between members of an LLC in the context of a member-managed LLC. Now, members owe one another a fiduciary duty, duty of care, and a duty of good faith and fair dealing.

What is the expected impact of the act?

The act should make Pennsylvania a more favorable place to be incorporated. The law benefits from consistency and clarity, as it is ambiguity and inconsistency that give life to litigation. Remember that, in the world of law, the LLC is still a relatively new creation. Before the act, it was not always clear that certain aspects of corporation law would apply to LLCs, despite the fact that numerous court decisions have held that wherever possible, the governing law should be consistent between an LLC and a corporation.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Settle disputes before they happen by drafting effective governing documents

There are misconceptions that people have at the outset of a business relationship that, over time, can present difficulties for the entity they create.

“People enter into a business partnership believing that the relationship is premised upon and strengthened by their personal friendship, and that their personal friendship will steer them through tough times,” says Christopher Passodelis, Jr., a shareholder and co-chair of the Litigation Services Group at Sherrard, German & Kelly, P.C. “Unfortunately, personal friendships deteriorate rapidly when disputes arise as to the direction of the company. That often leads to hostility that pollutes and corrupts. The reliance on friendship is misplaced and needs to be taken out of the equation.”

When entering a business relationship, he encourages partners to create governing documents that set the rules that guide the actions of a company from the start.

Smart Business spoke with Passodelis about governing documents, why they are important and what they should include.

What documents should shareholders prepare at the outset of a relationship?

Operating, Partnership and Shareholder Agreements set the rules that guide how a company will be run, creating, in essence, a roadmap to follow as partners navigate through various circumstances. These foundational documents are otherwise important because they force potential partners to consider and discuss major issues before entering into a formal business relationship. This can help determine if the two potential partners share similar goals. If not, it is better to forgo a partnership before money and time are wasted.

Governing documents dictate the ways in which the company will manage day-to-day affairs and long-term planning, how the company would approach a sale event, and how partners leave and new partners enter the business, among other issues.

They can also set the rules for appointing a board to oversee the business. It is best if the board has an odd number of members who are not closely affiliated with one partner or the other so they can dispassionately help resolve conflicts with minimal bias.

The process of dispute resolution among shareholders must be addressed. The risk of business failure is highest when partners are focused on disputes among themselves rather than minding the underlying business.

What options do shareholders have when it comes to dispute resolution?

To address disputes, build in a resolution process that starts with each side presenting their position at a special meeting with the board to seek their guidance, relying on their independence to decide what is in the best interest of the company. That is akin to an informal mediation.

The next step would be to retain an independent mediator to guide the partners to a resolution. Mediators are professionally trained to help find common ground.

If that fails, some form of litigation is next. Regardless of the approach — arbitration or court — the struggles associated with this last step are rarely worth the effort because it is such a caustic process.

To offer a way out for two partners who cannot get along, an effective solution is to include a ‘shotgun clause’ in the agreement. This gives either party the option to make an offer, to the other, to purchase his or her shares, and the party receiving the offer then has the opportunity to either accept the offer or buy the other partner out for the same amount. It can be a hard decision, but the value that you preserve is higher than the value that you lose in litigation.

When should legal counsel get involved? Does each partner need a lawyer?

The most effective approach is to have the company hire a lawyer who works to reach an agreement that favors the company over any other partner. Individual partners should be represented by their own independent counsel to ensure that they understand the effect of the agreement. Working with unbiased legal counsel in the formative stages can ensure that the terms and conditions in the governing documents are clear and fairly applied to both parties.

Forming an enterprise is serious and should be considered from every perspective from the outset. Separate emotion from the process and rely on governing documents as the guide. When times get difficult, this document will offer a logical way to resolve problems.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Mediation can be a useful tool for companies locked in conflict

When your business is entangled in a legal dispute, mediation offers a way to resolve the conflict that can save both time and money. But, you must enter into the process with the right frame of mind, says David A. Schaefer, an attorney at McCarthy, Lebit, Crystal & Liffman.

“Some companies use mediation to learn more about the other side’s case or position,” Schaefer says. “They view it as ‘cheap discovery’ or in other words, a means to prepare for their eventual day in court. As a mediator, I think the ultimate goal of mediation should always be resolution.”

