Consider if you want to reorganize or liquidate when bankruptcy looms

Bankruptcy is a unique tool that companies can use to restructure their debt, says Doris Kaelin, Of Counsel at Berliner Cohen.

“If creditors are getting aggressive, a company may decide to file Chapter 7, which offers an automatic stay of any actions, and let a trustee liquidate the assets,” she says. “But with Chapter 11, the officers, directors and investors believe there is a business worth saving and they can reorganize the company.”

Smart Business spoke with Kaelin about the types of bankruptcy for a business.

What different types of bankruptcy are there?

Chapter 7 is a straight liquidation; the business has typically ceased operating and control is given to a trustee appointed by the court. The trustee liquidates the assets and pays creditors in accordance with bankruptcy code priorities.

In contrast, Chapter 11 affords the company the ability to remain in control. The existing management, officers and directors continue to operate. A reorganization plan is put forth for how the company will emerge from bankruptcy. A company may also decide to liquidate some or all assets in Chapter 11, where greater value can be achieved than under a Chapter 7 straight liquidation. For example, with technology companies, the intellectual property often requires the know-how of the employees. A sale of assets in Chapter 11 may fetch a much higher price than in Chapter 7, because the buyer can hire the seller’s employees. In Chapter 7, employees no longer may be available for hire.

Why would a business choose bankruptcy?

Normally, when a company files Chapter 7, it has explored all alternatives, including a restructure, sale of its assets or new investment if there is still a business worth operating.

Sometimes businesses get sued and need the benefit of the automatic stay, which starts as soon as the business files bankruptcy.

If you are looking either to continue operating the business pending confirmation of a plan of reorganization providing for the restructure of the business, or to obtain approval of the sale of the company’s assets affording the benefits of a bankruptcy sale order, you may consider Chapter 11. Regarding the latter, a buyer may want to get the benefit of a free and clear order — an order approving the sale of assets to the buyer free and clear of liens, claims and encumbrances, a step a bankruptcy court may approve. That route may be taken because the buyer requires it. Bankruptcy could be the means by which to sell the assets.

How often can a business seek bankruptcy?

There are companies that have filed Chapter 11 more than once and successfully restructured the business. Sometimes the focus of the business changes and the company cannot continue with its current debt structure, so the bankruptcy process allows the company to restructure its debts and emerge stronger.

How expensive is bankruptcy?

Chapter 11 can be an expensive process. In Chapter 11, a company has to prepare monthly operating reports, file motions for court approval of transactions outside the ordinary course of business, and obtain the requisite votes and court approval of its plan to emerge from bankruptcy. There are a lot of things to be considered before a company goes that route, like is it really going to achieve what they need?

What are alternatives to bankruptcy?

If a company has financial difficulties, there may be non-bankruptcy options available. For example, a company can informally wind down outside of bankruptcy. Or it can utilize the assignment for the benefit of creditors’ process, a state law process that functions similar to a bankruptcy, where the company hand picks the assignee to liquidate the assets and pay creditors. Whether a company considers bankruptcy or other alternatives as options, it is important to talk to an insolvency professional sooner rather than later. You may have some options earlier that you may not have later.

If the company is a creditor in a bankruptcy filing, it is important to talk to an adviser to determine what may need to be done and to ensure that a deadline isn’t missed. There may also be an opportunity to purchase assets out of a bankruptcy case at a more favorable price.

Insights Legal Affairs is brought to you by Berliner Cohen

How to leverage your IP attorney for the analysis of intellectual property

As businesses invest in new products or services, the importance of identifying and protecting their intellectual property (IP) may not be at the forefront of their thinking.

“However, if you want to recoup your investment you have to be able to protect it, and IP is one way to do that,” says George Huang, an associate at Fay Sharpe LLP. “Most people are familiar with Chinese companies that knock off a product and can sell it much cheaper than the original manufacturer, because the Chinese company didn’t have to invest in developing the product and its market. Protecting your IP can keep others from harvesting the rewards of your work.”

