How to address potential pitfalls before moving ahead with cloud computing

Bill Cramer, Senior Counsel, Dykema Gossett PLLC

Service providers are touting the benefits of cloud computing, and more and more businesses are moving to the cloud. But beyond the benefits, there are also dangers, and companies should consult with an attorney to ensure that the language in the contract will protect them, says Bill Cramer, senior counsel at Dykema Gossett PLLC.

“Service providers like to emphasize the potential financial benefits by saying that inside every cloud is a silver lining,” says Cramer. “However, inside some clouds, there is golf-ball-sized hail. When you give up your computing needs to a third party, you give up control and expose yourself to potential liability.”

Smart Business spoke with Cramer about contractual issues to resolve before moving to the cloud.

What legal issues do companies need to be concerned about when moving to the cloud?

You need to protect yourself in contracts with your service provider. With your own network, you control your security. But if you move your computing needs to a third party, you lose that control.

The contract should address how the hardware is protected from both outside and inside intruders. Does it require security guards or alarms? Does it limit access, require background checks, and have entry and exit logs? How does it protect data from electronic intruders? Does it have passwords to access systems? Does it encrypt data when it is stored and transferred to and from the Internet?

The contract should require segregation of  your data from other companies’ data, because you don’t want your data mingled with that of another company. And if you are subject to regulations such as HIPAA or PCI, make sure the provider is contractually obligated to meet those standards.

Further, how often does the provider update system software? If it doesn’t keep its software up to date, your information may be at risk. You should expect your information to be at least as secure off site as it is in your own building, and your contract needs to set out what the provider is doing to protect it.

How can a company address uptime requirements and remedies?

While with your own network, you don’t have control over unexpected failures, you do have control over how you respond. But once you move into the cloud, you lose that control. Specify in your contract how information is stored online: At a minimum, there should be some level of redundancy, and preferably some level of error correction such that failure of a hard drive doesn’t take your system offline.

Second, where is online information stored? Are there multiple copies at multiple locations, so if there is a catastrophic failure at one site, is there a secondary site where service will continue so you can maintain your business?

Third, if the cloud becomes inaccessible for a short period, is there any definition of ‘short period?’ A service provider may promise 99.9 percent accessibility, but over a year, that’s more than eight hours of unscheduled down time. Further, some providers don’t start counting such interruptions as down time unless the interruption lasts more than five minutes.

Fourth, does the provider make periodic backups of data and have an applicable transaction log so it can recover data if there is a software problem? Fifth,  the provider should have a cluster of computers with multiple redundancies so if one is taken down for maintenance, it doesn’t affect service.

Finally, your contract should specify what level of support you can expect when there are problems.

What should the contract cover regarding liabilities to third parties?

You may become liable as a result of a breach in security, resulting in notification requirements, which can be expensive. You may be accused of patent infringement because of the provider’s services. It’s important to spell out in the contract that the provider is on the hook to indemnify you for your costs, as well as to provide for your defense if you are sued.

How should the contract address remedies?

The contract is empty unless it ultimately provides a remedy. Typically, contracts have limits of remedies, for example, if service fails, you don’t have to pay for that service. But you need to put a dollar value on what it means to your business to be offline for a minute, an hour, or a day. The provider may offer credit for down time, however, that credit has to be enough to incentivize the provider not to fail. For example, an hour of unplanned availability should result in more than an hour of credit, so that the provider has an incentive to get it right.

What if the move to the cloud fails?

You need to have a graceful retreat. Even with a competent service provider, a good internal team and a solid migration path, it still may not work as you expected. Start slowly, preferably with a pilot project that won’t cause too many headaches if it fails.

The contract needs to have a migration path to retreat, to recover data and software from the provider and bring your information back to your facility. This can be difficult if you didn’t expect it. It may take weeks to retrieve your data and software from the cloud, and during that time, how do you conduct your regular business?

To ensure all your bases are covered, look to a law firm that has experience dealing with the specifications, technology and provisions of service that can examine the contract for missing but essential terms and terms that carve out big exceptions in the provider’s obligations.

Bill Cramer is senior counsel at Dykema Gossett PLLC. Reach him at (214) 462-6418 or [email protected]

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Avoiding costly mistakes by partnering with the right attorney

Michael P. Wippler, Managing Member, Dykema Gossett LLP

When business owners run into a potential legal issue, too often, they call an attorney, get an answer and move on. But developing a closer, long-term relationship with outside counsel can put a client in a stronger position when the need for services arises, says Michael P. Wippler, recently appointed managing member for Dykema Gossett LLP’s Los Angeles office.

“Too often, businesses and individuals view lawyers like the dentist — they wait until their tooth hurts before they seek advice,” says Wippler. “There’s a complacency. Nine times out of 10, you’re not going to have a problem, but there is that one time when getting early advice can prevent you from making a really big mistake.”

Smart Business spoke with Wippler about what to look for in outside counsel to ensure you receive high-quality service at a fair price.

How can you find the right attorney to meet your needs?

Referrals are the best way to find the right person for your needs. Who do you know and respect in business that has had success with an attorney they like?

Once you’ve identified potential counsel, start asking questions. First, make sure they have the experience and expertise to properly handle your matter. If someone is a jack-of-all-trades, you have to wonder about his or her expertise for your specific area.

Then, ask the lawyer about the level of service you can expect. How quickly do they respond to requests and phone calls? In the past, it was OK to respond within 24 hours. But today, if you call or e-mail your attorney, you should receive a response right away. You should never have to call twice.