If you don’t know enough about the other side’s position, there’s a better way to get informed, according to Schaefer.

“Start a conversation with your adversary and run through your questions,” he says. “Go into the process with a sense of urgency to understand, but also a spirt of compromise and intent to resolve the conflict.”

Smart Business spoke with Schaefer about mediation and the benefits it provides to businesses when used in place of traditional litigation.

What are the origins of mediation as a tool to resolve legal disputes for businesses?
In 1990, Congress passed a statute known at the time as the Civil Justice Reform Act. It was pushed by the American business and insurance communities in response to concern that civil litigation had become too expensive and was affecting the ability of U.S. businesses to remain competitive. Cleveland was one of 12 cities designated as a pilot city to see if mediation would work for commercial disputes.

Once this door was opened for cases that were already in the court system, people began to ask why they had to wait for their case to be sent to mediation by a judge. Today, most mediation cases begin as lawsuits, but it’s not uncommon for a dispute to skip the courts and go straight to mediation.

What enables mediation to be effective?
A mediator has nothing to gain by the outcome of your dispute. His or her role is to gather facts, hear from both sides and use that knowledge to drive the process toward a settlement that is acceptable to both parties. It may be helpful for the mediator to offer an opinion at some point, but it’s always done in a neutral way and from the perspective of an outsider who is examining the case for the first time.

Written mediation statements are an important part of the process. They provide an opportunity to explain in writing what has happened and what led to the dispute. The more complicated the case, the more important the mediation statements become. They give the mediator an opportunity to prepare notes and questions in advance of the mediation session.

These questions can be used to gain understanding about aspects of the case or to make one side think about a particular point, typically a weakness in that side’s case. It’s important through this writing process to pull together the points of the dispute that favor your side and at least privately compile the points that favor the other side. You want to be as informed as possible going into mediation.

What about the cost of mediation?
Mediation eliminates the need for depositions, the filing of motions and, of course, a trial. A typical mediator in Northeast Ohio will charge about $300-$400 per hour and the average mediation is eight hours.

When all is said and done, factoring in the cost of a mediator, attorneys on both sides and the preparation to get ready for the case, mediation will cost a company around $5,000. If it resolves the case, it’s always cheaper than what it would cost to go to court.

If you find yourself in a legal dispute, give your attorney clear direction as to what you’re willing to accept to resolve it. Be upfront about what you’re willing to pay if you’re the defendant or what you’re willing to accept if you’re the plaintiff. Consider the scope of the case and what’s at stake to ensure these figures make sense, so your attorney can properly represent you.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to handle common neighbor-versus-neighbor disputes

One of the most common criticisms of lawyers is that they don’t give straight answers. They tend to use a lot of “ifs” and “buts,” describing alternative arguments they might make to reach different conclusions about seemingly simple matters. Some even make flippant comments, such as, “the law on a given day depends upon what a judge had for breakfast,” as if to suggest that it’s naïve to expect a reliable answer.

But William J. Maffucci, an attorney with Semanoff Ormsby Greenberg & Torchia, LLC, explains that there is at least one substantive area in which the rights of parties are relatively well defined: disputes among neighbors.

Smart Business spoke with Maffucci about some of the most common neighbor-versus-neighbor questions.

Do you agree that, in many fields of law, it’s hard to get straight answers?

Yes. Lawyers in some practice areas often don’t like to be pinned down to a position. That’s not necessarily a criticism of the lawyers. More often it’s a reflection of the complexity of the issues they must address and of the fact that the law in their practice areas is evolving so quickly. Intellectual property might be the best example, especially in recent years.

Why is it easier to get answers about neighbor-versus-neighbor disputes?

The law hasn’t evolved quickly in this area. The principles are not complicated, and the disputes rarely make it into the courts because the amounts at issue are usually too small to warrant the expense of litigation. This is particularly true with residential property, but the same principles apply to commercial property.

What are some examples?

Can an owner trim back branches of a neighbor’s tree that extend over the boundary?

Yes, the owner can trim them back to the boundary line.