Smart Business spoke with Huang about how your IP attorney can help analyze your IP, so you can protect your investments.

What kind of IP needs to be protected and how can an IP attorney help?

What product or service makes your business stand out from its competitors? What knowledge have you monetized? This is the IP that needs to be protected.

Your attorney can help by asking questions and providing a framework to help identify what IP in your business is valuable. It’s important to value your own assets highly enough, which is where an IP attorney can provide expert counsel.

Your attorney can also help identify what IP is protectable, and the best way to protect it. For example, two common forms of IP protection are patents and trade secrets. A patent excludes others from selling the patented product or service, and can be especially useful for manufactured products with new features. Obtaining a patent, however, requires disclosing the IP to the public in return for this monopoly, which lasts for 20 years, and certain requirements must be met.

In contrast, trade secrets are used to protect IP that is valuable because it is unknown, for example the recipe for Coca-Cola, and can last indefinitely. Your attorney can help determine whether your IP will meet the requirements for obtaining a patent, or perhaps might be better protected as a trade secret.

In addition, your attorney can identify your competitors’ IP. This can help you direct your investments towards new territories that can further distinguish you from your competitors. You can avoid investing in areas where your competitors already have an advantage.

If needed, your attorney can identify the best ways to assert your IP and protect your investment. For example, government agencies like the U.S. Customs and Border Protection must stop shipments of counterfeit goods from entering the U.S., and can do so when provided with the right information.

What’s an example of how the right protection can create value?

One good example is the SpinBrush toothbrush. The inventor had previously developed a rotating lollipop, and used that mechanism to spin the bristles on the toothbrush. Electric toothbrushes were previously high-end products that cost a lot of money, but this invention brought the price down below $10.

Because the inventor had the patents on the mechanism in the toothbrush, he prevented others from selling the same product, and had time to build his market share. Proctor & Gamble eventually paid $475 million for the company.

How important is timing for safeguarding new IP?

Timing can be critical. For example, many foreign countries require you to file a patent application before you even start offering your product. If you begin advertising before you file your patent application, then you won’t be able to get that patent protection at all.

How do you suggest companies weigh investing in their IP protection versus advertising/marketing?

That’s difficult to answer, and is unique to each company. It’s generally better to invest in IP protection as early as possible. However, it’s up to each company to decide how best to invest and grow their business. IP protection protects your assets and helps you keep the customers you find, but you still need to find those customers. Successful companies can balance these priorities.

Insights Legal Affairs is brought to you by Fay Sharpe LLP

How to manage the benefits and risks of social media in the workplace

As the number of people and businesses using social media continues to proliferate, workplace social media policies are getting more attention.

“It’s important to craft a written social media policy that protects a business without infringing on employee’s rights,” says Stephen Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC. He advises having a legal expert help establish a clearly defined social media policy.

“An employment lawyer who drafts personnel polices can help create a social media policy suitable to your business’s needs,” he says.

Smart Business spoke with Goldblum about the benefits and risks of social media, as well as the importance of a written social media policy.

What are some of the most popular uses and types of social media in the workplace?

There has been an explosion in the growth of social media and it has changed the way people communicate, both at home and in the workplace. Some of the most popular examples of social media include Facebook, LinkedIn, Twitter, YouTube and Pinterest.

Companies can benefit greatly from the use of social media, but there are also significant risks, which is why it’s so important to have a well-articulated social media policy. Even if a business doesn’t have a social media presence it can still be affected by what people, including its own employees, post about the business.

What benefit does social media offer?

All businesses can capitalize on the use of social media. One example is the recruitment of employees. Over the past several years, outlets such as LinkedIn and Facebook have become an important part of the recruiting process for many companies. Also, social media allows a business to communicate with current employees as well as the public to drive existing or prospective customers to its website or physical location.

What are the risks associated with social media?

