With the possible exception of retail[1], contracts are needed between the party who is the customer and the party who is the supplier. Each industry has its own unique form of contracting and its own internal (some written, some not written) rules, which are commonly referred to as industry practice. Industry practice is important for a number of reasons:

1)     The party (supplier or customer) upon whose form contract the relationship is based is often determined by industry standard. For example, in the home building industry, the home builder will typically supply their contract. When a party provides professional services to a large customer, the supplier typically provides their form documentation.

2)     If a term is left undefined in a contract, the ‘industry practice’ will fill the gap. For example, if a contract does not specify what are the customer responsibilities for a service contract (for example, if dedicated personnel is needed), then industry practice will help a court or other arbiter decide what customer responsibilities are necessary when and if it becomes an issue.

3)     The standard of performance is often governed by industry practice. If a good or service is to be provided to the ‘reasonable satisfaction’ of a customer, the industry practice and standard will help determine whether a customer is being reasonable.

Because industry practice is so fundamental to customer/ supplier contracts, my counsel for developing a form contract is typically to first go to a trade group or trade association. Often, they will have a contract that they will provide to members. Sometimes this contract is not only the starting point, but the finishing point as well. In home building, the industry standard is the AIA (Architecture Institute Association) form. Deviations from that form are rare.

On the other end of the spectrum, a more complicated situation arises when a company is in a new or developing industry. Not only are there no industry standards, the relative rights between customer and supplier are not yet clearly defined. Additionally, the risks associated with the relationship have not yet manifested themselves.

In these situations, the business developing the contract will begin with a standard form of service or sales agreement. From the standard form, a good description (even if taken from marketing material) is helpful. However, oftentimes people inexperienced with contracting will not work through the implications of the marketing promises. Usually a lawyer is necessary and a good investment at this point. (Just have a concise, but complete, summary of the business transaction.)

Over time, as issues arise, the contract can and should be modified. Remember it is a fluid process. As you go forward, a business should continually adopt the contract form to the business process and modify the form to account for business issues. As a business modifies the contract, care should be taken to keep the contract precise and concise. Often issues that crop up need to be handled outside of the contract (in a policy for example) instead of having a complicated contracting method. A contract that is too complicated is a deal that does not get done.

Mike Goodrich
Goodrich Law Firm, LLC

The scare tactic that Graham refers to was explained by Sachin Agawal, CEO of Posterous, in a recent article by the American Bar Association. As a signatory, Agawal says, “I think there’s definitely a second tier of companies that don’t compete on having the best product in the market but use their patents as leverage against start-ups.” Other signatories like Agawal feel that this second tier of companies opt to take this unfair route rather than what Graham’s supporters would call the more ethically-sound route of competing by innovating their products and staying up to speed with smaller companies by generating fresh ideas.

One significant aspect of the pledge is Graham’s acknowledgement of patents as a necessary evil – but he feels that the appropriate mode of action is to bypass the government. “Companies that use patents on start-ups are attacking innovation at the root. Now there’s something any individual can do about this problem, without waiting for the government: ask companies where they stand.”

As shown on the pledge website, 33 companies have signed the pledge so far. The pledge is progressive in that it is a new way to go about patent reform. The question then arises of the pledge’s effectiveness. Will the companies being targeted actually take the pledge?  Additionally, some feel that the recently passed Leahy-Smith America Invest Act bypasses the need for the pledge, as the Act lists several new protections in first-use claims that could be a potential benefit for the small companies on which Graham focuses his efforts. Only time will tell if the pledge will end up with a place in history or will go the way of the dot.com startups of the early ‘90s.

Elizabeth Ritter
Ritter Law Firm, LLC

As discussed in last week’s article, careful management of your relationships is critical in business. In my experience, the single biggest sources of litigation are frayed relationships, mismanaged expectations, and failure to live up to expectations.

Here are examples I have seen in the real world that have cost companies a lot of money:

- When terminating a relationship, one party told another party that he was getting compensating through Date X; the other party heard Date Y. Parties became involved in litigation to determine which date was correct.

- A company had engaged a professional to help handle licensing and qualification issues. The professional said that “it will be handled”; it was not handled. Company incurs damages when it is not handled. Company seeks reimbursement from the professional for the damage.

- Company installs software, without an agreement, onto a worksite. Software does not perform to expectations. Salesperson who sells the service made promises and commitments that could not be met. Software company is sued.

- Company presents a contract for signature. Contract is not signed, but party begins to perform under the contract. Court enforces the contract.[1]

A couple of easy steps exist that help prevent litigation:

- Pay people reasonable amounts at the front end so that the relationship can develop without the economics getting in the way.