Ask the lawyer how they will keep you informed of matters pertaining to your case or transaction. Too often, outside counsel will know about an important issue for weeks or months but not notify the client until the last minute.

As part of these conversations, determine if you personally like and trust the attorney. Is the attorney someone you can work with? The relationship between an attorney and client is fundamentally one of trust. Without trust, it’s very difficult to obtain what the client really needs from their attorney.

How can a client get a good price and create predictability in billing?

You should expect quality legal services at a fair price.

Ask what the rates are, what the billing procedures are and what you can expect to pay for a given matter. A client should never be surprised by the bill.

Ask what the attorney can do to give you certainty and some control over expenses. Today’s consumers of legal services can be more aggressive and ask for pricing models beyond the typical hourly rate. Asking for — and getting — pricing models such as flat fees, blended rates and volume discounts can provide increased predictability.

For matters such as a real estate lease or a patent application, an attorney may agree to a flat fee. If you have a mix of timekeepers from a senior partner to a paralegal working on a matter, you can request a blended rate in which you would be charged the same hourly rate for all people working on the matter. And with certain hybrid models, the attorney’s compensation varies depending on whether there is a successful outcome.

Other models include contingencies and partial contingencies. Clients can also request volume discounts and early payment discounts.

Should every business have outside counsel?

In today’s legal environment it is important to have a good lawyer that you can call on short notice. Anyone dealing with employees, contracts, financing and/or products will eventually have legal issues.

Before you have a problem, it’s a good idea to retain a lawyer you can trust. It is typically less expensive to pay for advice and guidance up front than for litigation or some other problem later on.

You may only need an attorney once in a while, but it’s good to know that attorney before you need him or her, and for the attorney to know you and your business.

Every business has issues that are particular and important to it.  If the attorney knows what is important to your business, it’s easier for the attorney to give you advice that benefits you. However, this type of knowledge about you and your business can only be learned over time by working together on different matters.

Always consider your potential exposure on the downside. Not everything goes as planned.

Michael P. Wippler is managing member for Dykema Gossett LLP’s Los Angeles office. Reach him at (213) 457-1717 or [email protected]

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How to prepare for and handle multi-jurisdictional litigation

Fredrick S. Levin, Member, Dykema Gossett PLLC

In multi-jurisdictional litigation, a client faces multiple lawsuits in more than one jurisdiction, asserting substantially similar claims arising from a common alleged event, transaction or practice.

“You have litigation going on in several jurisdictions raising the same set of issues, which can lead to duplication of expenses and the risk of inconsistent verdicts; defendants must manage that risk,” says Fredrick S. Levin, a member at Dykema Gossett PLLC.

Smart Business spoke with Levin about strategies one can employ to manage multi-jurisdictional litigation.

Why does multi-jurisdictional litigation need to be handled differently from routine litigation?


Multi-jurisdictional litigation needs to be treated specially because of the greater potential exposure. Take, for instance, a dispute over a small fee. Using a traditional cost-benefit analysis, it may seem to make sense to let your internal claims department handle it, or to employ the firm regularly retained for routine, lower-dollar cases.

However, ‘routine’ treatment may not be best. For a single, routine case, it may not make sense to spend the money to bring a motion to dismiss or take significant discovery. It may be less expensive to have a short trial. But, if the case goes to trial and the result is an adverse judgment, that judgment might be used against you in similar cases being heard across the country. The issues decided adversely could provide the seeds for a class action on a state or nationwide basis. If a claim challenges an allegedly common practice or has been or may be raised in more than one jurisdiction, there are a number of techniques for managing multi-jurisdictional litigation.

How can defense counsel work effectively across jurisdictions?


When facing multi-jurisdictional litigation, it is essential to create a defense that is consistently applied across jurisdictions. There should be a common approach to marshaling the facts, documents and other evidence, analyzing the legal theories and determining the most appropriate defense, and assuring that the strategy can be successfully applied across jurisdictions.

For efficiency and consistency, there is great value in appointing a lead firm to implement the overall strategy. In selecting a lead firm, look not only for substantive expertise but also experience managing multi-jurisdictional litigation, including experience managing other lawyers and law firms nationwide.

Lead counsel may also need to hire local counsel. Select local counsel based on:

  • Experience participating in coordinated, nationwide efforts;
  • Knowledge of the judge and local custom and procedures; and
  • A working relationship with opposing counsel, if possible.

What are some strategies for defending against multi-jurisdictional litigation?


The key to an effective defense is an early and thorough diagnosis of the problem. Is there potential merit to your adversary’s claim? Are the facts or practices easily explained and defended? If not, what is the best means for resolving the claims efficiently? Is the problem multiplicity of suits such that the cost of litigation poses a greater threat than the claims? Does such multiplicity impede a global settlement? What is the best forum for litigating, trying or resolving the claims? Is there an opportunity to consolidate all suits in one forum? The answers to these questions will drive the strategy for extricating your business from the problem.

For example, if your adversary’s claims are legally deficient, a motion to dismiss may be appropriate. Lead counsel will want to examine the law and a host of other factors for each of the pending cases and then push forward in the jurisdiction where you are most likely to prevail. The victory in that jurisdiction can then be presented in other jurisdictions.

If the problem is multiplicity of suits, various techniques can be used to obtain some or all of the advantages of single proceeding. For example, if several cases are pending in the federal court system, you can apply to the Judicial Panel on Multidistrict Litigation for an order consolidating the cases into a single court for pre-trial purposes. Some states have similar procedures for consolidating into one court multiple cases pending in different counties within a single state. In some rare situations, if the paramount objective is eliminating multiplicity of suits or achieving a global settlement, you may consider consenting to class action treatment, which, if allowed, will resolve in one proceeding all — or nearly all — similar cases.

Even without formal consolidation:

  • The involved courts can enter orders: (a) setting similar schedules for conducting discovery and motion practice; (b) requiring the use of a centralized document ‘library,’ so that evidence need not be produced more than once; (c) allowing depositions taken in one proceeding to be used in others, so you and your colleagues do not have to be deposed more than once; (d) imposing uniform written discovery forms; and/or (e) limiting the scope of discovery. Courts may also appoint a common ‘Special Master’ to hear and resolve discovery disputes so that the same rules apply across the board. Usually, such coordination will require motions to the involved courts. However, it may be possible to obtain agreement from opposing counsel; although litigation is adversarial, it need not be nonsensical.
  • In a multi-jurisdictional case, there will often be others in the same line of business who are being challenged for the same or a similar practice. Your lead firm can coordinate with its counterparts using a defense steering group.
  • Your lead firm can host a secure, password protected ‘extranet’ to facilitate communication among you, your lead firm and your local counsel. The extranet site can be used to host pleadings, depositions and discovery materials.
  • Your lead firm can (and should) help you to manage the selection of expert witnesses. To reduce expenses, these experts can be made available across jurisdictions.

Fredrick S. Levin is a member at Dykema Gossett PLLC. Reach him at (313) 568-5372 or [email protected]

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How to go about doing business in — and with — China

Julia Zhu, Senior Counsel, Dykema Gossett LLP

China’s economy is growing at a fast pace and its government has worked to attract foreign companies, which is opening opportunities for them to get involved in the country’s market.

“There is a demand and need by so many Chinese companies that have capital and want to expand their business but don’t have the technology a lot of U.S. companies have,” says Julia Zhu, senior counsel in Dykema Gossett LLP’s corporate finance group.

There are lots of matching opportunities for U.S. companies that have great technology but don’t have a market or the capital to expand their business, which she says creates a good environment for U.S. companies.

Smart Business spoke with Zhu about how to enter the Chinese market.

What do business leaders need to know about doing business in and with China?

First, it’s about the business structure you want to set up. Choosing a physical presence in the country or a procurement strategy depends on whether the company wants to produce goods or services in China for the domestic market. If the foreign company’s focus is on exporting, it might consider using China as a manufacturing base for finished goods or do production outsourcing, which means a straightforward procurement strategy. This can be good for foreign businesses new to Chinese markets while keeping the option open to setting up local production later.

What are some options in regard to business strategy and structure?

If the foreign business wants to set up a physical presence in China, two of the most popular choices are wholly foreign-owned enterprises and joint ventures.

Having a wholly foreign-owned enterprise means you have the sole responsibility for profits and losses. It takes less time to establish because the foreign company doesn’t need to find a local partner or enter into a joint venture contract. Also, this structure gives the foreign owner greater control over company operations, training and recruitment of employees, and better protection of intellectual properties.

With joint ventures, there are two types — an equity joint venture is typically used for long-term projects, and a cooperative joint venture is better suited for short-term projects.

Generally, joint ventures are preferred when a foreign company wants to enter industries for which the Chinese government has restrictions on investment. The government has a list of all the industries in which companies can invest only through joint venture structure.

A joint venture can also be preferred when a company needs a partner to share its capital burden. Chinese companies can have certain technological or distribution advantages, making a joint venture an attractive choice. Successful joint ventures are imbued with clear rules and clear strategy between partners.

There are some disadvantages, such as statutory features where Chinese law requires unanimous approval from a company’s board of directors for major issues, including capital changes and mergers and acquisitions.

How should location factor into a company’s strategy?

Location can be very critical to the success of foreign investors. They need to look at the nature of their business, as well as incentives offered by the local government, their logistical needs, import and export requirements, and government inspections and restrictions.

The theme now is to go west. The Chinese government has implemented tax policies as a strategy to encourage investors to go west. In some cases, qualified foreign investors can have tax holidays.

When people talk about investing in China, they often talk about first-tier cities, such as Beijing, Shanghai and Guangzhou. However, investors should consider second-tier cities such as Nanjing, Dalian, Wuhan and Chong-qing that have cheaper labor costs, greater government support and less competition.

What protections exist for intellectual property?

Intellectual property (IP) is a big concern for foreign investors. The government has taken measures to improve the IP environment. Although China’s IP environment is risky, many foreign businesses have found a way to work in it. The key is to take a proactive, strategic approach rather than a purely legal approach. Businesses should engage the legal system while reducing dependence on it. While traditional legal methods of protecting IP may not always be effective, copyrights, trademarks and patents should still be registered as an important starting point.

Some companies avoid manufacturing innovative, high-margin products in China and instead focus on mature commodity products with lower margins. Others might develop products in countries with better IP protection and bring them to China to guard certain proprietary details. You can also protect yourself with thorough investigation. Watch markets for products like yours, educate suppliers and employees regarding enforcement, and execute agreements to retain key employees.

How else does the Chinese legal system affect business?

Legal compliance in China is different than in the U.S., where one has the narrow task of following existing laws. In China, legal compliance should not be viewed as a standalone legal requirement removed from corporate activities and results, but as a key driver of project completion and investment returns. For business planning, it’s helpful to divide those compliance issues into several categories, such as actions that cause a project not to be approved; internal operating issues, such as those pertaining to labor; external laws, such as bribery and breach of contract; and investment exit issues. By taking a broad view of compliance and conceptualizing compliance issues as a vital part of business performance, it is possible to formulate a compliance strategy that substantially increases the likelihood of success of foreign business.

Julia Zhu is senior counsel in the corporate finance group at Dykema Gossett LLP. Reach her at (213) 457-1830 or [email protected]

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How business owners can deal with having their debt sold to a third party

Brian R. Forbes, Member, Dykema Gossett PLLC

When a company gets into a position of missing payments on a loan, the loan originator could possibly sell your debt to a third party. Once your commercial loan is sold, the velocity of both money and information becomes critical.

“Don’t panic,” says Brian R. Forbes, a member with Dykema Gossett PLLC. Instead, he suggests being proactive.

“The more proactive and transparent you are, the more likely the asset manager responsible for your loan will internally advocate options that may allow opportunities for a mutually acceptable restructure,” he says.

As a borrower, you have the chance to start your lending relationship over because there is no previous history with your new lender. Forbes says there is a possibility that you can restructure your debt on terms more favorable than offered by your original lender.

Smart Business spoke with Forbes about how to handle your distressed debt after it changes hands.

How do you define distressed debt?

Distressed debt would be any debt or credit that has one or more missing payments, either partially or in whole, or is in imminent danger of missing one or more payments without the ability to cure. If you are a borrower who has reached this critical point, there is a possibility your debt will be sold to a third party.

At what point does debt get sold?

Distressed debt can be sold at any given time. The third party that buys debt often has a different objective than the original lender because they are seeking to maximize their investment returns in a shorter time frame. Since the distressed loan frequently is purchased at a discount, an opportunity exists to negotiate terms more favorable to the borrower. The new lender could potentially offer more creative workouts, such as allowing the borrower more time to refinance, extending payments, stretching amortization or allowing a discounted payoff. A new lender is not always negative for the borrower.

How would you know your debt has been sold?

Most loan sale agreements require a borrower be notified immediately upon the closing of the loan sale. The loan buyer will contact the borrower quickly to ensure all payments due under the loan are going to the buyer and not to the seller. If the debt is in distress and there is a default, a workout specialist or asset manager will contact the borrower for updated information. In the best-case scenario, the borrower’s financial statements are complete and easily reviewed and verified, which enables the asset manager to quickly assess the situation and recommend a course of action.

The anticipation from an asset manager’s perspective is that information flows between parties within a month of closing. If the debt involves real estate, such as an office or apartment building, the asset manager will want to see rent rolls, pro forma financial statements and detailed budgets. The less information the asset manager receives, the more difficulty the asset manager has evaluating the credit and recommending a mutually favorable solution.

What’s at risk once it has reached this point?

The velocity of money and information is critical to the third-party debt purchaser. The new lender is making a decision as to whether there is a workable solution between it and the borrower. Many third-party buyers prefer to work quickly to resolve the asset with the borrower in either a full or, if justifiable, discounted payoff. In order to do this, the asset manager needs accurate information quickly to pursue the most cost-efficient action.

The remedies third-party buyers often exercise if they are forced to operate without the requested information include foreclosure, but generally third-party buyers do not want to own the property. Third-party buyers can enforce other remedies under any guarantees of the loan and pursue their rights against the guarantors and the underlying collateral. Third-party buyers will pursue a general workout strategy if it makes sense for both parties.

What should a company do when its commercial loan gets sold to a third party?

If a third-party buyer purchases your debt, anticipate that the new lender will be proactive in exercising its remedies under the loan documents in an effort to resolve the credit and that you should provide the new lender such information required under the loan documents. Remember, many debt buyers contractually respond to investors and lenders in the same manner as the borrower responds to the lender under the loan documents. It is advisable to have your asset manager well informed of your credit and circumstances in order to facilitate the best solution. Without sufficient information, new lenders often immediately exercise remedies.

Be forthcoming. Obtain counsel and with his or her advice gather and give your accounting information to your new lender who can evaluate and understand your credit as quickly.

What are the best-case outcomes once a company has reached this point?

The best scenario is the borrower obtains the opportunity to keep its business going, resolves a current credit that by its size may be limiting opportunities for the borrower, obtains for any guarantor a release from his or her guaranty for consideration, and either purchases the debt or refinances the debt at a price discount that corresponds to the current fair-market value of the asset serving as collateral or the value of the business. Do not panic. Everyone is interested in finding the best solution, which often means the borrower refinancing the debt with another lender.

Should a borrower get counsel involved?

Retain an expert representing borrowers in this context immediately to determine whether restructuring is viable and the best option. Counsel can help structure the best solution given the facts and circumstances of the underlying credit, while identifying and minimizing potential adverse tax consequences.

Brian R. Forbes is a member with Dykema Gossett PLLC. Reach him at (214) 462-6403 or [email protected]

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How to determine if your business really needs to file bankruptcy

Lewis Landau, Senior counsel, Dykema Gossett PLLCYour business has been slapped with a lawsuit, and in a panic, you run to see a bankruptcy lawyer.
Is declaring bankruptcy really the best course of action? In some cases, this can be true. But in most instances, it may be time to step back and consider other options, says Lewis Landau, senior counsel at Dykema Gossett LLP.
“I have found that by the time the debtor arrives at a bankruptcy lawyer’s office, there is an extreme bias in favor of pulling the bankruptcy trigger,” Landau says. “It’s almost as if the gravity pull of just going to a bankruptcy lawyer means you’re ready to do it. However, bankruptcy is just one of several tools available to a debtor.”
Smart Business spoke with Landau about how to determine the difference between needing to declare bankruptcy and simply wanting to declare it.

What is the difference between needing to file and wanting to file?

Have-to-file cases are ones in which there is an immediate loss of control of something, such as a pending eviction, forthcoming foreclosure, or a bank account has been levied up and has already lost money. Control has been lost — or is imminently going to be lost — and the debtor needs to take action through the help of the bankruptcy process today to regain control. In those instances you generally will have to file.
Those are the easy calls. However, most cases are not have-to-files, they are want-to-files, when people feel the need to do something to cure their problems.
If there is nothing that elicits the immediate loss of assets, the attorney should ask what is creating the pressure, why are you here and why are you contemplating bankruptcy?
The answer is generally a lawsuit. The sheriff has come and scared the owner by handing over papers. They panic and wind up in a bankruptcy lawyer’s office the next day because, having been served, they feel that they have to do something immediately.
However, lawsuits take a very long time to resolve; in Los Angeles, it generally takes a year. So you have to measure the cost of allowing the lawsuit process to continue. Even though you ultimately may wind up with a bad judgment, it could be smarter to let that timeline string out. You eventually could settle that case, and the problem is resolved.
Some of the hardest advice a bankruptcy lawyer gives is to not file when someone wants to do so. Your first reaction upon hearing that may be that the lawyer doesn’t know what he or she is talking about, but there may be a better alternative.

How can cost deter you from declaring bankruptcy?

To go into bankruptcy, you have to be able to afford it. Chapter 11 bankruptcy is a very expensive process. Much like you wouldn’t want to drive to Las Vegas from Los Angeles on half a tank of gas because getting stuck in the desert is never good, you don’t want to get involved in a bankruptcy case and not be able to finish the process because of the cost. At a minimum, figure $50,000 to re-organize, and the sky is really the limit.
Another concern is that the moment you file, a whole host of new people and agencies are involved in your life who weren’t before, such as the U.S. Department of Justice’s Trustee Program and its trustee offices, the court and the creditors, who have a large stake and influence in a debtor’s future. There are degrees of loss of control that happen by filing that may not happen if you don’t file, and those need to be measured and balanced.

What else should a business owner be thinking about when considering filing?

A business cannot operate in the red in bankruptcy.
A company may go into bankruptcy and have a few months of losses before going back into the black, and that’s OK if a debtor can show the low point of a seasonal business or orders that will create a profit in the future.
The reason why accrual of losses in bankruptcy is especially treacherous is that post-bankruptcy debt — to the extent that it is unpaid — receives administrative expense priority, which means it’s the top priority at the same level as unpaid legal fees.
The day before bankruptcy, if credit is extended to a business without collateral, it is general unsecured debt. That same credit extended the day after bankruptcy is top priority and entitled to be repaid in full, immediately, in order to exit the bankruptcy. General unsecured debt, on the other hand, generally gets paid back over years, or not at all.
If too much post-bankruptcy debt is accrued and unpaid, the ship can’t sail to its goal. It gets top heavy and falls over because the organization can’t pay its debts to get out of bankruptcy.
The process is a partnership between the bankruptcy lawyer and the business. The lawyer can do a lot to make it work but can’t do anything without a profitable business. Bankruptcy attorneys fundamentally take that profit component, drop it to the bottom line and make deals with creditors to split that. And if there is no profit, the attorney has nothing to work with.
If you have a bias toward filing, you will always be able to find a bankruptcy attorney to file for you. However, if an experienced bankruptcy attorney who knows the system and who understands the adverse consequences advises against it, it may be prudent to heed that advice.

Lewis Landau is senior counsel at Dykema Gossett LLP. Reach him at (213) 457-1754 or [email protected]

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How to negotiate a put and call agreement when selling your business

William B. Finkelstein, Attorney, Dykema Gossett PLLC's Corporate Finance Practice Group

When selling your business, you may be thinking about scoring a quick payout and retiring.
But many buyers today want the person who built the business to continue to play a key role after the sale, and, as a result, leave you with a stake in the company. If the arrangement works, everyone benefits. But many times, sellers have difficulty adjusting to a new role where they no longer are in charge.
If you’ve negotiated the deal correctly, you can exit the deal with relatively little pain. But if you haven’t, it may cost you, says Bill Finkelstein, an attorney in Dykema Gossett PLLC’s Corporate Finance Practice Group.
“In today’s market, the buyer, often financial as opposed to strategic, is frequently not looking to buy the entire company,” Finkelstein says. “The buyer wants the investment, and control of the company, but it wants to keep the management team in place for its expertise, knowledge of the market, reputation and key relationships, and it wants to incentivize management to grow the business.”
Smart Business spoke with Finkelstein about how a put and call agreement can offer options to a seller.

How are buyers approaching the market today?

Traditionally, the buyer buys 100 percent of the company and puts the former owner under a management contract. However, after ‘cashing in’ the former owner may exhibit less drive and interest in running the company.
Today, it’s not unusual for smart investors — or strategic buyers who are in different markets — to want to retain and incentivize the management that got the company to where it is, and partner with them going forward. As a result, they buy a majority interest, but the former owner is still invested.
This is a smart play for the acquirer, but it  makes the transaction more complicated. As the seller, you have concerns. Selling to a larger corporation gives you better access to capital markets, and funding sources should be better and less costly, allowing you to improve operations and grow your business. However, are you really going to be in control, or is corporate headquarters going to be pulling the strings?
It’s a difficult situation because the buyer is coming to the table with a lot money. The buyer is in control and ultimately will have the final say on major matters such as expansion, capital improvements, etc.

How can the seller plan for an appropriate exit strategy?

Oftentimes the solution is a buy/sell agreement, which might not be that attractive to the seller. Under a typical buy/sell, one party notifies the other that he or she will buy the other’s shares for a set amount, or under a formula or valuation process. The other side may elect to sell or, if the price is too low, buy. Frequently, the price is payable in cash, and as a seller, you don’t want to exercise the buy/sell agreement with the possibility you might be required to buy back your company.
The seller is often at an economic disadvantage. A buy/sell agreement is not going to scare a buyer that is a global company. It can say, ‘Fine, I’ll buy you out,’ and trigger a discounted price, knowing the seller took the money from the sale and used it. You worked your whole life to build a company turn it into cash and now you must sell your shares at a lower price or buy the company back.

What is the alternative?

From the seller’s perspective, you should try to negotiate an option, called a put and call, for the seller to require the other side to purchase your remaining shares, either all at once or staged out, or for the buyer to exercise the right to buy the remaining shares from the seller.
The put gives the seller an out if the situation becomes, ‘I tried, but I don’t like headquarters telling me what to do. We just don’t see eye-to-eye, so let’s part company.’ Moreover, the buyer can buy the rest of the seller’s shares if it wants total ownership later. An additional advantage is that a buyer who wants to retain management may think twice before vetoing management’s plans knowing you may exercise the put if disagreements or differences reach a certain level.
This is a very good tool if you can negotiate it. In order to ensure some degree of management stability or to allow the buyer to plan for the capital needed to buy the remainder of the shares, you may not be able to trigger the option for a reasonable period. A period of three to five years, beginning on the third anniversary of the sale, is not uncommon.
If you sell a majority interest in your company at a multiple of earnings or cash flow, you can say you want a put and called priced at the original sales price formula.
But if, at the time of the put, the company is more profitable, you don’t want to sell at today’s price, so you can negotiate the put and call price at the greater of today’s price or the same formula applied to the then trailing 12 months before the sale. Therefore, if the company is more profitable, the price of the buyout increases; this is fair because you could argue the additional value is due in large part to your efforts.
This formula also provides a guaranteed floor. You don’t want the put price to be lower than the original sales price because of the financial risk of a downturn in the economy or industry, or bad decisions by your new owner.
Having that exit strategy is crucial to ensure the reason you sold in the first place — to get liquidity — doesn’t vanish.

William B. Finkelstein is an attorney in Dykema Gossett PLLC’s Corporate Finance Practice Group. Reach him at (214) 462-6464 or [email protected]

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Knowing your rights and responsibilities to avoid employee credit card fraud

Joe Hickey, Member, Dykema Gossett PLLC

Your employees may be using your business’s credit cards to make charges you haven’t authorized. And if you don’t discover it soon after the fact, you may be liable for those charges.
“A court’s rationale is pragmatic and straightforward. If the credit card bank sends you a monthly statement and you send payment in full for all charges, then the bank is entitled to rely on the fact that all of the charges on that statement are authorized and have been approved,” says Joe Hickey, a member at Dykema Gossett PLLC.
Smart Business spoke with Hickey about how to keep from becoming a victim of employee credit card fraud.

How is fraud perpetrated against individuals and businesses?

Unauthorized use is a use that is not authorized by express, apparent or implied authority. If someone uses your card with your express consent you are obviously liable for the charges. But cardholders can be liable for a fraudulent use of their card — one they likely view as unauthorized — when the cardholder’s conduct cloaks the perpetrator with the apparent authority to use the card.
Typically, fraud with a personal card involves a wealthy individual who hires an assistant and gives that person access to all of the security verification information needed to apply for and/or use a card. That person will also review and pay the monthly card statements received from the credit card bank. It’s this combination of complete and unfettered autonomy and access, coupled with the cardholder never reviewing the statements, that creates apparent authority.
Businesses that frequently issue business cards to individual employees in their own names and with their own credit card numbers may have someone in their accounting department who both reviews and pays all business card statements. If that person is dishonest, he or she might fraudulently apply for their own card, with no one the wiser because that same person pays the bills.

How can business owners try to avoid being defrauded?

That is up to the business owner. To ensure the card is not being used fraudulently, a good start is to separate the payment and review functions. The person monitoring incoming statements should be independent of the payment process, and the person making payments should probably not have the ability to incur charges on the card (unless, of course, someone else is auditing).
Courts are likely to hold you liable if you do not separate those functions. While this is undoubtedly a fraudulent use of the card, it will be considered an authorized use because the bank receiving the payments rightfully concludes (based on the actual cardholder’s conduct) that the charges were authorized. Otherwise, why would payments be made?

Why do businesses often overlook fraudulent charges?

Individuals and businesses erroneously believe it is their bank’s duty to monitor their accounts for fraud. That is not true. While credit card banks employ fraud detection technologies, those technologies are designed merely to try to detect fraudulent use of your card before you receive your statement. Banks in no way hold themselves as monitoring your account and being responsible for finding fraud. Frankly, this is an impossible task. The best fraud detection system is personally reviewing the monthly statements.
Businesses might also mistakenly believe that they have procedures in place that would expose fraud, but because the perpetrator employees are also given unfettered access to make payments and withdrawals from bank accounts, as well as having broad access to accounting books and records, they are perfectly situated to manipulate information to hide their fraud. For example, while the ledger may indicate that a check was issued to pay a vendor, it’s possible for a perpetrator to issue a check to pay off the credit card. If you or someone independent does not audit the credit card statements and bank records with the books, it’s likely no one will know for sure if a payment was actually made to the credit card bank rather than the vendor.
In addition, business owners might have an employee create summaries of charges from the credit card statements. The owner reviews this summary prepared by the same person committing the fraud, but never reviews the actual statement. This, too, is not the bank’s fault.

How can a company avoid finding itself in this situation?

Be diligent and employ reasonable audit and cross reference procedures. It’s important to regularly review the statements so you notice charges you didn’t approve. Alternatively, keep the review and payment functions separate. Either way, the quicker you take action to advise the credit card bank the charges are fraudulent, the less likely this use will be viewed as authorized. If, on the other hand, you do not look at statements for months — or even years — it’s possible the courts will show little sympathy if you seek to recoup the money from the credit card bank. While you could always go after the renegade employee, they likely lack the funds to pay you back.
Under the Fair Credit Billing Act, you generally have 60 days to contact the bank and say, ‘This charge isn’t mine.’ If 60 days is the appropriate time for reporting billing errors, it’s also appropriate for reporting fraudulent use of a credit card. After that, the bank has a better argument.

If, despite its best efforts, a company is the victim of credit card fraud, what is the next step?

Contact your credit card bank, report the fraud and ask it to investigate. If the bank concludes that this was your employee and this employee was authorized to use the card via apparent authority, it will likely say you are liable. True, the person forged your signature and the act is fraud; but if you’re not timely in uncovering the fraud, the courts will determine that you let it happen.

Joe Hickey is a member at Dykema Gossett PLLC. Reach him at (248) 203-0555 or [email protected]

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How employers can address new NLRB rules that increase the chance of unionization

John Entenman, Member, Dykema Gossett PLLC

Under new National Labor Relations Board rules, your employees are finding it much easier to unionize. And with micro-units now permitted, even companies with fewer than 50 employees may find themselves dealing with more than half a dozen unions, says John Entenman, a member at Dykema Gossett PLLC.
“This is a tsunami coming at employers, and many are not prepared for the implications of the new rules,” says Entenman. “The next few months could see an explosion of union organizing.”
Smart Business spoke with Entenman about changes to NLRB rules and how employers can react proactively.

What new rules has the NLRB enacted?

Historically, the NLRB has only rarely engaged in rule making. But last fall, it decided two major rules would go into effect on April 30.
The first would have required employers covered by the National Labor Relations Act to post a notice, ostensibly designed to inform employees of their rights. It further said that failure to post would result in a per se unfair labor practice being committed by the employer, and that the six month statute of limitations on the amount of time in which a charge can be brought could not be used as an affirmative defense, resulting in open-ended liability for acts an employer may or may not have committed.
In a South Carolina lawsuit, a federal court said the NLRB did not have the authority to require posting. However, in a separate lawsuit, the federal district court in Washington, D.C., said the Board had the authority to issue the rule but not to declare the failure to post a per se unfair labor practice, nor to toll the statute of limitations.
However, on appeal the Board was enjoined from making employers post the notice until a final ruling is issued.

What other rules did the Board issue?

The second rule did go into effect on April 30 and allows for expedited union elections. It greatly shortens the time from when a union files a petition to the holding of a secret ballot election.
Previously, it was 30 to 40 days before a vote, giving employers time to communicate to employees why it hoped they would not vote for union representation.
Under the new rule, the period between filing a petition and holding a vote has been shortened to 10 to 15 days, meaning that employees will not get a meaningful opportunity to hear from their employer. In addition, matters that were appealable prior to the election are no longer appealable until after the election, so a secret ballot election could occur within 10 days.
We expect to see a significant uptick in the number of union petitions filed. Employers will be receiving documents from the NLRB, and by the time they meet with a lawyer and assess the situation, there’s an election in five days, and they’ve got problems.

How will the new rule impact employers?

This will greatly increase unions’ chances of winning elections from the current 50 percent  to a union success rate of 80 to 90 percent. An employer may not even be aware its employees are interested in a union until it gets a petition, and then there’s an election 10 days later. Many employers are going to blindsided.

How will the ability to form micro-units impact unionization?

Micro-units are a new phenomenon. In 2010, a union petitioned to represent a collective bargaining unit of poker dealers. The employer (a casino) said that was not appropriate because the result would be separate unions for each card game it offered. The NLRB decided, only 2-1, that a unit solely consisting of poker dealers was not an appropriate bargaining unit.
A year later, a union petitioned to represent only CNAs at a nursing home and the NLRB approved the petition. The nursing home objected, saying it didn’t have many employees and couldn’t deal with a multiplicity of unions, but the ruling held.
Finally, in a recent case at the Denver International Airport, a union wanted to represent just rental car agents at a car rental company. The NLRB ruled that was fine, that each job category could form its own separate union.
As a result, unions are poised to represent these micro-units. And most employers are not going to fare well if their work forces are composed of multiple unions all whipsawing each other. If one union goes on strike, and the others observe the picket line, the employer could be in real trouble.

What can employers do?

It starts with sitting down with a labor lawyer, who can help assess your situation and define what, if anything, you should be doing. If you haven’t yet prepared for this new legal environment, you need to do so immediately.
Employers should also be educating their employees, explaining what unions may mean to the workplace. Tell them there are reasons to believe they may be approached by a union organizer and that you want them to know the good, the bad and the ugly about what is involved with union representation.
Tell them you are educating them so that if a union asks them to sign an authorization card, they will know something about this and will have heard the employer’s side of things.
Employers may not want to raise the subject with employees, and that may work for some, but you take the chance of employees only hearing one side of the argument, that of the union. It’s better to be proactive, because union organizing is expected to increase significantly the next few months.

John Entenman is a member at Dykema Gossett PLLC. Reach him at (313) 568-6914 or [email protected]

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How policies can help you prevent, and fight, lawsuits

Thomas M. Hanson, Member, Dykema Gossett PLLC

Every business, no matter how well it is run, faces the possibility of a lawsuit.
But there are steps you can take before that happens to position your company to prevail, says Thomas M. Hanson, a member of Dykema Gossett PLLC and head of the firm’s Dallas office financial services litigation practice.
“If you’re in business, litigation is not necessarily inevitable, but it is certainly a possibility,” Hanson says. “Every company needs to prepare for it, just as you would prepare for other contingencies that might affect your business.”
Smart Business spoke with Hanson about the policies you need to have in place and if, despite your best efforts, you are sued, the steps to take to lessen the pain.

What everyday practices can help minimize litigation costs and potential liability?

In litigation, documents generally carry the day. Most businesses utilize some type of standard form contract, such as purchase orders, sales orders, or a standard form employee/consultant agreement. Businesses need to review those forms on a regular basis to ensure they clearly lay out the terms of the contract. A manufacturing company might think, for example, that its sales order gives the buyer ten days to inspect the goods. But review the contract from the perspective of a judge who has no understanding of your industry. Will she read it the same way? If not, you should clarify the language and potentially save yourself many thousands of dollars in litigation costs, not to mention potential liability.
Significant litigation expense can also be avoided if you have a standard document retention policy. Every company should have one, particularly given the proliferation of e-mail communication. Whatever your policy — if e-mails are deleted every six months, every five years or never — it should be written down. When you get into litigation, courts are more and more interested in finding out what happened to electronic documents.
If you have a standard policy and can show that a key e-mail in the case was deleted according to a standard policy, you’ll be in much better shape than if you have no policy and it looks like e-mails were deleted haphazardly. Again, this simple practice can not only save you from attorneys’ fees but also from potential liability.

What other steps should businesses take to protect themselves?

Another issue with standard contract terms and conditions is making sure employees are using them. Too often, there is a two-page contract; the first page has a purchase order and page two is the standard terms and conditions. But your employees may not bother to send that second page. Suddenly, the case-winning provision you were relying on may not be part of your contract at all.
Finally, proper insurance coverage can be a lifesaver if your company is sued. If you have coverage, the insurance company is not only obligated to pay damages assessed, but, even more important, it is generally obligated to defend you and pay your lawyers. It makes cases infinitely more resolvable if you have a policy that will cover all or some of the cost.

If, despite its best efforts, a business is sued, how should it approach that suit?

Again, documents are key. In particular, courts are cracking down on what happens to electronic documents after litigation commences. If your servers automatically delete e-mails at a set time period, you need to have your IT personnel stop the automated delete function for any potentially relevant electronic documents.
Take steps to collect documents that might be relevant right at the beginning, and make sure, in writing, to instruct any employee who might have relevant documents not to delete anything — not e-mails, spreadsheets or documents stored on their hard drives. If you don’t, some courts may severely punish even the innocuous destruction or deletion of relevant documents. Real-life horror stories exist of courts ordering monetary sanctions of tens or hundreds of thousands of dollars or (even worse) issuing instructions allowing a jury to infer that the destroyed documents were harmful to the company’s case.

Should companies consider alternatives to fighting in court?

Absolutely. There are many ways of trying to resolve a suit without going through a trial, even without invoking a formal litigation process.
Arbitration, especially for smaller disputes among smaller companies, can be a great forum. You have much more limited discovery and, generally, you’ll have an arbitrator who is much more informal and will allow the parties more flexibility to try to work things out on a reasonable schedule. Also, decisions reached in arbitration can generally not be appealed, which lends more finality to a judgment that might be reached in court.
The downside is that you’ll have to pay for arbitration services, but a case that might be a two-week jury trial may only be three or four days in arbitration due to the informality and the lack of dealing with a jury.

Is settlement sometimes a better option than fighting a lawsuit?

Yes. Businesspeople often take a sound, rational, economic approach to business matters until they get sued, then the gloves are off and they don’t care about the expense and just want to fight it. When passion takes over and you’re lashing out at the other side not because there is any long-term benefit but because you are outraged that you’ve been sued, you have to ask if this is the right business decision for your company. But if the answer is yes, and a principled stance is the best approach for the company’s long-term success, then stick to your guns.

Thomas M. Hanson is a member at Dykema Gossett PLLC. Reach him at (214) 462-6420 or [email protected]

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