Due diligence is a critical tool when entering into an M&A transaction

Business owners should take the time to perform thorough and smart due diligence before entering into an M&A transaction, says Elizabeth G. Yeargin, a Partner at Brouse McDowell.

“It is better to spend time and money on the front end of a deal uncovering risks and learning the ins and outs of the potential target than to blindly enter into a deal,” Yeargin says. “You may end up spending extensive amounts of money post-closing for liabilities that should have been uncovered during an appropriate due diligence process.”

This process enables the buyer to make a more informed decision about whether to move forward with a transaction, but the effort can also be very useful to the seller.

“Due diligence is important to sellers because it gives them the necessary information to determine a realistic valuation for their business so they don’t leave money on the table,” Yeargin says.

Smart Business spoke with Yeargin about due diligence and what you need to know before finalizing your next M&A transaction.

How informed is the typical buyer going into an M&A transaction?

Two factors that often have the most impact on the approach a buyer takes toward an M&A transaction are the size of the deal and the relationship the buyer has with its legal counsel. Companies will often spend less time and money if it’s a smaller transaction because they see the risk as being smaller. But you run into some of the same issues when trying to complete a deal whether you’re buying something for $50,000 or $50 million. Regardless of the size of the target, you need to dig into the potential legal and financial risks, uncover potential liabilities and get assurance that the benefits of the deal outweigh the potential dangers. You can then use that information, if you decide to move forward, to determine or adjust the purchase price for the target.

The relationship you have with your legal counsel is another key component. If you work closely with your legal representatives and stay in contact on a regular basis, you’re more apt to have that team involved in the M&A process from the beginning to provide information and answer any questions that you might have along the way. If you haven’t worked as closely with your legal partners, it makes the process more difficult and creates more risk. The best advice is to take steps to build a stronger partnership with your legal team before you enter into negotiations to buy or merge with another company.

What areas should you focus on as you conduct your due diligence?

Buyers typically are adept at reviewing another company’s management team and the big picture financials such as revenue, sales volume and personnel costs. But you also want to review the condition and composition of that company’s assets. How much real estate, if any, does the company you’re looking to purchase own and are there any environmental issues with that property? What about intellectual property (IP)? What does that company’s customer base look like? What supplier or material contracts are in place? You also want to be aware of any litigation or product liability issues that might pertain to that company, as well as matters that involve employee benefits, labor unions, insurance, taxes or potential anti-trust concerns.

How do you address successor liability issues?

As a general rule, sellers prefer equity purchases, while buyers prefer asset purchases. Sellers will usually favor an equity deal because it allows them to completely walk away, often free from any future obligations with respect to the business. With a buyer, the advice is typically to do an asset deal. You pick and choose your assets and you also pick and choose which liabilities you are willing to assume. As an asset purchaser, you’re not going to assume litigation that involves the seller or take on debt with the seller’s lender.

If you decide to do an equity deal and assume the seller’s liabilities, you’ll want to keep that in mind as you determine what you’re willing to pay for the business. You’ll also want to work with your legal team to structure the agreement to include representations from the seller and indemnification against the risks you’re choosing to take on in the deal.

Insights Legal Affairs is brought to you by Brouse McDowell

Not used to use tax? How to make sure you’re paying your fair share

Everyone is familiar with sales tax, but few know of use tax, which is typically imposed on the purchase and use of items and services that are subject to sales tax but for which no sales tax was collected.

Use tax issues often arise in connection with out-of-state purchases. A resident of a state with use tax may purchase taxable goods in another state that doesn’t impose sales tax or may buy such goods from an online retailer that doesn’t collect sales tax. In either instance, the customer has a duty to pay use tax.

“Use tax is a complement to sales tax,” says Andrew P. Sonin, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. “It’s like a safety net, albeit with some sizeable holes.”

Smart Business spoke with Sonin about use tax, who has to pay it and how it’s collected.

Where is use tax in effect?

Nearly every state, including Pennsylvania, New Jersey and Maryland, has a sales tax and a compensating use tax. Delaware does not have a general sales or use tax — a fact which Delaware businesses advertise to residents of neighboring states. The other states currently without a statewide sales or use tax are Alaska, Montana, New Hampshire and Oregon.

What is the rate?

The use tax rate usually matches the sales tax rate. Pennsylvania has a statewide sales tax rate of six percent, so the use tax rate is also six percent. However, there is an additional one percent local sales tax in Allegheny County and an additional two percent tax in Philadelphia. So if you acquire property subject to use tax, you will owe seven percent in Pittsburgh or eight percent in Philadelphia.