- Engage a party as a consultant before hiring that party.

- Have a good deal of experience (probably over a year) before granting or selling equity to a person.[2]

- Enter into Letter of Intents – non-binding term sheets – in order to sort out the business before formalizing the relationship.

All that said (documents/no documents/ oral/ formal contract/whatever), failure to pay or failure to perform is the leading cause of disputes amongst parties that lead to litigation. Maintaining good, clearly-understood relationships is the primary key to not getting sued or having to sue.

In Summary:

- Do what you say you are going to do. If you hired them, pay. If you were hired, do your

- Be careful about oral contracts and smoking gun Email contracts.

- Be careful to not let business become personal.

Mike Goodrich
Goodrich Firm, LLC

Sometimes the relationship is governed by common law[2], sometimes statute [3], sometime government regulations govern the relationship, sometimes a contract (written or oral) supplements, modifies, or restates the legal relationship that exists between, or amongst, the parties. The law of contracts (which is the basis for business organization law) defines the relationship; this law is based on centuries of business people interacting.[4]

At this point, the sage and stock advice says that the prudent person emphasizes their documents. There is wisdom to this advice. Oral contracts can and do arise (see next week’s article), and when the relationship sours, a he said/she said emerges, and litigation ensues.

I am cognizant of this advice, but it should be taken with a grain of salt. Too often, parties spend an enormous amount of time and resources in order to formalize a relationship. They engage attorneys; they exchange several versions of contracts; they compromise, wrangle, cuss the lawyers and finally meet in the middle and have a fancy celebratory dinner. The next day, they figure out that the document does not exactly square with the transaction; one party may be more involved or less involved than originally planned. All of the business parties are comfortable with the new relationship, but are hesitant to have lawyers redo the agreement.

That is not to say that you should be flippant in documenting the relationship. If someone is working for you, they have a motive, probably pecuniary, and that motive needs to be dealt with openly. When things go unsaid, or more importantly unwritten, expectations are not met and issues arise. Clarifying the expectations in writing is an important aspect of both business law and doing business in general.

Balancing the necessity of formalizing a relationship with the necessity of letting the relationship develop over time is a major challenge for the business person. However, I believe that mastering that balance is fundamental to doing business. I also believe that lawyers have a tendency to push formal documents too soon in the relationship. [5]

Part of this bias on behalf of lawyers is that lawyers are concerned that they will be held at fault if the relationship deteriorates. Lawyers can and should do better — focusing on more simple contracts and focusing on contracts that can be undone quickly. Lawyers can also let relationships develop a little more without dire warnings of the devastating consequences of not having a thorough (and consequently expensive) contractual document.

Essentially, however, business people need to be the driver of contracting. They need to understand it; they need to understand when to do it; they need to understand clearly the obligations put on both themselves and the other party and be able to clearly articulate why it is so.

In Summary:

• Be aware of people’s motives. Have a presumption of capitalism and make sure that someone’s end goal is something that can be accomplished.
• Document those expectations in a written format.
• Apply the appropriate (no more, no less) formality to documenting the relationship.

Mike Goodrich
Goodrich Law Firm, LLC

Ami Kassar, the founder of MultiFunding, LLC found that, “bigger banks shed $93 billion of small business loans during this period, while the smaller banks increased their small business loan balances by $17 billion.” Kassar feels that despite these findings, big banks use marketing tactics as a ploy to appear that they are giving more money to small businesses. He says that the 73% of small businesses that do not apply for big bank loans refrain from doing so because they assume they will get rejected.

On the other side of the debate, Marc Bernstein, the executive vice president at Wells Fargo, feels that his bank in particular is especially helpful for start-ups and small businesses. He argues that big banks such as Wells Fargo have been adding more careful consideration to their loan process to ensure that they are not supplementing extra burdens by adding more debt to companies experiencing little profit. Bernstein also attributes the current economy to the lag in loans; however, he feels confident that Wells Fargo, among other banks, is working to expand its small business support. “[D]uring these difficult times, more so than ever, Wells Fargo and many other banks are trying to stretch in whatever ways we prudently can to put credit into the hands of small business owners,” he says, confirming the widely-held belief that big banks must play a hand in restoring the current economy.

Both sides of the debate acknowledge that there is a credit crunch due to the recession, but also encourage entrepreneurs and small business owners to keep the faith.

As for those entrepreneurs and small business owners, the lesson appears to be that if at first you don’t succeed in procuring a loan with a big bank, try a smaller bank to secure your capital needs.