One of the biggest risks is that people misuse social media while at work. For example, employees may inadvertently or intentionally disclose confidential or proprietary information about their employer through social media, or publish negative or false information. Employees may also waste time on Facebook or YouTube rather than concentrating on their assigned responsibilities.

The social media phenomenon can be a liability for businesses. For example, social media can be a source of discovery in employment discrimination cases. In fact, the Equal Employment Opportunity Commission recently ruled that a claim of racial harassment made through a co-worker’s Facebook postings could go forward.

It’s also important to note that personal information that companies glean from social media cannot be used to make employment decisions. Although most businesses know that questions about a person’s background are generally not permissible in a job interview, significant information about a person’s race, gender, religion, national origin and age can be gleaned from a person’s use of social media, which creates a risk for discrimination lawsuits if this information is used in the hiring process.

Why are written social media policies important?

It is incumbent upon businesses that they have a well-drafted social media policy that is distributed to employees so they know in advance what is expected of them. The policy must clearly state whether social media usage is allowed at work, and if so, under what circumstances. The organization should articulate its social media goals, including what it uses social media for and what it expects to get out of its use of social media.

Employees must understand that they are responsible for the things that they post on social media and must clearly understand the legal impact that their actions can have on the company. Employees must understand the need to exercise good judgment and to protect the company from the disclosure of its confidential and proprietary information.

Finally, it’s important to outline the consequences for failing to abide by the policy, which might range from a warning for a minor infraction to termination for a more significant violation of the policy.

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

CEQA abuse rises; what businesses should know if they need discretionary permits

The California Environmental Quality Act (CEQA) was signed into law in 1970, designed to ensure that when state and local agencies make decisions that impact the environment, the impact of those decisions is analyzed. What is becoming more common today, however, is that CEQA can be misused.

“It is usually the vehicle of choice for people who don’t like what is going on,” says Andrew L. Faber, partner, Berliner Cohen.

“Although CEQA is sometimes actually invoked by project opponents for sincere environmental reasons, it seems more and more in recent years that it is misused by: (1) neighborhood groups that simply oppose a local project; (2) business competitors; (3) unions trying to put pressure on a non-union employer (for example, Walmarts with a grocery store are routinely challenged by unions, claiming to be concerned about the environment).”

Smart Business spoke with Faber on why businesses should be concerned about CEQA and its implications.

When might CEQA affect a business?

CEQA applies to “discretionary” approvals made by the state or local entities, including cities. Discretionary approvals involve matters such as issuing a planning permit, rezoning or changing a general plan. In granting any such approval, CEQA requires some level of documentation, ranging from a relatively cheap and quick initial study all the way to a full blown environmental impact report (EIR), which can cost hundreds of thousands of dollars and a year or more to prepare.

CEQA compliance can be straightforward. For example, there normally is no problem for, say, a retail business moving into an established commercial area. Similarly, a minor expansion of an existing business should be simple.

I’m sure that’s what the owner of Moe’s Stop and Gas in San Jose thought when he embarked on a minor expansion of his gas station.

What happened to Moe’s?

If ever there was a poster child for CEQA reform, it would be the owner of Moe’s gas station. He needed a conditional use permit from San Jose to add three gas pumps to his existing gas station/convenience store.

San Jose approved the permit based on a “negative declaration,” a form of CEQA compliance much less onerous than a full EIR — but after all, this was an existing business proposing a minor expansion. However, the gas station across the street wanted to stifle this competition.

The easiest way to do so was to hire a traffic expert and an attorney, who filed suit claiming there was a “fair argument” that there would be traffic impacts at their common intersection. The trial judge agreed that this very low standard for requiring a full EIR had been met, so he ordered the city to do an EIR for this trifling project. Ultimately, after spending hundreds of thousands of dollars on the EIR and attorneys’ fees, and having to close his store for eight months, Moe’s request was again approved by the City of San Jose, more than two years after filing the original application.