If a neighbor builds an expensive improvement, intending to locate it correctly but accidentally positioning it so that it encroaches by a fraction of an inch over the border, does the owner of the adjoining land have the right to demand that the encroachment be removed?

Yes, an owner has an absolute right to demand the removal of that portion of a newly constructed improvement that encroaches on the owner’s land. This is true regardless of how small the encroachment is, regardless of whether the encroachment actually affects the way the owner uses the property, and regardless of the cost to the neighbor or relocating the encroachment.

Does the same rule apply below the surface?

Yes, title to land is said to extend vertically downward to the center of the earth. No matter how far down a neighbor digs to construct an improvement — such as a building support, an underground storage tank, or a well — it cannot extend past that vertical plane.

Can the owner of land object to the construction of a building or other structure that ruins a beautiful view that the owner and the owners’ predecessors-in-title had enjoyed for many decades or centuries?

No, not as a simple matter of common law. There is no time period beyond which the right to a particular view becomes vested. But there might be other bases to prevent the obstruction, such as a local zoning ordinance or the existence of a private development restriction previously agreed upon by the owners or by their predecessors in title.

Is it true that someone can acquire title to property just by using it long enough?

Believe it or not, the law does recognize a type of ‘squatter’s rights,’ under the doctrine formally known as ‘adverse possession.’ In Pennsylvania, the use must continue for 21 years. But the rights don’t arise just by using the property for that long. The claimant must also prove several other things. Some of them are that the possession must have been visible, adverse and hostile to the rights of the record owner, and continuous for the entire 21-year period. It’s hard to do, particularly when the record owner of the land can produce evidence that he or she gave the claimant permission to use the land, because in that case the possession wasn’t actually adverse at all.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Cyber security basics and legal considerations for a good program

Think of all the interlinked systems that businesses use to access and transmit data. Valuable and sensitive confidential information is funneled through these conduits. Without protection, it is vulnerable to theft.

“The most valuable information for cyber thieves is the personal information of individuals, because there is a ready market for that kind of information to be bought and sold,” says Edward G. Rice, Co-Chair of the Cyber Security Group at Sherrard, German & Kelly P.C. “In more recent years, as thieves have become more sophisticated, they’ve started looking at commercial data, including trade secrets. That data could be stolen and sold on the open black market.”

Smart Business spoke with Rice about cyber security and how to set up processes to protect electronic information.

Why do companies typically fall victim to cyber attacks?  

Many companies have not created a data security plan because there is no legal requirement compelling them to abide by certain standards of protection, or they do not think it is important. In other cases, the plans companies do put in place may be deficient for any number of reasons: not enough money spent, not the right expertise, not properly tested for vulnerabilities, etc. Some companies think they are safe if they just put up a firewall and install antivirus software. There is nothing further from truth.

Additionally, data security breaches are often about who a company lets in. For example, in the Target Corp. credit card data breach from a couple of years ago, data thieves hacked into Target’s systems indirectly, through the computer systems of one of its HVAC vendors. That allowed the hackers to steal data, which cost the company millions of dollars and ultimately resulted in the resignation of its CEO.

What are the core aspects of cyber security?

Among the fundamental aspects of cyber security is risk analysis. This involves understanding what types of data a company has and the risk the company faces if that data gets breached. A fundamental first step is to take inventory of all data, the systems that house and permit access to it, and test these lines for vulnerabilities. A common method is to engage an outside specialist to do a penetration test. If weaknesses are discovered, they can be patched.

What should companies understand about the legal components of cyber security?

Most states have data breach laws that apply to all businesses, not just to banks, hospitals and insurance companies. For example, if a company that collects and stores data on individuals has that data stolen, the  company would be required to provide notice to all those individuals whose data was breached and offer them credit report monitoring services, both of which are significant financial obligations.

Further, if an individual or group of individuals affected by the breach can show real harm or damages, those individuals can seek recovery from the company.

The reputational risks to the company also are significant. A data breach can create a sense of insecurity with existing and potential customers, and also cause a company to lose contracts if clients worry that their data is at risk.

Why should companies involve legal counsel when constructing or improving a cyber security program?

