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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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How partnerships and LLCs can avoid pitfalls that lead to litigation

Cash investors can get upset and file lawsuits when they learn that others involved in a partnership or limited liability corporation haven’t risked as much capital in a failed venture.

“It really comes down to not having the operating agreement and the prospectus adequately explaining all of the moving pieces and what different people are putting into the project,” says Stephen J. Erigero, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Erigero about the legal needs of LLCs and partnerships and how to avoid situations that lead to lawsuits.

What issues need to be addressed when forming the company?

The issues at the formation stage are:

  • Adequate capitalization.
  • Full disclosure of capitalization by formulative partners or managing members.
  • Adequate preparation of an operating agreement.

Litigation arises later because of situations such as an idea person coming into an LLC without any money. Their capital contribution is premised on the intellectual property and management skills they bring. That must be fully disclosed to the passive managing people, who are often the ones who provide the starting capital.

Disputes happen when you have one member of an LLC contributing real estate, and other members contributing capital. Without full disclosure and an explanation of roles and duties, there can be problems when the venture doesn’t work out as anticipated. Or, if there is a lot of profit, disputes about how it is distributed.

So a specific value should be placed on everyone’s equity, including IP?

Yes, you have to have some value placed on that, and people need to understand in the beginning, through the operating agreement and prospectus, how everything will be allocated.

There are cases when it’s not spelled out in the LLC operating agreement that some members are cash investors and others are not. Perhaps $10 million is needed for a development and $2.5 million comes from cash investors, while $7.5 million is from a bank. The development goes sideways and the property is worth $7 million. The property is sold, the bank writes down the loan a little, and the nonmonetary investors go away. The only people who lose money are the ones who made the $2.5 million cash investment.

That can happen on a much larger scale, and the problem can be avoided if managing members spell out everything in an operating agreement that all members sign. The allocation of risk needs to be disclosed so cash investors understand they are in second position to the financing company that has a secured interest.

What other problems arise that can lead to lawsuits?

It’s important that the managing member is not involved in any other aspect of the deal in a way that could create an allegation of self-dealing. For example, a company didn’t have sufficient cash to close on a property so the managing member lent money without disclosure to the limited members. He took a priority position in lending money and that could be construed as a self-dealing transaction, even though he probably thought he was being a good guy by putting extra cash into the deal.

That also occurs when managing members provide a service, by being the contractor, accountant or lawyer for the project. There has to be clear value placed on those services and there may be situations in which you need to change managing members to avoid the appearance of a conflict.

Lawsuits can be filed even after the entity is dissolved, so you need to maintain insurance for some time thereafter, especially if it’s a LLC that failed. Investors have moved on, there’s no money left, so plaintiffs with claims will go after the members or shareholders directly.

There will always be unforeseen circumstances, but full disclosure, following general accounting principles and the proper insurance, will go a long way to ensuring you’re protected.

Stephen J. Erigero is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2013 or [email protected].

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Proposition 65: What you do not know will hurt your business

Thomas H. Clarke Jr., partner, Ropers Majeski Kohn & Bentley PC

Thomas H. Clarke Jr., partner, Ropers Majeski Kohn & Bentley PC

California Proposition 65 — the Safe Drinking Water and Toxic Enforcement Act of 1986 — has spawned a cottage industry that profits from putting businesses on notice that they have products containing chemicals on the list of potentially hazardous substances.

But the mere presence of a chemical in a product doesn’t mean that there has been a violation, and there are steps you can take to protect your business when you receive a notice, says Thomas H. Clarke Jr., partner at Ropers Majeski Kohn & Bentley PC.

“Everyone seems to lose sight of what Prop 65 is about because the plaintiffs want you to see a list of chemicals in your product and think you’re a bad person. But the law is not about the chemical being present, it’s about exposure,” Clarke says.

No exposure above a specified level, no violation.

Smart Business spoke with Clarke about what you should know about Prop 65.

What is the main flaw with Prop 65?

The burden is placed on the defense. A plaintiff only needs to show that the chemical is present and there’s a reasonable exposure pathway. Then the burden shifts; the defendant must prove the exposure is below the warning threshold. If plaintiffs were required to prove exposure, all of the games go away because frequently the only exposure scenarios they present have nothing to do with product usage.

For example, a client was selling a keepsake binder and one of the plaintiff’s scenarios involved the binder being on the floor, and a baby crawling over and licking it. The regulations state that an exposure is determined by normal use by an average consumer. The thesis that babies licking binders happens frequently is ludicrous.

Plaintiffs exaggerate so that you are intimidated and will not contest the case. They want a settlement that pays them substantial sums. To justify their fees, they will impose some reformulation standard, but quite often there’s no evidence the reformulation has any beneficial affect on exposures.

Why do businesses agree to settlements rather than go to trial?

Plaintiffs know what it costs to defend these lawsuits and are clever about making a settlement offer. If it’s going to cost $150,000 to defend, they’ll seek $80,000 to $90,000.

Upon receipt of a 60-day notice that a lawsuit will be filed, be proactive — model the use of the product. Such evidence is not cheap. In the case of the binder, about $8,000 was spent to prove the exposure was under the threshold. Such evidence changes the dynamics of the case.

How should a business react when it receives a warning letter?

When a business receives a 60-day warning letter, it should take immediate steps to assess the product. Probably 90 percent of these notices are tossed. No one worries about them; it’s only when a lawsuit is filed that they realize they have a potential problem.

After assessing whether there is an exposure, you know if the case is defensible. If it is, that’s the posture to take. If not, then you need to settle, and one of the things you’ll need to do is change the composition of the product. If you assess early, then this process is in your control, not the plaintiffs.

What is being done to solve the ‘greenmail’ problem?

Assembly Bill 227 addresses the kind of shakedown lawsuits that get a lot of publicity. Plaintiffs review public records for violations, like allowing smoking near an ATM machine. Then they fire off letters stating the business is in violation of Prop 65, and demand money.

AB 227 covers those activities that are frequently exploited. If it passes, someone receiving one of these shakedown notices can cure the problem immediately because usually the only requirement is a warning sign. There is a small penalty provision, but most of the money goes to the state.

However, if you really want to eliminate abuse, demand that the law be amended to put the burden of proof on the plaintiff. There’s nothing wrong with warning people, but to associate the presence of a listed chemical in a product with an actual threat of real harm lacks merit.

Thomas H. Clarke Jr. is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (415) 543-4800 or [email protected] Learn more about Clarke.

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How contractors can comply with California law

Kevin P. Cody, partner, Ropers Majeski Kohn & Bentley PC

Kevin P. Cody, partner, Ropers Majeski Kohn & Bentley PC

California Business and Professions code section 7159 comprises eight pages of small type covering home improvement contracts, which makes it difficult for contractors to always follow the letter of the law.

“There are so many very technical requirements in 7159, including type size and placement of various provisions within the contract document, that even a conscientious contractor might miss them,” says Kevin P. Cody, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Cody about construction contracts and how companies can avoid problems that void agreements.

When do contract problems arise?

Obviously, if construction goes well, the contract typically isn’t brought up. But when there is a problem, the homeowner or his or her attorney will search the contract for defenses. For example, the entire contract can be voidable or unenforceable if the contractor hasn’t complied with all of the requirements of section 7159, which are numerous and pretty detailed.

California law gives particular protection for home renovation projects because it’s frequently a one-on-one relationship between an inexperienced homeowner and a contractor. Prior to enactment of 7159, a homeowner might find himself or herself in a position where substantial upfront payments had been made, the contractor would only be partway through with work, and all of a sudden the homeowner couldn’t find the contractor. In a commercial setting, where you’re dealing with people who are quite sophisticated and savvy, they do not require the same degree of protection.

However, strict compliance with 7159 will not always work as a defense for the homeowner. A landscape designer/contractor client didn’t strictly comply with all code provisions, and a homeowner, because he was dissatisfied with a few things, hired an attorney and decided not to pay. The homeowner filed a lawsuit, claiming the contractor’s failure to strictly comply with 7159 justified nonpayment. In spite of the landscape designer/contractor’s failure to strictly comply, the court sided with the designer/contractor and awarded it all of the money the homeowner had withheld.

How detailed are the code provisions?

A window company wanted contracts prepared for installations it was going to be doing. On the first page of the contract, you have to mention the date the buyer signed, there has to be a notice of cancellation and a heading that says ‘home improvement’ in at least 10-point, bold face type — that comes straight from the statute. There are a lot of other very detailed requirements.

What should you do to draft contracts that are compliant?

Most contractors already have contracts that comply in certain areas, but in many instances they haven’t updated them. An attorney can go through and make recommendations. In addition to compliance with the technical requirements of 7159, there are other statutes with provisions that the contractor may not appreciate fully, e.g., those dealing with attorney’s fees, or with provisions that have changed in the last few years, e.g., indemnity.

For example, Civil Code section 1717 states that if a contract provision allows one party to recover attorney’s fees, it will be reciprocal to the other party. Without knowing about 1717, the contractor may want an attorney’s fees clause in the contract that only allows the contractor to recover fees if it has to sue to collect payment. But what happens if there is litigation and the other party can recover attorney fees, even if it isn’t mentioned? It becomes an issue of whether the contractor really wants the clause because it might engender litigation.

Similarly, while the law with respect to what general contractors can be indemnified for recently changed to limit indemnity rights, there still are ways to improve the situation. Though a general contractor cannot be indemnified for its active negligence, it typically has leverage over subcontractors to request that the general contractor is named as an additional insured on the subcontractor’s insurance.

It’s a good idea to update your contracts every two or three years with an attorney who specializes in construction contracts. The cost will be relatively modest in the long run, especially considering the benefits of that review.

Kevin P. Cody is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4557 or [email protected] To learn more about Kevin Cody.

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How to protect your product from unfair competition, counterfeiting

Timothy L. Skelton, partner, Ropers Majeski Kohn & Bentley PC

Timothy L. Skelton, partner, Ropers Majeski Kohn & Bentley PC

If your company makes a product, it’s increasingly likely that someone will copy it or produce counterfeit versions.

“I can’t think of any industry that isn’t being affected,” says Timothy L. Skelton, a partner with Ropers Majeski Kohn & Bentley PC. “I bought a $40 bicycle chain that was a counterfeit. It came in a similar-looking package to the chain I normally buy, but when you looked at it closely it was slightly different.”

One client had a medical device copied by another business.

“It was absolutely identical in every way to my client’s product except one letter in the trademark was changed. So it wasn’t actually a counterfeit because it didn’t use my client’s trademark, but it did infringe on the trade dress and product design,” Skelton says.

Smart Business spoke with Skelton about trade dress and how companies can protect themselves from unfair competition.

What is trade dress and how does it differ from trademarks?

Trade dress is the design and appearance of a product together with the elements that comprise its overall image in identifying the product to consumers. Broadly speaking, it’s the product’s look and feel and can include size, shape, color, or combination of colors, texture and graphics. Trade dress can either be the product itself or its packaging.

A trademark is any word, symbol or device indicating the source of a product. For example, the word ‘Coca-Cola’ and the Coca-Cola swoosh are trademarks, but the bottle is trade dress. The shape of the glass bottle is unique and readily identifiable by consumers as being the source of the product.

Do companies have to take specific action to protect trade dress?

No. Trademark and trade dress are protected when used, not when registered. However, both can be registered, which confers certain benefits. If the trade dress is registered, the burden of proof is in the owner’s favor, and the company may be entitled to remedies that wouldn’t otherwise be available.

Where do businesses run into trouble with product infringement?

There is very thin trade dress protection for websites. Web pages look similar — there are only so many ways to arrange them.

But the biggest problem in the last 10 years is not really a legal change; it’s the business landscape changing because of offshore manufacturing. Counterfeiting touches almost every business. One of the most common occurrences is that a company manufacturing your products will just make more without your name. Those items are sold out the back door of the factory.

It used to be that only expensive items like Rolex watches were counterfeited. Nowadays, it’s almost anything. A current client has a case involving curling irons — a sub-$100 product. Most products are now made overseas and, although laws are changing, historically many foreign countries have not respected intellectual property rights. As a result, many overseas companies don’t even realize when they’ve done something wrong.

How can companies fight counterfeiting and trade dress infringement?

Add clauses in supply agreements that prohibit manufacturers from making your product for anyone else. That may or may not provide protection, but it puts the manufacturer on notice that you’re watching.

If copies of your product are entering the U.S., use whatever business intelligence possible to determine their origin. It’s virtually impossible to shut down manufacturing operations overseas, so try to cut it off at the import stage. Write a cease-and-desist letter to the first link you can find. Make sure that the letter invites a dialogue — it’s always preferable to resolve matters without litigation.

Trade shows are a good place to find the source of problems. An attorney friend goes to a show for automotive aftermarket manufacturers every year and is paid to walk around and look for infringing products.

Counterfeits can slip into the supply chain anywhere. Even the most respectable vendors are having problems. Be reasonable — don’t assume people are acting in bad faith — and in a surprising number of cases you can get the problem resolved.

Timothy L. Skelton is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2055 or [email protected] Learn more about Timothy L. Skelton.

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How to protect your company’s product when entering new markets

Michael J. Ioannou, partner, Ropers Majeski Kohn & Bentley

Michael J. Ioannou, partner, Ropers Majeski Kohn & Bentley

Trademark, copyright and intellectual property (IP) laws can vary greatly in foreign markets, so it’s vital to seek local legal expertise before doing business internationally, says Michael J. Ioannou, a partner at Ropers Majeski Kohn & Bentley.

“Local law firms know the system, including the politicians and judges,” Ioannou says. “It’s no different than doing business here. If a Florida company has a problem in San Jose, they could send someone, but they would most likely hire an attorney here. It makes sense to have someone like me who has practiced law here for 32 years and worked in the local courts.”

Smart Business spoke with Ioannou about how companies can avoid legal problems when expanding into foreign markets.

What are some important issues to consider before entering a foreign market?

From a general standpoint, you need to understand the business environment. You can accomplish that in India, for example, through the National U.S. India Chamber of Commerce, Confederation of Indian Industry or the National Association of Software and Services Companies, which caters to high-tech companies.

You also should be checking local laws with the help of a local lawyer in the country or near where you want to do business. So, if you’re going to mainland China, there are good attorneys in Hong Kong that can advise you or connect you to counsel in mainland China that they know well.

What mistakes do companies make when doing business overseas?

They might rush into a market without checking other companies’ rights and get sued for infringing IP rights in the foreign country. Apple thought it had acquired rights to the iPad trademark in China from a Taiwanese company, but courts said a subsidiary of that company still owned the rights in China. Apple paid $60 million in a court-mediated settlement. So one route is to buy the trademark, but you still have to ensure that what you’re buying is legitimate.

It’s the same situation with foreign companies coming into the U.S. A client with a chain of Indian restaurants wanted to expand here and found a restaurant on the East Coast that used the name in interstate commerce first — that’s the test for trademarks, first use — but the restaurant didn’t have the trademark registered. Instead of spending money to argue in federal court that the restaurant didn’t have first-time use, the client bought the restaurant and trademark. It was cheaper than paying legal fees in a later dispute over the name.

How can businesses protect themselves from legal problems?

When entering a country, you want to secure trademark rights for your product there. If you can, obtain patent protection, register and apply for a patent in China or India, for example. A patent in the U.S. is not enforceable in India or China. You can stop someone from shipping goods into the U.S. that infringe on a patent here, but you can’t stop a sale occurring in India or China based on a U.S. patent.

Pharmaceutical companies are having problems getting inventions patented in India because there’s a huge market there for generic drugs. India doesn’t even recognize software patents. One client in India was threatened by a U.S. company for IT support services offered here. It was a U.S. patent, so as long as the function that was within the patent claim was being done in India only, the U.S. company couldn’t claim infringement.

What can companies do to fight patent infringement?

In India, for example, you could file a lawsuit in civil court, but that could take 15 years to reach a resolution. However, the entity that’s infringing laws in India may be doing business in the U.S., which would provide another angle to file a lawsuit here for unfair competition. You also may be able to intercept their goods from coming into this country, depending on the nature of the IP rights being infringed.

But if you have a counterfeiter in Shanghai that’s only selling goods there, you have to use the local courts. Things are getting better in terms of that kind of infringement — that’s why you’re seeing a lot more activity to enforce rights in China, for example. Just be cognizant that you can’t expect a perfect day in court as a foreign company coming into these jurisdictions.

Michael J. Ioannou is a partner at Ropers Majeski Kohn & Bentley. Reach him at (408) 287-6262 or [email protected]

Learn more about Michael J. Ioannou.

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How to protect your business in a global economy

Lawrence Borys, partner, Ropers Majeski Kohn & Bentley PC

Lawrence Borys, partner, Ropers Majeski Kohn & Bentley PC

A global economy means product manufacturers should take a broader perspective when addressing issues related to product liability.

“They have always had to worry about warnings and product defect issues, but now with a global economy and the Internet, they need to be worried about not only federal and state laws and regulations but also international concerns in countries where their products may be advertised and purchased,” says Lawrence Borys, a partner at Ropers Majeski Kohn & Bentley PC.

“The changing world has expanded the concerns of businesses. Whereas previously manufacturers worried about design and quality control, warranty issues, or their warnings or labels, they often did so from a more provincial perspective. They now need to look at things from a much more global point of view,” Borys says.

Smart Business spoke with Borys about product liability and how businesses can protect themselves from legal judgments.

How has the Internet changed the product liability landscape?

Typically, product liability cases involved whether the product had a design or manufacturing defect, or the nature of the warning label or instructions on how to use the product. Because so much information is available on the Internet, manufacturers and sellers need to be careful about what representations are made online. Online sales raise a concern for manufacturers that simply didn’t exist 30 years ago. There needs to be a balance between marketing and selling a product versus the representations being made. The Internet is so prevalent that in many product liability cases there is an allegation or contention that raises an issue about what was represented online.

How can companies limit product liability?

Whether in product design, manufacturing, marketing or sales, work closely with your staff, experienced counsel and risk management professionals, including insurance representatives. No matter how careful you are, almost by definition success will lead to a greater probability of a product liability lawsuit with more products on the market. Working with strategic advisers reduces the likelihood that an isolated case will impact a successful business.

What types of insurance are available?

Traditionally, businesses get general liability insurance and some type of product liability coverage, but there are newer, advanced products such as patent infringement coverage and cyber liability to protect against hacking. Product recalls, once rare, have become more common, so there also is product recall insurance.

Does documenting the development process help when defending a lawsuit?

Record keeping and documenting how you addressed concerns is important when defending a product. California has separate product liability areas — there is a negligence aspect, which is focused on whether you acted as a reasonable manufacturer. Records of what was done to make the product safe are critical in the analysis of whether you acted reasonably in the process or recklessly in putting a product out into the marketplace. The other area of product liability, whether the product contains a defect, usually focuses on if the product functions the way most consumers think it would. Again, good record keeping is essential to show you considered foreseeable and anticipated uses.

It’s been said that you can manufacture the most effective mousetrap in the world, but that’s just a start. You have to determine whether your product may have violated patent or other forms of intellectual property protection, here and abroad; how to ensure every subsequent mousetrap gets built the same way as that first one; how you’re going to market and sell it; what your website will say; and how you want to label it with warnings provided on how to use the mousetrap. And you need to do all of that remembering that you may have to defend your product in a much broader geographic area than anticipated. Good documentation will help in every jurisdiction.

Also, if you’re going to sell your product online, either directly or through an intermediary, you have the same concerns, as well as ones related to the specifics of many jurisdictions. Working with your in-house team and legal and insurance consultants, you might not be able to stop product liability exposure, but you can help limit it.

Lawrence Borys is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2026 [email protected]

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How well-written product warning labels can lessen a company’s liability

James C. Hyde, partner, Ropers Majeski Kohn & Bentley PC

James C. Hyde, partner, Ropers Majeski Kohn & Bentley PC

When screwdrivers were created, they had an obvious use — to turn screws. But over time people started using them as chisels and pry bars, which led to injuries and the addition of warning labels that laid out the proper use of screwdrivers.

What to include on warning labels is tricky. You not only have to warn about the inherent risks of the product from its intended use, but you have to consider the ways it could potentially be misused, says James C. Hyde, a partner at Ropers Majeski Kohn & Bentley PC.

“Most small to midsize businesses think about the need to have instructions and warnings on product labels, but there are topics they need to address that they’re not thinking about or are even aware of,” says Hyde.

Smart Business spoke with Hyde about what should and shouldn’t belong in product warning labels and ways companies can protect themselves from legal judgments.

How do you determine what to address on warning labels?

There’s an obligation to warn about inherent risks associated with the intended use of products and provide instructions on proper use. But companies often don’t understand they have a duty to warn against reasonably foreseeable misuse of the product. Basically, you have to brainstorm scenarios in which people might be injured misusing the product and warn against them.

There is also a duty to warn of potential allergens in your product. That also applies to products that are not ingested. A small business selling hand soap might have an ingredient that could cause an allergic reaction, so there’s an obligation to warn that the product contains the ingredient.

Making this more challenging is the prevalence of companies that sell products they do not manufacture under their own labels. The company might not be aware of all the chemicals used in the manufacturing process. For example, a company was selling exercise mats containing a chemical that required a California Proposition 65 consumer warning label. The company was not the manufacturer and were not aware the chemical was in the finished product, but it was sued for not warning of its presence. The state Office of Environmental Health Hazard Assessment has a website that lists chemicals that require a warning label because they’re considered carcinogens, or could cause birth defects or reproductive harm.

Do you have to warn against obvious dangers, such as coffee being hot?

There is no duty to warn consumers of an obvious danger — those making custom knives do not have to warn that the knives are sharp and may cut the user. The law requires warnings to be effective. But if the warnings become voluminous, consumers won’t read them and they lose their effectiveness.

The famous McDonald’s coffee case seemed pretty obvious on the surface — coffee is hot. But the plaintiff’s argument was that it was served at a temperature that was much hotter than one could drink it at or that one would expect it to be served. This illustrates how broad and very product-specific the issue is and why businesses need to have a well thought out procedure in place for developing use instructions and warnings.

How does a company protect itself?

Before the product goes to market, the company has to evaluate it specifically to determine what use instructions and warnings need to accompany it. The process should include the people involved in developing the idea for the product, as well as the designers and marketers, and engage resources such as industry associations. It’s a good idea to not only document the design and development process of the product but also to document the development of warnings and instructions, too. If sued, it helps to show the jury the process undertaken when developing the warnings. It demonstrates that there was a procedure in place and a comprehensive effort to provide clear and complete warnings including dangers of potential misuses of the product.

Ultimately a jury will decide whether it was reasonably foreseeable that someone was going to use that screwdriver as a chisel.

James C. Hyde is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4538 [email protected]

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How to resolve business conflicts without costly litigation

Jennifer E. Acheson, partner, insurance and bad faith expert, Ropers Majeski Kohn & Bentley PC

Jennifer E. Acheson, partner, insurance and bad faith expert, Ropers Majeski Kohn & Bentley PC

Abraham Lincoln may have been the first lawyer to recognize the pitfalls of litigation but certainly not the last. He noted that: “The nominal winner is often a real loser — in fees, expenses and waste of time.”

Fortunately, today’s executives have an alternative way to resolve disputes that doesn’t put your fate in the hands of a judge or jury.

“Not only is mediation less expensive than litigation, the parties are in control of the outcome and they can be completely creative in finding a solution,” says Jennifer E. Acheson, partner and insurance and bad faith expert at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Acheson about the benefits of mediation.

What is mediation and how is it different from arbitration and litigation?

Mediation is a type of alternative dispute resolution, where a neutral or trained mediator helps conflicting parties resolve issues, ideally before a lawsuit is filed. Mediation differs from arbitration and litigation in that it’s not a sworn evidentiary hearing or trial, and the mediator doesn’t rule on the merits of the case or take sides. The parties still have the opportunity to air their grievances during caucuses with the mediator and there’s more leeway in offering testimony.

What are some common business situations where a mediator might be used? 

Mediation can be used to settle a variety of disputes including:

• Employee disputes with other employees.

• Employee disputes/grievances with management.

• Sexual harassment complaints.

• Hostile workplace issues.

• Discrimination complaints.

• Americans with Disabilities Act compliance issues.

• Business partner disputes.

• Contract disputes.

How do you select an appropriate mediator, who pays for mediation and how much do mediators charge?

The actual cost of mediation varies with the complexity of the case; however, the parties split the charges and avoid the cost of pre-trial maneuvering, court reporter fees or similar expenses. Mediation is a bargain when you consider that lawsuits cost small businesses $105.4 billion in 2008, according to the U.S. Chamber of Commerce. Since the process of being heard is often the overture to resolution, look for a mediator who is a close and patient listener.

Is mediation confidential?

Yes, anything said during the course of mediation is inadmissible in court, and the communication among participants is confidential. In fact, the mediator needs permission to disclose information revealed during individual caucuses with the other party. This protection even extends to the settlement agreement, unless the parties agree to waive confidentiality. In contrast, trials are normally open to the public.

What happens if the parties can’t agree?

Unlike arbitration or trials, which have a mandatory and possibly binding decision, the mediator doesn’t have the power to force the parties to reach an agreement. The process is voluntary and either party can withdraw at any time. If the parties can’t resolve their issues in one session, with the parties’ permission, the mediator can continue the process until the dispute is resolved.

Is an agreement made at mediation enforceable?

A mediation agreement is enforceable as long as the authorized parties agree on a deal and sign the memorandum. If a party refuses to comply, the parties can appoint the mediator as an arbitrator for the sole purpose of rendering an award that complies with the agreement, as long as the dispute hasn’t gone to litigation. If the matter is already in litigation, a motion for enforcement can be brought under the civil code. This makes mediation an enforceable and cost-effective alternative to litigation.

Jennifer E. Acheson is a partner, insurance, and bad faith expert at Ropers Majeski Kohn & Bentley PC. Reach her at (650) 780-1750 [email protected]

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

 

How to protect personal assets with timely business incorporation

Francois Laugier, Partner and Director, Ropers Majeski Kohn & Bentley PC

Francois Laugier, Partner and Director, Ropers Majeski Kohn & Bentley PC

Every entrepreneur dreams of the day  his or her fledgling startup becomes a going concern, but you could end up losing everything — including your house and your car — unless you take steps to separate and protect your personal assets.

“Owners should have limited liability for business debts and obligations,” says François G. Laugier, partner and director for Ropers Majeski Kohn & Bentley PC. “Incorporating sooner rather than later offers considerable protection with virtually no downside.”

Smart Business spoke with Laugier about the benefits of incorporating at the right time.

When is the right time to incorporate?

Owners expose themselves to liability for their company’s actions and debts the minute their venture becomes operational or starts hiring employees. So, it’s time to incorporate when your startup begins interacting with third parties or logs its first sale. Whether you manufacture food products or develop software, you could lose everything unless you form a legal business structure to safeguard your personal assets.

What are the advantages of incorporation?

Incorporating not only keeps creditors from attacking your own assets and employees from suing you personally, but it also increases a company’s credibility and raises the valuation you can expect to receive from a prospective acquirer. A corporation is always perceived as a safe and familiar recipient where a business can accumulate intellectual property and other assets such as patents, trademarks and copyrights to subsequently transfer them to a new owner or heir. And consumers, vendors and partners often prefer doing business with an incorporated company. Incorporated businesses can also offer stock options to employees and contractors, thereby attracting the best technical talent and, in turn, the most influential investors. And, history shows that buyers are willing to pay more for a business that is incorporated, has a well-maintained corporate book, complete with up-to-date annual records and government filings, and that has received guidance from reputable and competent lawyers, accountants and advisers.

What are the different legal vehicles available for incorporation?

Entrepreneurs of for-profit ventures usually consider a limited liability company (LLC) or a corporation when selecting a legal entity. For budding companies, a LLC is often the preferred choice because its shareholders, called members, only pay taxes on profit distributions at the member’s personal income tax level, while profits are otherwise taxed at both the corporate and personal level when generated through the activities of a corporation. For the IRS, a LLC is known as a ‘disregarded entity,’ as its profits and losses essentially pass-through to the owners. But if you soon plan to raise venture capital or offer employees stock options, a corporation is the better vehicle. Get advice from your lawyers and accountants, but remember the conversion of a LLC into a corporation is a relatively simple legal process. Conversely, there will be a host of negative tax consequences if you convert a corporation into a LLC.

How can business owners limit their personal liability by incorporating?

If your budget is so tight that you can’t hire a lawyer, it’s tempting to incorporate on the Internet, but the lack of a formal business structure and legal guidance can leave you just as exposed as if you had not incorporated. To limit liability, you must ensure your company is sufficiently capitalized, has complied with securities regulations when issuing shares and soliciting investment, and you haven’t commingled personal and company funds. You must also record the proper documents on the federal, state and local levels and maintain a good record of all accounting transactions, meeting minutes and periodic filings so savvy creditors can’t attack your assets by piercing the corporate veil.

When shouldn’t a business incorporate?

It may not make sense for an independent consultant or a very small business to go through the incorporation process. Their limited exposure may not require the protection and cost of a corporate entity. But for everyone else, there’s no reason to link your personal assets to the company’s fate.

François G. Laugier is a partner and director at Ropers Majeski Kohn & Bentley PC. Reach him at (650) 780-1691 [email protected]

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