Should I play it safe and prepare a full EIR?

According to the “fair argument standard,” if it can be fairly argued, based on substantial evidence, and in light of the whole record, that a project may have a significant environmental effect, then an EIR must be prepared.

Because this standard is very low, and the courts have always interpreted CEQA as favoring the preparation of full EIRs in doubtful cases, we often do advise project applicants to start out with a “defensive” EIR. If serious opposition to a project is expected, it can be advisable to do a full EIR, even though the EIR may report no environmental impacts.

Should a lawsuit arise, this approach is more defensible.

What approach do you suggest?

When looking at potential CEQA compliance requirements, a business should think first of hiring an experienced land use attorney. CEQA compliance is more of an art than a science, as there are many gray areas and judgment calls have to be made throughout the process.

While involving an attorney early on may seem to some businesses as an unnecessary expense, having the expert counsel of an experienced attorney often saves time and money in the long run.

Insights Legal Affairs is brought to you by Berliner Cohen

What you need to know when you enter into a borrowing agreement

Lender liability is a general term that encompasses a number of claims that can be asserted by a borrower against its lender. Lender liability actions tend to gain prominence during economic downturns.

“As businesses and real estate developments suffer in recessionary times, lender liability actions have historically tended to increase in number,” says Suzana K. Koch, attorney at law at Brouse McDowell. “The types of legal claims filed under ‘lender liability’ can arise out of common law or statutory provisions.”

The Uniform Commercial Code (UCC) imposes an implied duty of good faith on the lender-borrower relationship and a breach of duty can be a type of lender liability claim. Good faith is defined by the UCC as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”

Each party is required to sign a contract to act in such a way that would not deprive any other party of the benefits of the contract. Although this is the standard for commercial loan agreements, the reality is not always so straightforward.

Smart Business spoke with Koch about lender liability and the importance of knowing the details of the agreements you sign.

How can a borrower’s financial circumstances dictate lender behavior?

If a borrower finds itself in financial trouble, the lender may seek to protect its assets and lower its risks by limiting borrowing capacity. This can, in turn, compromise the viability of a borrower’s business. This type of lender behavior may lead to lender liability if the lender does not act in good faith.

Over the past several decades, courts have increasingly expanded the standard by which good faith is measured for lender liability claims, and good faith theories have been applied to every stage of the lending process.

One such example involves line-of-credit cases in which a lender, with the ability to exercise complete control over the borrower’s business or cash flow, begins to restrict the credit line. When a borrower enters into an agreement with a lender to borrow only from that lender, there is an imbalance of power between the two.

If a borrower is financially distressed, drawing on the credit line may become the borrower’s lifeline. The lender may be reluctant to advance cash to the borrower because of the borrower’s financial troubles, but the lender’s ability to control how much of an advance the borrower may receive can negate the purpose of the open line of credit.

How much responsibility does a lender have to honor a borrower’s request?

While the traditional view taken by courts is that a line of credit does not obligate a lender to fund every request, the seminal case of K.M.C. Co. v. Irving Trust Co., 757 F.2d 752 (6th Cir. 1985) challenged this rule when a lender’s refusal to advance on a line of credit ultimately led to the collapse of the borrower’s business.

The loan agreement limited the borrower to only one lender, and the court held that good faith requires the lender to give the borrower sufficient notice to obtain alternative financing. Although this case has been heavily cited and distinguished across the country, the ruling in K.M.C. changed interactions between lenders and borrowers, and it continues to provide guidance for future interactions.

How can I protect my business and myself?

Lender liability claims are very fact-specific, so there has not been a bright line rule established. It is important, though, for commercial borrowers to maintain a close watch on lender activity and be keenly aware of the terms and conditions of their loan agreements.

Not all lender behavior rises to the level of bad faith, especially if notice is provided to the borrower.

Nevertheless, a borrower should be alert if a loan commitment or side deal is not honored, if its lender refuses to renew a loan or threatens enforcement action when it had previously agreed to forgo such action or if its lender interferes with day-to-day management. Lenders should be aware of the consequences to the borrower of their actions, so as to avoid liability for lack of good and fair dealing.

Insights Legal Affairs is brought to you by Brouse McDowell

Why effort is needed to understand how companies do business globally

Anti-corruption laws are designed to promote fair and equitable business practices, but the definition of what’s right and wrong can vary from one country to the next.

“When you are dealing with foreign governments, but you’re not putting checks and balances in place for how you deal with those officials and what you are permitted to do, you could inadvertently trigger the anti-corruption laws of that country, as well as be liable under the U.S. Foreign Corrupt Practices Act, 1977 (FCPA),” says Vinita Mehra, a global business attorney at Kegler, Brown, Hill + Ritter.

It could be something as seemingly innocent as having lunch with the zoning inspector you are working with to get a permit for a new manufacturing plant you want to build in India or China.

If you’re not careful, that meal could land you in a lot of trouble.

“You need to get clarity, education and training for your employees so they understand how to act,” Mehra says.

Knowledge of local customs is also crucial when meeting with people overseas.

Smart Business spoke with Mehra about setting up a compliance program and understanding the business culture that will help you avoid critical mistakes.

What makes compliance with anti-corruption laws a challenge?

You are dealing with anti-corruption laws on two levels, the laws in the U.S. and the laws in the country where you are doing business. The FCPA has served as a good guideline for what is permitted and what is not.

But you still need to provide adequate training to employees in foreign countries so they understand and can work within those guidelines.

What is a key first step when developing a compliance program?

Audit the types of contracts your company is entering into. If any of those contracts are dealing with foreign government authorities, get to the bottom of how those contracts came into place. Do they have fair terms with respect to the obligation of both parties? Are they unfairly sided to your own benefit? Due diligence is the key.

How can you ensure clarity about what is appropriate on an ongoing basis?

Hire a compliance officer who can guide your employees and answer questions as they come about. You can also hire a native of the country where you are doing business. This person ideally has local knowledge from having grown up in this particular country and can serve as a sounding board for issues that arise where you’re not sure what to do.

Any strategy that you develop has to be country-specific. There is no one size fits all. Every country has their own nuances with respect to negotiations, time and the process it takes to do business in that country.

China strongly believes in relationships and trust. Sometimes, people don’t even start talking about commercial terms until they have had two or three meetings. That’s unlike in the U.S., where people will start talking business at the first meeting.

But if you’re having a meeting with a company in India, and they know you are coming for business, they would expect you to at least have some basic ideas or terms as part of the agenda for the first meeting. If you don’t know the right approach to take, you’ll have a hard time striking a deal.

How important is cultural integration when doing business overseas?

The integration of overseas employees into your culture leads to more productivity and fewer problems.

Take the time to have top management make frequent visits to these countries to visit the operations and have those same foreign leaders visit you at your U.S. office. Go through meetings and talk through decisions and make sure that you are all on the same page about how things are to be done in your company. Make it standard practice to monitor the rules and customs of these countries so that you are aware of changes and can quickly respond to ensure your team is still compliant, and culturally integrated with your global business.

Additionally, U.S. businesses must have a strategy in place. It should involve a thorough study and analysis of the foreign markets to ascertain the potential for their products or services, which would be an important factor for their operational integration.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

How to draft enforceable noncompetition agreements

Employers often have their employees sign “noncompetition” agreements as a condition of their employment. These agreements are generally intended to prevent employees from going to work for a competitor and from taking other employees or customers with them. A well-crafted, narrowly tailored noncompetition agreement can achieve these goals.

However, it’s often the case that such agreements are too ambitious. They may be overbroad and declared unenforceable if the employee or a subsequent employer challenges them in litigation.

Shelby L. Drury, of counsel at Novack and Macey LLP, says, “Review your standard noncompetition agreements and make sure they do not contain provisions that have already been declared to be overbroad and unenforceable by Illinois courts.”

Smart Business spoke with Drury about common provisions that courts have held unenforceable and how to draft them better.

Do Illinois courts typically enforce noncompetition agreements?

The courts enforce these agreements only if they are no broader than necessary. Because they operate as partial restraints on trade, Illinois courts carefully examine noncompetition provisions and resolve any doubts as to their validity against enforcing them. The Illinois Supreme Court has held that a noncompetition provision is reasonable only if it is:

  • No greater than necessary to protect the employer’s legitimate business interest.
  • Does not impose undue hardship on the employee. 
  • Is not injurious to the public.  

Even where there is no dispute regarding an employer’s legitimate business interest, a noncompetition provision that is broader than necessary to protect such an interest will be declared invalid.

What are some provisions that Illinois courts have found to be unenforceable?

Illinois courts tend to hold invalid provisions that purport to prohibit an employee from working for a competitor in ‘any capacity.’ Such provisions forbid an employee from becoming an employee of any business that competes with the former employer without regard to the nature of the employee’s new job. Thus, these provisions prevent an employee from working for a competitor even in a noncompetitive capacity. For example, such provisions, interpreted literally would prohibit an executive from going to work for a competitor as a janitor. Courts tend to declare such provisions invalid, even if, under the particular facts of a case, the employee actually was hired in a competitive position. Courts look to the language of the agreement to determine its validity regardless of the particular facts.

Illinois courts are also unlikely to enforce provisions that prohibit an employee from soliciting customers with whom the employee had no direct contact or relationship. While recognizing that employers have a legitimate interest in preventing employees from soliciting customers that the employee developed or formed a relationship with while working for the employer, Illinois courts tend to invalidate provisions that prohibit an employee from soliciting customers without regard to the degree of contact the employee had with such customers during the employment.

Courts also will look at whether the time period and geographic restrictions in a noncompetition agreement are reasonable. Courts are reluctant to enforce provisions that are temporally excessive or extend to geographic locations in which the employer did not do business or that were not actually serviced by the employee.

Won’t the court just enforce a narrower version of the objectionable provision?

Not usually. Courts tend to avoid rewriting overbroad noncompetition provisions. Typically, courts view their job as interpreting the agreement as written, and not rewriting it. This is true even where the agreement says that a court may modify it.

How are these common pitfalls avoided?
The key is to draft provisions that prohibit actual competitive activity. Limit nonsolicitation provisions to customers that the employee had direct contact with or developed during the employment, and make sure that the time and geographic location restrictions are reasonable under the circumstances.

Insights Legal Affairs is brought to you by Novack and Macey LLP

What to do when your company is named in a personal injury lawsuit

Owners of midsize or growing businesses often overlook the simple things that, if done up front, would help them avoid a personal injury or wrongful death lawsuit.

“For those growing a business, especially those who own or lease their space and host customers, a little prevention early on can save a lot of trouble,” says Michon Spinelli, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Spinelli about reducing your company’s exposure to personal injury lawsuits as well as what to do if you’re the subject of one.

What policies should be put in place to reduce a company’s exposure to personal injury and wrongful death litigation?

Policies can be a doubled-edged sword for a business owner. A good lawyer can use a business’s lack of polices, which is often the case with small or midsize businesses, against a business owner. The lawyer’s goal is to show that a business owner doesn’t really care because he or she doesn’t bother to put policies in place that can protect customers and employees.

On the other hand, a policy that’s in place, if it’s not a good policy or if it’s not followed, can be equally problematic. It doesn’t do you much good to have a policy in place if no one enforces it.

There isn’t one policy that every business should follow. But generally, business owners should at least know that the federal and state rules that apply to their business are being enforced. Post applicable rules for employees somewhere visible and make sure your employee handbook is current. Beyond that, a lot of it is common sense. You’re there everyday, you know your operation top to bottom, so be proactive and look for solutions to potential problems.

What common mistakes do companies make when they become the subject of a personal injury lawsuit?

When there’s an incident, what’s done is done. Never cover it up or try to influence the person involved. You’ll end up looking worse and get in more trouble than if you were forthright. At trial, a jury will punish you a lot more if they think you’re trying to hide things from them.

Don’t destroy evidence. The worst thing is trying to explain to a jury why certain key documents are missing or an uncomfortable email that addresses the plaintiff disparagingly has been deleted.

But if the case brought against you is meritless, have some trust in the process. You can make a case worse if you act rude toward the people trying to come after you. It comes off as if you have something to hide.

What type of conduct should be avoided while a case is active?

It’s important to remember that as soon as you’re involved in a lawsuit or litigation you’re under a microscope. You’d be foolish to think the other side isn’t watching you, so behave as if the jury has been picked, the trial is underway and you’re being judged based on everything you do. There’s nothing that upsets the judge more than a post on social media saying the judge is biased. Anyone who is reading that could be a potential juror. Conduct yourself as a responsible member of the business community at all times.

How can companies get the maximum value out of their legal teams that represent them in these cases?

Some companies are fortunate to have an in-house attorney. Many times that in-house counsel will coordinate with the outside counsel handling the case to make sure they’re on-task and working effectively.

If you’ve hired an attorney to handle your case and haven’t heard from him or her in a while, reach out. If he or she isn’t responsive, then you’re probably not on your attorney’s radar. Keep in communication. Ask questions. Call if you haven’t seen a bill in a while and you’re on monthly billing because you want to know what’s being worked on. If your attorney has a history of doing work without you knowing, agree on a workload and get a bill for it. A successful outcome requires a healthy ongoing dialogue with counsel.

 

 Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

How to address issues when rezoning properties for a different use

Columbus has had a few different hot spots for urban redevelopment near the city’s downtown in recent years, including the Short North and, more recently, Franklinton.

Businesses looking to locate in these areas need to realize that the process isn’t the same as when building on undeveloped land or in a suburban development, says Nick Cavalaris, a director at Kegler, Hill, Brown + Ritter.

“There are other things to consider when taking a warehouse building that’s zoned for manufacturing and rezoning it for residential use,” Cavalaris says.

Smart Business spoke to Cavalaris about the best way to approach urban redevelopment and unique situations that may arise.

What are some unique things that can happen regarding urban redevelopment?

One interesting case involved The Ohio State University’s implementation of what’s called Second-Year Transformational Experience Program (STEP), which requires sophomores to live on campus. Starting next year, sophomores will have the opportunity to participate in STEP and be eligible to receive a cash fellowship of up to $2,000 to use toward an experience they might not otherwise be able to do. This has created a problem for fraternities and sororities, which rely on sophomores living in Greek housing due to attrition.

The Greek institutions and the university came to an agreement that sophomores can live in the fraternity and sorority houses as long as they are upgraded to include assembly areas for instruction and dedicated study spaces like those in dorms.

Kappa Kappa Gamma sought legal help regarding an addition to meet the standards. That was challenging because the university area is like downtown or German Village in that those districts all have their own overlay to the city zoning code — standards that apply specifically to that district. The university has its own architectural board of review that signed off on the project.

What do companies need to consider when redeveloping urban properties for different uses?

You have to be sensitive to surrounding land uses. Many times, what you’re doing is basically downzoning when the use is changed from manufacturing to residential. A vacant plant is zoned for manufacturing and a new manufacturer could go in there, but times have changed and it doesn’t make sense for the area any longer.

That’s happening in Franklinton with the B&T Metals factory and the Eickholt Glass building. The city is looking at Franklinton in a similar fashion as the Short North 10 years ago. B&T was rezoned to a mixed use of residential, office and retail.

With projects like that you have to be aware that you have neighbors and you’re going to increase traffic. You’re going from a vacant space with no activity in some cases to a 24-hour, mixed-use development. There will be residents and members of area commissions who like the fact that the property is a dormant site — and now you’re introducing 100 residential units to the neighborhood.

A good way to handle these situations is to come in with a plan, show it, and be as open and honest as possible with people who live in the area. Let stakeholders have a voice in how it changes the neighborhood.

That way they’ll feel good if they received a concession and input into the new plan. It makes it a win for everyone as opposed to not letting them participate — a route that often leads to litigation.

Most times companies will negotiate six-month options on properties, with the sale contingent on zoning approval. That way they don’t have to buy the property if they run into opposition. But there are times when someone has already bought the building. That raises the stakes in the zoning process.

There will always be people who don’t want change. They have the right to their point of view, just as developers do. The public might think that there is indiscriminate development happening, but developers actually have to go through a lot of hoops.

Even if rezoning is approved, adjacent property owners will have standing to file an appeal in court. That’s why it’s best to be honest with them at the beginning and find a solution that works for everyone.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

The risks of out-of-state liability when doing business over the Internet

You run an Illinois-based business that sells products to customers in your retail stores in the state and online through your website. Although your company has no physical presence outside of Illinois, one of your online customers recently filed a consumer fraud action in Alaska against your business. Do you need to expend the time and money to defend the company against this lawsuit?

“It depends,” says Amanda M.H. Wolfman, an associate at Novack and Macey LLP.

Whether the business’s Internet activities subject it to out-of-state lawsuits depends on numerous factors interpreted differently by courts across the country.

“If the company did nothing to direct its business to Alaska and merely had a ‘passive’ website that provided information to Internet users, the likelihood that you would have to defend the company in Alaska is relatively low,” she says. “On the other hand, if the business used the Internet to directly negotiate and form contracts with Alaskan residents, that likelihood is much higher.”

Smart Business spoke with Wolfman about the gray area where a business may find itself due to the business it conducts over the Internet.

 

Could the company in your example be subject to any lawsuit in Alaska based on its Internet activities?

Probably not. The company is incorporated in Illinois and maintains its principal place of business there. It only would have to defend itself against any and all claims asserted against it in Alaska if the company’s affiliations with that state were so ‘continuous and systematic’ that it could be considered ‘essentially at home’ in Alaska. It is very unlikely that a court would decide that the business’s Internet activities alone create this kind of connection with Alaska.

 

Could the company be subject to this lawsuit in Alaska?

The company may still need to defend itself against this lawsuit because of its connection to Alaska and this consumer. For that to be the case, a court would need to decide the following:

ν  The company ‘purposefully availed’ itself of, or ‘purposefully directed’ its activities at, Alaska.

ν  The lawsuit ‘arises out of’ the company’s contacts with Alaska.

ν  It would be fair and just to force the company to defend itself against the lawsuit in Alaska.

While all of the company’s contacts with Alaska are relevant to this analysis (not just its Internet-based contacts), courts are far from uniform in how they analyze businesses’ online activities.

Regardless, the company can analyze its risks by asking the following questions:

  • How ‘interactive’ is its website? Given that the website is not ‘passive,’ the business should consider where its website falls on a sliding scale. In the middle of that scale are websites that allow Internet users to exchange information with a host computer, but are not characterized by the knowing, back-and-forth transmission of documents often associated with contract negotiations.
  • Does its website specifically reference Alaska or expressly exclude other states from its scope?
  • Does the business advertise over the Internet? If so, are those advertisements part of an overall marketing campaign targeted at Alaska — even if also targeted at other states? These advertisements are especially noteworthy if coupled with physical advertisements in, or directed at, Alaska. 
  • How aware is the business of its customers in Alaska, including the overall size of its customer base there? This factor is relevant but not determinative.  

While each situation will dictate the appropriate response to a lawsuit, considering these questions will help businesses determine their risks and responsibilities when doing business over the Internet.