Lawyers know the rules and obligations companies must adhere to and typically have a good network of professionals who, together, can assemble a comprehensive cyber protection program.

Companies need to understand all of the risks they face, and legal counsel can convey that. After the program is built, lawyers can monitor changes in the law and be ready to advise the company if and when an issue arises. Of significance, working with a lawyer from the outset of a problem provides the company with the added benefit of attorney/client privilege.

Talk with a lawyer about the requirements, from both a legal and business standpoint, to protect your business, and its sensitive and confidential information. Build a plan for a cyber security program, test it and have contingencies. The worst time for a company to find out that it is unprepared for a breach is after it happens.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Investors may have recovery options when investments go wrong

When an investment or portfolio goes shockingly wrong, fear and embarrassment often will cause investors to wait much longer than they should before confronting their stockbrokers, says Hugh D. Berkson, a Principal at McCarthy, Lebit, Crystal & Liffman.

“When brokerage customers enter into an investment, they do so with feelings of optimism and hope,” Berkson says. “If the investment’s value later plummets, the customer’s natural tendency is to accept a trusted broker’s recommendation to stay the course and to believe the broker’s assurances that things will eventually turn around.”

Certainly, there are instances where patience does pay off and investments do recover. But that’s not always the case.

“An investor’s inquiry into possible misconduct or malpractice by his or her broker often starts with a simple question: What happened to my money?” Berkson says. “The typical response from the broker is to advise continued patience or to blame a loss on ‘market conditions,’ but eventually, the investor justifiably becomes suspicious. At that point, it’s a good idea to have someone else look at your portfolio.”

Smart Business spoke with Berkson about the options available to investors when an investment doesn’t work out.

How do you know if your broker has acted inappropriately?
Investment brokers aren’t required to be infallible or even very good, but they all have an obligation to select and recommend investments that are suitable for each particular investor. Brokers also must take many factors into consideration as they craft an investment plan, including the investor’s age, investment objective, risk tolerance, income and tax status.

If your broker recommends a suitable investment that just doesn’t work out, there’s no liability. Your loss is simply part of the risk you take when you make an investment. But you might not know whether your loss was caused by your broker’s misconduct unless you meet with a qualified investment lawyer.

That lawyer can help determine whether the investments were suitable, whether the broker had a hidden financial incentive for selling them or whether the broker was simply stealing. The good news is that your broker and his or her brokerage firm can be made to compensate you for some or all of your losses if you’ve been a victim of these types of behaviors.

What are some common acts of wrongdoing by brokers?
The most common, by far, is the recommendation of unsuitable investments or investment strategies. Brokers also sometimes misrepresent or fail to disclose important facts. They may sell unauthorized investments, trade excessively to increase their commissions, trade without their customer’s authorization or fail to adequately diversify a customer’s holdings.

And very occasionally, brokers engage in Ponzi schemes and other types of fraud or theft. Of late, many brokers also are selling high-commission investments they claim to be very safe, but actually are complex, risky and illiquid products in which the customer can lose every penny invested.

What can an injured investor do to recover?
Brokerage firms are primarily regulated by the Financial Industry Regulatory Authority (FINRA). Stockbrokers can be held accountable for their wrongdoing through FINRA arbitration.

Obviously, a favorable result can’t be guaranteed, but FINRA arbitration makes it possible for brokerage customers to recover some or all of their money. The advantages of going through arbitration are that the case is private, so your name is not made public.

It’s also faster and cheaper than court and there are no costly and time-consuming depositions, except under rare circumstances. If your case doesn’t settle, it will be decided by a panel of three arbitrators. However, as in the court system, most cases are resolved through settlement, in which case a hearing is avoided. The decision about whether to accept a monetary settlement or go to a hearing always belongs to the client, though lawyers will advise the clients on the pros and cons of each option.

If you have lost money at the hands of a bad broker, you shouldn’t be embarrassed. Talk to a lawyer. You do have options to attempt to recover what was lost.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Protecting your reputation without using non-disparagement clauses

Businesses understandably care about their reputations, as negative publicity can drive away customer traffic. Many businesses have attempted to forestall negative feedback by putting non-disparagement clauses — also known as gag clauses — in their form contracts.