Who has to pay it?

Use tax falls on whoever uses the product or service, with the responsibility for reporting and payment resting squarely on the purchaser. It affects both individuals and businesses.

Online sales have brought use tax to the forefront. After years of resistance, several online retailers, such as Amazon, have recently reached deals with various states to collect sales tax on online purchases. If an online retailer does not collect sales tax, most buyers will owe use tax on the purchase and use of any taxable goods from that retailer.

How is it collected?

It’s a difficult tax for revenue authorities to collect because there is no surefire way to know when and what people are buying. States generally rely on self-reporting and provide forms for that purpose. That is problematic, however, because most people aren’t aware of use tax and even if they are, they have little motivation to analyze their receipts, calculate the tax and pay it.

States have dealt with this in different ways. Pennsylvania has a line on its individual income tax return for reporting use tax. Businesses may be audited for use tax compliance if they are already collecting and remitting sales tax.

How is it enforced?

Businesses sometimes face liability when they least expect it. There was a case in New York a few years ago involving a major delivery company that had a practice of giving shipping supplies to its current and potential customers for free. The items bore the company’s logo and clearly were provided for marketing purposes. The New York authorities did not see it that way, though, and imposed use tax on the company’s purchase and distribution of the supplies. After years of expensive administrative wrangling, the company ultimately required intervention by New York’s appellate courts to confirm it had no use tax liability under an exception for promotional materials.

Since enforcing individual compliance is an even greater challenge, revenue authorities tend to concentrate on big-ticket purchases to get more bang for their buck. In one instance, a man bought a boat ‘tax free’ in Delaware and decided to dock it occasionally in New Jersey. The New Jersey Division of Taxation eventually learned of the situation and, assuming the man to be a New Jersey resident, sent him a use tax assessment with interest and penalties 20 years after the purchase — an example of the state’s perseverance in pursuit of a dollar.

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

Drafting employment, noncompete agreements to weather legal challenges

As the economy continues to rise and fall, quality employees become harder to find. Employment and noncompete agreements are increasingly prudent for senior executives or key employees. And as intellectual property becomes the most important asset for more companies, these agreements can provide critical protections for employers.

Smart Business spoke with Suzanne L. DeWalt, a Shareholder at the law firm of Sherrard, German & Kelly, P.C. and Chair of its Employment Services Group, about drafting employment and noncompete agreements that withstand legal scrutiny.

What are the key elements of an employment agreement?

Fundamentally, employment agreements are intended to define the employee’s title and job duties; the compensation in terms of salary, benefits, stock options, etc.; and under what circumstances the parties can separate and what happens when they do. Separation terms often include restrictions on the kind of employment the employee can accept after leaving the employer and whether the employer will pay severance to an employee terminated without cause.

A company should have a protective agreement between itself and key employees. This is especially important if there is confidential or proprietary information or relationships to protect.

How can companies ensure these agreements can withstand legal scrutiny?

Any agreement can be challenged, but some areas are particularly scrutinized and deserve even more attention when they are crafted.

Post-employment restrictions, written by a company to prevent former employees from revealing trade secrets or competing against it unfairly, are typically the most litigated if the restrictions are considered too limiting.

Payment provisions are another area of potential conflict. An employer will run into problems if bonuses, commission plans or severance agreements are unclear.

A good commission plan addresses when a commission is earned, when it must be paid and what happens if the employee leaves the employer before that happens. For example, Pennsylvania law has strict penalties if an employer fails to pay an employee in full and on time, so being clear on this issue is key.

How do employment agreements differ from noncompete agreements?

A noncompete agreement is a subset of an employment agreement. The noncompete can be included in a broader employment agreement, but need not be. Having it stand alone maintains the obligation to honor confidentially separate from compensation. This also means a compensation change will not likely affect a noncompete provision’s enforceability.

There are four separate post-employment obligations that should be considered for inclusion in any noncompete agreement:

  • A duty of confidentiality drafted to preserve trade or company secrets.
  • Nonsolicitation restrictions preventing former employees from calling on any of the employer’s current customers.
  • Antipiracy/antiraiding terms barring former employees from encouraging other employees to leave the company.
  • Restrictions preventing former employees from working for competing businesses.

Where must careful wording be used when drafting noncompete agreements?