1. Keep it realistic and authentic. Overestimating your potential success (i.e. making a billion dollars in the first year) will not convince potential investors that your idea has validity.

2. Don’t oversell your strongest point because it will undoubtedly get old. Make sure you have other points that complement the appeal of your pitch to form a well-rounded sales pitch.

3. Stick to the facts. Any sign of outrageous claims will instantly make investors wary of your pitch.

4. Answer questions directly and efficiently. Don’t convolute your answers with unnecessary stats or details when your audience will more often than not want a concise answer.

5. Don’t drone on. Efficiency is more effective than flowery language or unnecessary details.

While most entrepreneurs focus on the presentation of their pitch, like giving a sturdy handshake and maintaining excellent eye contact, the content of your pitch will be the greatest asset to your success.

Some employees are fighting back against this perceived invasion of privacy by citing the 1935 National Labor Relations Act. The Act contains a provision stipulating the right for employees to complain about their employers. However, the nature of these complaints is still open to debate.

According to the Wall Street Journal, “the law gives private-sector employees certain rights to complain about pay, safety, and other working conditions. It doesn’t protect simple griping.”

While this law has been used successfully in some cases, the boundaries are murky for employees trying to make their case.  Most of this is due to the fact that there have been a small number of these cases – this is a relatively new phenomenon for this 80-year-old law.

One successful case of the law’s protections involved Dawnmarie Souza who was fired after calling her employer a “scumbag” on Facebook. According to the Wall Street Journal, “She was unhappy the supervisor had questioned her about a customer complaint, according to the NLRB’s investigation. The NLRB’s complaint on Ms. Souza’s behalf—the agency’s first ever involving a firing related to social media—came after NLRB lawyers in Washington concluded the firing was illegal because the postings were made during an online discussion among employees about supervisory action, which is considered ‘protected concerted activity’ under the law.”

Souza’s case marks how employers should increase their awareness of such social media rules.  While some of these provisions could be potentially harmful for employers, the Act itself and its interpretations are so broadly defined that in many cases, employees’ actions do not fall under the Act’s protections.Here are some of the provisions that have been made clear in interpreting the National Labor Relations Act:

1. Workers are free to discuss with each other pay and working conditions on social networking sites, but it must be a group activity in order to be protected.

2. Complaints made in the context of an individual’s posting are not protected.  These types of remarks must be made in a group setting in order for the law’s protection to apply.

3. Verbal threats against employers or employees are never protected by the Act.

4. Name-calling is allowed but is judged by the Act on its severity, so this is up to interpretation. For employers, establishing a social media policy can be the first step towards avoiding problems that arise from Facebook and Twitter comments.

Brice Johnston
Johnston Firm, P.C.

Photo by Bizior.

CARD cracks down on questionable credit practices by small businesses, but it also creates easier credit opportunities for small businesses.  One of its main provisions allows small businesses to use both personal and business credit cards as they run their companies. This is important because small businesses tend to use credit to finance their ventures.

The primary benefit of CARD is that small businesses do not have to use credit cards solely branded as “business credit cards.” This means small businesses can benefit from the better credit card options given to individuals. Under CARD’s stipulations, credit cards branded as “business credit cards” are not protected by the act, which will undoubtedly propel the use of personal credit cards by business owners.

According to the Washington Post, “Prior to the passage of the CARD Act, small business owners were resigned to debt instability primarily because it was inevitable regardless of the type of card used. Now, the most savvy small business owners use personal credit cards to avoid unwarranted interest rate increases on company debt and business credit cards for expense tracking and rewards purposes.”

The rules of the CARD Act are useful tactics for smarter small business spending. Here is an overview of the delinquency structure under the CARD act:

1.  A credit card company must notify a small business 45 days before they anticipate a rate increase.

2.  A small business can cancel their card and pay the original credit card rate.

3.  Promotional rates must last at least six months, so credit card companies cannot surprise a user with a sudden increase in rates after a promotional introduction.

4.  Payments are applied to those cards with the highest interest rates.

5.  Credit card companies cannot raise rates on any existing balances, only new charges.

6.  Companies must review your account statements, the goal of which is to reduce one’s rates.

7.  Any additional rates, fees, or penalties must be deemed “reasonable” by the Federal Reserve

There are certain valuable protections the CARD act provides for small businesses, such as allowing business owners to record company spending and create individualized credit limits for employees. There are also more lenient provisions given to late payments.