“However, a new federal law prohibits the use of non-disparagement clauses in certain form contracts entered into by consumers,” says Julia Richie Sammin, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Sammin about non-disparagement clauses, the newly enacted Consumer Review Fairness Act of 2016 (CRFA), and the consequences of violations of the new law.

What is a non-disparagement clause?

Non-disparagement clauses prohibit customers from sharing their opinion of a seller’s goods or services, for instance by forbidding a customer from leaving reviews on websites such as Yelp, Angie’s List and TripAdvisor.

But this attempt to avoid negative publicity can backfire when a business sues a customer to enforce the contract provision, particularly where the review reflects the customer’s honest assessment of a business’s goods or services.

What is CRFA?

On Dec. 14, 2016, President Obama signed into law CRFA, a bill that received bipartisan support. Under CRFA, a provision in a ‘form contract,’ defined as a contract with standardized terms where the consumer does not have a meaningful opportunity to negotiate the terms and conditions, would be void from the inception of the contract if the provision:

  • Prohibits or restricts a consumer from making a statement assessing the seller’s goods or services,
  • Imposes a penalty or fee on a consumer for making such a statement, or
  • Claims ownership of the intellectual property in such a statement made by a consumer.

CRFA will not invalidate the entire contract, just the offending provision. It also does not preempt state law — if a state law regarding non-disparagement clauses is even more protective of the consumer than CRFA, that state law will remain in effect.

CRFA is very broad, even encompassing contractual provisions restricting false and defamatory comments. However, CRFA does not prohibit a business from bringing a civil action for breach of confidentiality, defamation, slander or libel, or from removing reviews from its own site that are defamatory, harassing, obscene, false or misleading, or unrelated to the goods or services offered by the business. A business just cannot attempt to restrict the consumer’s speech before such speech is made. Moreover, CRFA does not apply to employment or independent contractor agreements.

CRFA applies to non-disparagement clauses in effect on or after 90 days from the enactment of the new law, i.e. March 14, 2017, so businesses should act quickly to remove any non-disparagement clauses from their form contracts.

What are the consequences of violating CRFA?

A violation of CRFA is considered a violation of the Federal Trade Commission (FTC) Act’s prohibition against unfair or deceptive trade practices, which can result in a civil penalty of up to $40,000 per violation, among other outcomes. If the violation is ongoing, each day that the conduct continues is treated as a separate violation. The FTC Act, however, does not allow a private right of action, so a consumer could not sue a business directly for a violation of CRFA.

How can a business protect its reputation without using non-disparagement clauses?

CRFA instructs the FTC to begin providing non-binding best practices to assist businesses in compliance with CRFA within 60 days after the passage of the new law. In the meantime, businesses can proactively encourage happy customers to leave public reviews and unhappy customers to contact the business privately. Businesses can also ask review websites to remove reviews that are false or misleading, harassing, obscene, etc. Finally, businesses can still sue for defamation, breach of confidentiality, and other claims that are allowed under CRFA.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Minimize project disputes through patient, thorough planning

The progress and success of a construction project is often defined by time well spent in the early planning and preparation process. Too often, however, developers, contractors and design professionals rush to start a project and do not spend the time needed in these critical phases.

“Thorough scope discussions and extensive contract negotiations will often yield a better understanding for the parties and their respective roles and responsibilities,” says Edward B. Gentilcore, Shareholder and Director of Sherrard, German & Kelly, P.C. and Chair of its Construction Services Group. “Patience in planning and preparation is the key to later success.”

Smart Business spoke with Gentilcore about the planning and contracting process, and what should be defined before starting actual project construction.

What needs to be determined during the planning and contracting process?

First and foremost, the project requirements and scope of the project need to be defined. Specifying Contractor and Owner Performance Expectations (aka SCOPE) are fundamental to establishing what is to be accomplished.

It should also be determined who will take the lead on developing the execution plan for project aspects such as design, construction and engineering. The parties involved should identify and create contractual silos of responsibility to help avoid disagreements and disputes.

What aspects of construction contracts are most susceptible to legal challenges?