Any wording that indicates that the noncompete agreement’s purpose is mainly to stifle competition will not likely hold up in court. Their only intent can be the protection of legitimate business interests.

Pennsylvania law does not support enforcing anything longer than a two-year restriction, except when a business is being sold. But even in that situation, the two-year length of time has its skeptics.

Courts will look to determine if the noncompete has a reasonable geographic scope. For example, a nationwide restriction is too broad for a company that only sells goods or services in Pittsburgh.

The agreement also will be judged by whether the activity that is restricted is reasonable. A specific list of direct competitors will likely hold up in court.

A good employment agreement clarifies expectations and protects business interests. A poorly drafted agreement, by contrast, can subject employers to lawsuits and resulting legal fees.

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

Self-settled trusts: How to make sure your trust works for you

A self-settled trust is a type of trust in which the trust creator or “settlor” is also the person who is to receive economic benefits from the trust during his or her lifetime. The simplest type is the standard Revocable Living Trust (RLT). There, the same person is the trust’s settlor, trustee and a beneficiary.

RLTs are typically created as part of an estate plan to manage assets during the settlor’s lifetime, avoid the necessity of a guardian if the settlor becomes incapacitated and ultimately avoid probate upon the settlor’s death. Some settlors want to enhance these benefits by structuring the trust to exempt its assets from the claims of their creditors.

Smart Business spoke with Brian R. Price, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC., about self-settled trusts, their advantages and disadvantages, and the importance of working with an experienced attorney when establishing such a trust.

What should be included in a self-settled trust?

It’s important to include the terms upon which various individuals can receive funds. That should include the trust creator as well as the terms for the ultimate disposition of the trust funds at some point in time, whether before or after the creator’s death. Designating successor trustees is also a crucial component of any trust.

How should a spendthrift provision be utilized?

A spendthrift provision typically prohibits a trust beneficiary from selling, assigning or otherwise disposing of his or her interest in the trust and at the same time prohibits the trustee from honoring claims by third parties to satisfy the settlor’s/beneficiary’s legal obligations from the trust assets.

Can a self-settled trust’s assets be exempt from claims of the settlor’s creditors?

At least 15 states have enacted legislation to permit settlors to create a trust from which they may receive discretionary distributions while exempting the trust assets from the claims of some, but not all, creditors.

To qualify for creditor protection under these states’ laws, the trust generally must be irrevocable, administered by a trustee in the state adopting the protective legislation and created at a time when there are no pending or threatened legal actions against the settlor/beneficiary.

Even in these jurisdictions, the trust assets are not protected from claims for spousal or child support and alimony, or from certain tort or governmental claims. And even if properly formed and administered under a state’s asset protection trust laws, such a trust may not be exempt from claims in a bankruptcy proceeding against the trust’s settlor/beneficiary.

What are some disadvantages?

The possibility that a federal bankruptcy court may ignore the state laws makes the use of such trusts a risky proposition.

It is an open secret that states with favorable self-settled trust laws hope to attract trust business, and their compensation comes from the creators and the trust’s funds. A cottage industry of specialists promotes the concept and they need to be paid as well.

Do some of these trusts actually provide benefits to the settlor/beneficiaries?

The promoted benefits are attractive to many people who believe that because they have amassed a certain degree of wealth, they are the targets of predators. In this regard, trusts of this sort may provide psychological benefits to the trust settlors.

Additionally, the mere existence of such a trust may intimidate creditors who don’t want to pay the costs of trying to extract money from the trust. This is particularly true if the trust is created in a far away place where obtaining jurisdiction over the trust makes matters even more difficult.

How should someone go about creating a self-settled trust?

Anyone interested in creating such a trust should ask what type of benefits he or she can reasonably expect from the trust. Many self-settled trusts are created either by non-legally trained individuals or trustees who aren’t well-versed in the area. It’s important to seek an attorney who is experienced with the technicalities of self-settled trusts.

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

How to find the right-sized law firm for your business needs

Often, but not always, midsize businesses do not have internal legal departments, but are large enough that they need sophisticated legal guidance on a variety of day-to-day issues that arise. This requires midsize businesses to have a knowledgeable, experienced and cost-effective outside legal resource that supports the midsize business and its operations.

Smart Business spoke with Eric C. Springer, Managing Shareholder and Director at Sherrard, German & Kelly, P.C., about the unique legal needs of midsize businesses and what businesses should consider as they choose a law firm.