According to the CARD act, the time period to make a missed payment is extended for small businesses, regardless of the type of card used, which maximizes benefits for small businesses.  The act also provides several lenient and loose provisions that make it easier for small businesses to avoid high interest rates or other penalties that were debt-inducing problems for small businesses in the past.

Small businesses often need outside capital to succeed. However, all types of fundraising for private companies are government regulated. Since start-ups are often dependent on outside investors, they must keep Securities and Exchange Commission (SEC) regulations in mind.

The most important SEC measure, known as Regulation D, defines how companies can go about raising needed capital. Rules 504, 505 and 506 are particularly important to the regulation. By qualifying under these exemptions, companies can receive investments and be exempt from federal securities law.

However, Reg D has certain disclosure requirements. If a company files under rules 504 or 505, it has certain disclosure requirements. Additionally, the investment is still subject to state regulation, also known as state blue sky laws, which regulate the securities of companies on a state-by-state basis. A company is subject to regulation in each state in which an investment takes place.  This state-by-state regulation creates significant compliance cost and is problematic in terms of gaining capital in a timely matter or not being able to meet the investment requirements of multiple states.

Rule 506 is perhaps the most relaxed regulation, as it states that only certain “accredited investors,” investors with significant funds and capital of a certain amount, can contribute freely to an enterprise. Additionally, under the National Market Securities Improvement Act of 1996 securities issued pursuant to a Rule 506 exemption are exempt from state regulation. Because of this preemption, Rule 506 is heavily used by accredited investors:

“Rule 506 imposes no disclosure in connection with sales to accredited investors. The purchaser qualification requirements of the rule are met if purchasers are accredited investors, and there is no limit on the number of accredit investors under 506.

“These are the reasons that roughly 80 percent of all offerings in the size range that would qualify under 504 or 505 are made under Rule 506 limited to accredited investors.  Issuers rationally conclude that an offering under Rule 506 limited to accredited investors involved lower transaction cost than offerings under Rule 504 or Rule 505, which are required to meet the registration provisions under each state’s blue sky law.”

p. 933, The Business Lawyer, The Wreck of Regulation D: The Unintended (and Bad) Outcomes for the SEC’s Crown Jewel Exemptions by Rutherford B. Campbell, Jr.

Thus, except for investments by accredited investors in Rule 506 offerings, Regulation D is problematic for small businesses. In an economy where smaller start-up companies make up a significant portion of the workforce, more coordination needs to be in place between state and federal exemptions in order to accommodate those investors who help the bulk of start-ups with smaller contributions, as many start-ups do not receive their capital from wealthy individuals.

There does seem to be some movement in this area. In addition to the above-cited articles, a decision by the House Financial Services committee backing legislation that would allow crowd funding may do away with many Regulation D woes. (Crowd funding is an easy option for entrepreneurs to raise funds. Backers receive a portion of a company in exchange for their investment.)

According to the Wall Street Journal, “Under the proposal, investors would be able to buy stakes of up to $10,000 a year, or 10% of their annual income, whichever is less. Companies would be able to sell up to $2 million in equity—but must provide audited financial statements if the total exceeds $1 million.” The proposal would enable the transfer of smaller amounts of capital that are more realistic gains for start-ups.

While opponents of this bill feel that fraud is more likely through crowd funding, many entrepreneurs feel that easier access to crowd funding offers them a greater chance to succeed in business. Indeed, those in favor of stringent state regulation of capital fundraising argue that it is a huge help in dispelling fraud. The Alabama Securities Commission has thwarted countless fraud without issues of securities.

At this stage, I have not formed an educated opinion on the legislation.  With a Congress that appears unlikely to pass anything, I reserve the right to wait until actual passage. However, when balancing investor protection with ease of capital markets for small business formation, I would urge lawmakers and administrators to take into consideration the following:

1) Are we really protecting investors if the regulation designed to protect small investors effectively precludes the investment? While some credence should be given to the securities motto that allows rich people to lose money, non-millionaires can provide crucial capital. Whether it is through crowd sourcing or through friends and family activities, I believe, with respect to small businesses, people can best judge for themselves the type of business they can investment in.

2) The general solicitation ban needs to be brought into the 21st century. A distinction should be made between active solicitation – i.e. the boiler room calls and passive solicitation. If an investor, through social media, website search reaches out to a company to invest, he or she should be afforded less protection. A company should be allowed to post on Facebook or on their website that they are offering stock. This investment solicitation is fundamentally different then a cold call, and the law needs to recognize this difference.

Mike Goodrich
Goodrich Law Firm, LLC