Many legal challenges are often based on scope and site disputes. Scope disputes arise where the parties have not adequately allocated responsibilities. Site disputes emerge where site conditions are unexpected, the desired site is not available or access to the site is delayed. There can also be material and supply delays that impact the progress of project, and lack of coordination of performance responsibilities that causes delays and claims.

Untimely payments are another source of disputes. Sometimes these can be attributed to financial insolvency issues, but other times they have to do with one party believing performance expectations have not been met, so payment is withheld.
In the event of any disputes, regardless of their origin, parties need to be mindful of notice provisions with regard to changes, claims and payments. This is why the contract does not belong in the drawer. It should serve as a reference point that defines responsibilities and expectations.

How should companies respond to disputes?

If disputes occur, look at the contract first and determine what relief there is to claim, the obligations of providing notice, and whether those notice provisions have been fulfilled. If proper and timely notice isn’t provided, a party must then justify why it didn’t give notice. In these situations, the needed focus is not on the impact, but rather contention over why contractual obligations to provide notice were not met.

What can construction project participants do to mitigate claims?

Hopefully, when a party realizes it needs to make a claim, information about the claim has been accumulated in the form of notes, emails, photos, etc.

Counsel should be alerted and engaged early with an issue because they can help ensure contractual nuances are followed, notices are met and a sound information collection process is undertaken. To the extent that there could be a formal claim, communications over information collection can be made privileged if counsel is involved.

When transitioning into a dispute phase, there is the belief that parties can mitigate costs by not contacting counsel. That is counterintuitive. If the dispute escalates to an arbitration or court proceeding, costs are going to be much more significant and not likely accounted for in initial budget projections. That is why engaging counsel’s assistance sooner may reap benefits of earlier resolution of project conflict.

The best dispute resolution occurs at the earliest stages of a project. Defining more precisely the roles and responsibilities of each party in the process reduces the likelihood of uncertainty and of conflict. So patient and proper planning should always precede actual project performance.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Navigating divorce by using a business mindset

Divorce, like a business dissolution, is a process to terminate a relationship and divide assets, liabilities and wealth, says Kaitlyn D. Arthurs, an Attorney at McCarthy, Lebit, Crystal & Liffman. Unfortunately, this process can be complicated by emotion.

“Divorce is a high-conflict situation that involves sadness, anger and grief,” Arthurs says. “However, when a person approaches it with a business mindset, he or she can lessen the emotion in order to reach an end and minimize cost, both financially and emotionally.”

While there has been a shift away from litigation to numerous alternative dispute resolution processes, every case is unique. Clients should know their options and work with a practitioner who has a firm grasp on how those alternatives will coincide with different personalities and situations, and can then help determine the right approach.

Smart Business spoke with Arthurs about these processes and how bringing a business-minded approach to divorce can reduce some of the stress involved in reaching an end.

What are some important things to keep in mind when going through a divorce?
It’s important to recognize that a divorce is like a business breakup. The end goal is to ‘cut a deal’ to reach a resolution where both parties are satisfied and will, therefore, adhere to the terms. It is advantageous to both parties to be solution-driven to avoid getting lost in the weeds on the problems, which may or may not matter.

More importantly, a process provides the parties significant control over both the process and the outcome. The more involved the parties are in taking steps towards resolution, the better off the parties will be in the end.

What are some of the processes available?
Dissolution and divorce. In a divorce, a lawsuit is filed and, absent a settlement, the court will decide all issues. Litigation provides the ability to issue subpoenas to obtain information, to secure restraining orders, and/or to obtain a “divorce” if the other party refuses to engage.

However, litigation makes sensitive family matters public record, which can be problematic.

A dissolution allows the parties to reach a resolution prior to submitting the final agreement to the court. The parties may use one of many alternative dispute resolution processes, which include the following:

■  Cooperative Divorce: Through counsel, the parties utilize principled and facilitated negotiations to come to a settlement, which can involve meetings, phone discussions, sending proposals or shuttled diplomacy.