What options do midsize businesses have for getting the legal representation they need?

There are as many options as there are midsize businesses out there because one size does not fit all.

In-house counsel can provide the kind of daily legal service that is needed, but not all businesses can support the cost structure of adding this person as a full-time employee. For many companies, the better option is to develop and maintain a close relationship with one or more outside lawyers capable of addressing those issues, when needed, but without a full-time cost component.

In short-term situations or specific initiatives or transactions, the cost of outside counsel might be perceived as a more significant expense. When viewed over the long term, however, these relationships may prove less costly and more efficient for the midsize business —given the breadth and depth of knowledge, resources and practice areas available from the attorneys from a broad-based, general practice law firm.

What are some questions midsize businesses should be asking as they look to establish a relationship with a new firm?

Is the firm a fit with you, your management team and your business? Will the firm be engaged and responsive to your needs and requests? Are the attorneys knowledgeable about your business sector and the issues you tend to confront more regularly? What other practice areas and resources does the firm have that you may need? Do they work with a number of similar sized businesses in your industry?

Once that connection is made, put trust in your law firm’s advice and keep them in the loop on a timely basis regarding issues that are popping up. Trying to minimize costs by compressing the time the lawyer has to work out an issue or keeping counsel on the sidelines as to issues that you are facing may be counter-productive. Getting your legal counsel involved early will often lead to better and more cost-efficient advice and results.

How does a legal firm’s size affect its ability to service a business?

Cost structure is a big feature that tends to fluctuate greatly with the size of the firm. This leads to concerns about costs or whether to reach out to outside legal counsel at all.

Midsize firms are a better match for midsize businesses as the cost structure allows for more accommodating rates and fee arrangements, but offers the variety of high-level, experienced legal resources that a midsize business needs in order to quickly address the legal issues it frequently faces in the commercial, corporate, employment, tax and litigation disciplines.

When interviewing firms, what are some key factors businesses should look for in choosing which will represent them?

Look for a connection with your main point of communication with the firm — the legal point person for your business, so to speak.

Engage them on whether they have an appreciation for and experience in the issues involved with your business and market segment, and how they structure their communications, delegation of work and billing. All these items should help you gain a better feel for the firm and whether building a long-term relationship is a real possibility.

Midsize businesses and midsize law firms share a common focus on knowledgeable, experienced and practical advice in order to make decisions. This common connection can result in a valuable partnership and a cost-effective, long-term relationship.

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

A look at how a new trade secret law will affect businesses

A trade secret is valuable information not generally known to the public that a company can use to provide a competitive advantage.

Every business has trade secrets. Trade secrets can include formulas, processes, methods, know-how, customer lists, business plans and other confidential information. Unfortunately, current or former employees, competitors, vendors and even suppliers can improperly acquire a company’s trade secrets.

Current employees may also inadvertently share company trade secrets. Trade secret theft from U.S. companies is estimated to cost those companies billions of dollars every year.

Trade secrets have long been protected by federal criminal laws like the Economic Espionage Act of 1996, but civil actions have been left to state law. On May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law.

The DTSA now provides federal jurisdiction for civil actions for the theft of trade secrets and seizure of stolen trade secrets in extraordinary circumstances, as well as remedies that may include an injunction to protect the trade secret and monetary damages.

Smart Business spoke with Jennifer Hanzlicek, an Attorney at Law at Brouse McDowell specializing in intellectual property, about trade secrets and the implications of the DTSA for businesses.

How should businesses be protecting their trade secrets?
Adding simple computer features like security software and computer logouts and locks can reduce your exposure.

Companies should also limit access to sensitive company information to necessary employees. Train employees to safeguard company information by locking it away after the workday, to keep and frequently change passwords on their computers and mobile devices, to avoid suspicious links and emails, and to shred hard documents.

Additionally, the use of external hard drives and thumb drives can make it easy to transport data, but also leaves it unsecured. Prohibiting their use can reduce the loss of the company’s trade secrets.

Have nondisclosure agreements with contractors, consultants, suppliers, vendors and other business partners that set forth the terms of the disclosure of any confidential information, including what is considered to be confidential, the term of the agreement, and the provisions for a breach of the agreement arising from an improper disclosure of trade secrets.

Employment agreements should also contain nondisclosure provisions to protect confidential information.

What does the Defend Trade Secrets Act of 2016 mean for businesses?
Although the DTSA may provide added protections for companies, you still need to take precautions:

■  Educate your employees to protect the company’s trade secrets by limiting their exposure. Your trade secrets could be compromised by an ‘innocent’ social media post of a picture taken in a production area or discussions in unsecure locations like restaurants and airports.

■  Eliminate exposure of trade secrets by preventing unnecessary visitor access to areas of the company that contain sensitive company information.

■  Revise employee agreements to fulfill the notice requirement of the DTSA for trade secret disclosure to the government. Under the new law, companies must provide notice of whistleblower and retaliation protections for reporting suspected trade secret violations to both current employees and contractors.

If no notice is provided, the company may lose exemplary damages and attorney’s fees in an action against that employee. You should also include a procedure in your company policies for an employee to report suspected trade secret violations to government officials.

■  Review and update current company trade secret policies to comply with the DTSA, taking into account soon-to-be former employees that may take trade secrets from the company and new employees that could bring trade secrets from a previous job.

It is uncertain how the DTSA will impact future litigation. However, businesses should review current agreements to comply with the new law. Trade secrets are valuable assets that must be protected. Creating policies to safeguard trade secrets within the organization can help to protect them.

Insights Legal Affairs is brought to you by Brouse McDowell

Biometric data could widen your exposure if you’re not cautious

Seeking to reduce their risks and improve security, business owners may unknowingly take steps that invite more risk of liability. Upgrading your security by using biometric data to strengthen security protocols can subject your business to liability from an increased risk of privacy litigation. More businesses are using biometric data for internal operational security, consumer authentication and other identification purposes.

While there is no uniform definition, biometric data is information derived from human biological and behavioral characteristics such as fingerprints, facial scans and voiceprints. Today, the use of biometric data in everyday interactions is exploding — retailers are using fingerprint scans at the point of sale to verify customer payment, banks have announced plans to replace PIN numbers with facial and retina scans at ATMs, and employers are increasingly using biometric identifiers to access and maintain data centers.

Smart Business spoke with Lucas Blower and Amanda Parker, Attorneys at Law at Brouse McDowell, about the consumer and employee privacy implications of this trend.

How is biometric data governed?

One problem with biometric data is that currently, there is no federal or uniform law that directly addresses its collection and use. Consequently, it is unclear whether biometric data will be treated as Personal Identifiable Information or if it will be subject to a heightened standard. While there are regulations for the health care, insurance and employment context, these laws do not address novel uses businesses may employ using biometric data. In some instances, biometric data may be subject to the Health Insurance Portability and Accountability Act or the Genetic Information Nondiscrimination Act.

Currently, the only states with pending or existing laws addressing biometric data are Illinois, Texas, Alaska, California, New York and Washington. The legislation in these states often addresses requirements such as notice, consent, disclosure, policy and destruction periods. Several such laws also provide for civil penalties for each violation.

Additionally, the Federal Trade Commission may have the authority under the Federal Trade Commission Act to pursue enforcement action where businesses do not comply with their own policies regarding consumer data collection. This inconsistent treatment of biometric data increases the potential risk of litigation for businesses using biometric identifiers.

What other issues should be considered when using biometric identifiers?

Businesses across industries collect, use, protect and share biometric data differently. As a result, there are no clear standards for how companies should handle biometric data. Decisions on how to collect, store, protect, share and analyze biometric data should be made in consideration of existing and emerging privacy laws, but also in light of available insurance coverage. Whether businesses use biometric data to prevent fraud, increase internal controls or promote wellness, the collection of biometric data increases a company’s exposure to a data breach. Having adequate coverage in the event of a data breach is the only way to protect against the cost of litigating privacy claims and to reduce the risks associated with using biometric data. A company’s policies and controls for handling biometric data can also affect whether a data breach is covered or excluded from coverage. Insurance companies are adding new exclusions, especially those applying to cyberrisks. Businesses that fail to follow minimum required practices will likely find themselves without coverage.

How can I minimize the risks?

In order to ensure your biometric technology is reducing risk and not increasing your exposure, businesses should develop thorough policies and controls for handling biometric data. Additionally, businesses must develop and train employees in compliance with their privacy and data security policies. Finally, by periodically auditing and re-evaluating both your privacy and data security policies and employee compliance, businesses can reduce the risks of using biometric data and ensure that they won’t be denied coverage in the event of a data breach for failure to follow minimum required practices.

Insights Legal Affairs is brought to you by Brouse McDowell

Consider putting a general power of attorney in place

A durable, general power of attorney is a document in which you appoint an agent to make decisions for you and otherwise act on your behalf when you are incapacitated.

“Everyone needs a durable, general power of attorney,” says John T. Ort, an attorney at Semanoff, Ormsby, Greenberg & Torchia, LLC. “They are not just for the elderly.”

Smart Business spoke with Ort about a general power of attorney, how it should be structured and when it becomes effective.

How should one go about addressing the possibility of being incapacitated?

Without a durable, general power of attorney in place, no one could act on your behalf if you become incapacitated. In that situation, your family or another interested party would have to apply to the local Orphans’ Court to have you declared incapacitated and have someone appointed as your guardian to act on your behalf. That takes time and money, and the court-appointed guardian would be subject to continued court supervision.

It’s better to create a durable, general power of attorney now so you can choose your agent.

A ‘durable’ power of attorney is effective notwithstanding your subsequent incapacity. Pennsylvania law makes all powers of attorney presumptively durable.

How should a general power of attorney be structured?

The concept of the general power of attorney is to grant your agent as broad authority as possible because you don’t know what actions your agent may have to take on your behalf in the future. It’s often useful to designate specific powers such as the power to open and close safety deposit boxes, to write checks, pay bills, manage investments, sign your tax returns, and to sue or defend against a suit on your behalf.

A general power of attorney typically is not the best way to authorize someone to make health care decisions on your behalf. That should be relegated to a separate document, such as a combined health care power of attorney and living will.

What are hot powers?

In Pennsylvania, there are certain powers that an agent is not granted by a general grant of authority. These so-called ‘hot powers’ are very sensitive and can potentially be abused by the agent. Such powers include the power to create or change rights of survivorship, the power to create or change beneficiary designations on insurance policies, annuities and retirement plans, and the power to make gifts. If you want to authorize your agent to exercise these powers on your behalf, you need to specifically grant your agent such powers.

When is a power of attorney effective?

You can make the power of attorney effective immediately when you sign it. This means your agent could act on your behalf even though you are not disabled. The alternative is a springing power of attorney, which becomes effective at some future point in time and requires a clear definition of the future event that makes it effective.

One common way for a springing power of attorney to become effective is upon a certification by a physician that the principal has become disabled. This can be problematic if the physician does not want to be put in that position, especially if there’s family friction about whether or not the power of attorney should become effective.

Alternatively, you could delegate to one or more persons the power to make it effective — for instance, a majority of your spouse and your adult children.

What advice would give about choosing agents?

General powers of attorney are powerful documents and can be subject to abuse by the agent, so you need to have absolute confidence that the agent will act in your best interests. You can have just one agent at a time serve on your behalf. Or, you can appoint two or more agents to serve at the same time, in which case it is presumed that they are required to act jointly, thereby requiring unanimous agreement among the agents, which could minimize the possibility of a single agent abusing his or her powers. Also, successor agents should be appointed and you should consider granting the last-serving agent the power to appoint one or more successor agents.

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

Contests, sweepstakes provide fun opportunities for customer engagement

Contests and sweepstakes can be a fun way to boost customer engagement, but there are some important details to consider before the games begin, says Christy A. Prince, a Director at Kegler Brown.

“These types of promotions are a valuable and relatively inexpensive way to engage with customers and build brand recognition and customer loyalty,” Prince says. “They can also help the company position itself as fun, creative and relevant depending on the structure and execution of the promotion. The key is to have good rules for your promotions to ensure that they run smoothly and that any disputes can be handled appropriately without creating exposure or negative publicity.”

The worst-case scenario is you develop an exciting contest that draws customers to your business, but you end up in court because you didn’t verify that the prize and method of selection were in compliance with laws and regulations.

“If you have a good framework and clearly understood rules in place, it is a great opportunity,” Prince says. “You want someone who has compliance in mind to be involved as you develop your plan.”

Smart Business spoke with Prince about how to engage customers and build momentum with contests, sweepstakes and social media promotions.

Where is a good place to begin building customer engagement using contests and sweepstakes?

One of the first steps is to be clear about the difference between contests and sweepstakes. A sweepstakes is a drawing in which the winner is randomly selected and everyone has an equal chance to win. A contest is based on skill, meaning everyone does not have an equal chance to win. The winner is the person with the cutest dog or someone who answered a series of trivia questions correctly or came up with the funniest one-liner for your new slogan.

As you consider the nature of your promotion, you should also think about customer demographics and what type of promotion customers would best respond to. Would they prefer a skill-based contest or a simple raffle for a prize? You should also consider whether you want to incorporate audience participation to select the winner or use a preselected panel of judges. In either case, participants need to clearly understand how the winner will be selected.

Look at your goals for the promotion. If you’re trying to drive traffic to your website or social media channels, that forum would be your ideal method of entry. Social media has led to a surge in promotions as companies see value in the exposure and the additional opportunity for engagement, especially if your promotion goes ‘viral’ and gets shared with a wider audience.

What are some legal concerns that need to be addressed?

There are laws you must comply with when conducting your promotion. If your promotion is only going to be available to Ohio residents, you should state that in the rules. Make sure the entry method for your promotion is clearly understood.

Requiring any form of consideration (payment or valuable effort like completing a lengthy feedback survey, etc.) can be problematic if you don’t have the right safeguards in place. For example, if you run a drawing and the only way to have a chance to win is to buy a product, and you don’t fit into some exception, such as a charity, that would be illegal gambling. You must be aware of the law of each state where the promotion will be offered, and each state typically has substantial differences in what it considers to be permissible promotions  Your promotion must also comply with federal requirements.

Also, companies can run into ‘troll’ participants who perceive problems in the promotion (for example, with unclear rules or selection criteria) and threaten to sue or create negative publicity. Work with your attorney or legal counsel to ensure you’ve addressed all legal questions that might pertain to your promotion.

If you don’t maintain your focus or try to take shortcuts as the promotion is developed and operated, it’s easy to run into legal trouble. As long as there is a framework in place and you work within that framework, you can typically avoid problems and focus on the benefits of increased visibility that the promotion will offer you.

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

Before you sign a contract, take time to understand indemnification clauses

Business executives often spend a considerable amount of time negotiating the contract terms they deem the most critical while others are merely glanced over.

As such, monetary terms, warranties, lead times, contract length, termination and noncompete covenants typically generate a lot more passion than indemnification or “hold harmless” clauses.

Smart Business spoke with Isabelle Bibet-Kalinyak, an Immigration and Health Care Corporate Attorney at Brouse McDowell, in order to better understand the purpose and importance of these technical provisions.

What are indemnification clauses?

Risks are inherent to all types of contracts. Indemnification is the process whereby one party seeks to secure another party against anticipated losses or damages. It is a contractual tool that allocates in advance the risks or losses associated with the contractual relationship, whether such risks or losses are suffered by the parties to the contract or a third party.

Why are indemnification clauses important?

Indemnification or ‘hold harmless’ clauses have become universal in the business world. Although initially most common in the construction industry, they are now pervasive across all industries and contract types by default.

Parties should carefully review all indemnification terms because they may cause substantial financial losses (including, at times, reimbursement for all legal fees) to the indemnifying party if successfully invoked.

Are indemnification terms required in all contracts?

The parties should analyze the necessity and scope of the indemnification terms to best fit their respective needs and risk tolerance.

Express indemnification terms may not be required when insurance (general liability, medical malpractice, etc.) for the risks or losses at stake is already part of the deal.

Further, various common law principles already allocate vicarious or derivative risks based upon the relationship between the parties.

For example, under the legal doctrine of respondeat superior, an employer is responsible for the wrongful acts of its employees, and under the doctrine of agency by estoppel, a principal is liable for the acts or omissions of its apparent agents. These common law doctrines vary from state to state.

Are indemnification clauses legal?

Indemnification clauses are legal, for the most part. Their proliferation and abuse have, however, triggered statutory limits at the state level, notably in the construction industry and landlord-tenant context. Some states now prohibit certain transfers of risk or void clauses that attempt to pin all liability on one party, even when concurrent negligence exists.

What are some key elements executives should discuss with legal counsel?

Executives should not forego all negotiations relative to indemnification merely because of relatively unequal bargaining power between the parties.

The parties should at least review and weigh the following elements of the clause, particularly when the stakes are high: necessity, scope, types of risk transferred (acts, omissions, concurrent negligence, etc.), defense, defense/legal costs, duration and termination, effect of settlement, damages limitation, insurance coverage, effect of merger and acquisition, statutory limitations at the state and federal level, and regulations (Medicare).

Amending the language or establishing reciprocity can help mitigate the risks. Indemnification clauses are risky and complicated. Understanding exposure and specific terms is key prior to signing on the dotted line.

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