■  Collaborative Divorce: The parties and counsel agree in writing to work together in a series of ‘four-way’ planned meetings (which can involve joint evaluators/experts) to resolve the case. If there is an impasse, the parties must hire new counsel to pursue other processes, including litigation. This rule keeps the parties engaged to the collaborative process, while promoting an environment of confidentiality.

■  Mediation: The parties jointly hire a mediator to facilitate discussions to lead them to an agreeable solution. A mediator cannot provide legal advice, but will place the parties in the driver’s seat to problem-solve solutions, which can minimize cost.  Either party may retain counsel to consult on legal issues as they arise.

How does being proactive help minimize costs and preserve wealth?
Organized information is power. It’s important to establish a team (attorney, accountant, financial planner, etc.) that will be available to answer questions during the process.

Moreover, compiling documents to substantiate all assets, liabilities and income is a proactive way to prepare. Such information would include documents to demonstrate premarital, inherited, gifted or personal injury monies, which would remain a party’s separate property not subject to division.

Wealth can only be preserved when a party asserts and proves a claim with documents. Knowing how to transfer wealth during the marriage is also good preparation. Staying one step ahead of the other side will create an advantage. Time is money. The more information that can be provided in an organized fashion, the better an attorney can prepare and keep costs reasonable.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to avoid common intellectual property missteps

The American legal system provides certain rights and protections for owners of intellectual property (IP). It is crucial that businesses avoid infringement of intellectual property rights.

“Businesses often inadvertently infringe the intellectual property rights of others because of inattention to internal operations, a lapse that comes with a significant price tag,” says Alexis Dillett Isztwan, member, Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Isztwan about the risks and consequences of infringing on intellectual property as well as how to avoid missteps.

What businesses are at risk?

In any business, a multitude of infringement risks exist in daily operations. Since infringement does not require that the infringer knew its activities were infringing, businesses must bear the burden of policing their own operations.

Where are the risks?

The most common risk is the unauthorized use of images, content or music. Businesses often look to the internet or social media as a flexible marketing platform for advertising and promotional campaigns that can be launched quickly and inexpensively. The downside is that employees often equate easy access on the internet to images and music with an unfettered right to use third-party works in advertisements or on company websites.

In reality, use of third-party images, music or content requires a license from the owner and typically a fee, regardless of the significance of the use. While employees may believe the IP owner will never discover the use, many technologies exist that enable IP owners to cast a broad search over the internet to identify unauthorized uses of their works.

Another risk arises with the use of software in excess of permitted use under the business’s license. Unless a license allows for enterprise-wide use, the business must limit its use to the numbers specifically permitted, whether those limitations are per user, per laptop or desktop, per server, or per location.

Employees often believe that a software license is carte blanche for use in the business and will copy a program to additional devices, laptops or desktops without the knowledge of the business owners. This misunderstanding of software rights puts a business at significant risk of infringement claims based on the unauthorized uses. While discovery may seem unlikely, all it takes is one disgruntled former employee to disclose the infringing uses to the software owner.

What are the consequences?

The stakes are high. Typically, once unauthorized use is detected, the IP owner will send a letter demanding payment of damages and immediate removal of the unauthorized use — the clear implication being that failure to comply will invite a lawsuit. Six-figure settlement demands are the norm with IP owners often arguing the infringer must pay three to five times the actual damages so that the settlement amount acts as a deterrent.

Even short of litigation, damages can quickly grow. When coupled with legal fees related to negotiating a settlement, damages may have a substantial financial impact on a business even before considering the resulting operational cost of purchasing the appropriate number of software licenses or replacing the promotional piece.

How can a business avoid missteps?

First, never respond to a demand letter without consulting counsel. If the IP owner took the time to send a letter, the matter will not be resolved with a brief call. More often than not, attempts by business owners to resolve an IP matter without counsel result in increased settlement amounts or a severely compromised negotiating position.

Second, businesses should implement internal processes that minimize the risk of unauthorized use of IP. The policies should state clearly what activities are permitted and by whom, and identify the point person to be contacted for inquiries and approvals.

Third, educate and train employees on avoiding potential infringements and knowing when to ask questions and seek approvals.

Finally, appoint an internal coordinator to oversee use of third-party IP and software in the business’s daily activities.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC