Posts Tagged Business Law
Article 9 of the Iowa UCC (Iowa Code Section 554.9101 et seq.) governs the purchase and sale of goods and related secured interests. This blog will deal with protecting a business during an initial transaction. My next blog will deal with placing the public on notice of a security interest.
Bill’s Bakery Supplies is an equipment wholesaler.
Joe Smith is CEO (and sole employee) of Smith’s Confectionary Inc.
Smith purchases equipment from Bill’s. If Smith cannot pay, how can Bill’s recoup the unpaid balance?
Often, security agreements arise where an item is sold on account (six months same as cash) or a loan is received for the purchase of an item (bank loan for a car), and the purchaser is allowed to pay off the balance over a period of time. A seller may want to retain certain rights to the goods until paid in full.
Smith pays 10 percent of the total price, signs the purchase agreement, and takes the equipment. Bill’s Bakery Supplies may be entitled to full payment on the account, but has it retained a security interest in the goods?
Likely no. In Iowa, an agreement to sell goods alone is not enough for a security interest to attach to the goods. Iowa Code Section 554.9203 provides that for a valid security agreement there must be:
(1) value given;
(2) a right in the collateral that the debtor can transfer to the secured party; and
(3) a signed security agreement with a description of the collateral or the collateral in possession of the secured party.
This means Bill’s no longer has an interest in the goods sold and, essentially, has an unsecured open account.
If your business wishes to keep a secured interest after sale, create an agreement that:
(1) specifies that a security interest is held by the seller;
(2) is signed by the purchaser; and
(3) includes a detailed description of the goods (e.g. serial number, make, and model).
 (Author’s Note: The UCC refers to a security agreement in this situation as a Purchase Money Security Interest, where the entity which gave the funds to the person to procure the good/s has a security interest in the goods as collateral.)
In case you haven’t heard, YouTube won its case against Viacom, who sued for copyright infringement based on thousands of Viacom videos that were uploaded to YouTube.
Now that YouTube escaped liability for piracy, you may post ANYTHING you like on your website, right?
To put the answer in legal terms: no, no, No, NO.
The 1000-pound gorilla just defeated the 800-pound gorilla. (800-pound gorilla has vowed to appeal.)
Before drastically changing the content policy for your website, consult your Intellectual Property attorney. Copyright law is old but evolving. At this point it may be better to stay the course and heed trusted advice for your online business.
Now may be the wrong time to mess with the 800-pound gorilla who is looking for the fight it can win.
Waivers are everywhere: the back of concert tickets, Web sites, sales agreements. As a business consumer, you may wish to make sure
that you are willing to give up the stated rights. As a business owner, ask:
- From what are your protecting yourself?
- Is this a real danger?
- What is your goal?
- Do you run a PR risk by warning your clients that your product “may cause death” (especially if you sell coffee tables)?
This post addresses personal injury waivers: the kind you sign at batting cages and skating rinks.
My next post will address the types of waivers that are part of sales agreements and are found within websites for products..
The post that follows that will address Indemnification Agreements.
First, the easiest way to avoid lawsuits and judgments for personal injury is to be prudent in taking care of your business. Common sense safety is more cost effective than waivers.
- Encourage employee common sense through a wellness program.
- Talk with your insurer about risk analysis and risk reduction.
The Iowa Supreme Court addresses waivers in a number of cases:
Personal injury waivers must “be specific enough to identify all possible causes of injury so that a reasonable person is on notice.” A waiver that simply agrees that one party is not responsible for any injuries is not specific enough to waive all claims related to acts by that party1.
A waiver must be “voluntary“, ”intentional” and “knowing”. The waiver must intentionally relinquishment a known right.”2 The court uses the standard of a reasonable person to determine whether a party had notice of the provisions in question and may be bound by terms within a contract/agreement.3
The parties must be clearly identified to be considered released parties.4
Once the release is clear in its intent, parties may be bound. Even if you (or your client) does not read the release, a party who is able to read and has the opportunity to do so must suffer the consequences of failing to do so.5
The more dangerous your business, the more likely you can set out the risk and put them in the hands of a person who assumes the risk. For example,“Hang gliding is associated with injuries and death.” If you run a shoe-shine stand, it is more difficult to set out the risks and pass them on to a client. (Then again, hopefully the shoe-shine isn’t dangerous.) From a client perspective, you may have clients who wonder why they must sign a waiver that states that “death is a possible consequence” of their shoe shine. If you are leading rock-climbing expedition, the client likely expects a waiver.
A well drafted waiver will:
- specifically set out the parties involved,
- address the type of danger,
- specifically waive the damages, if any,
- show that the waiver is voluntary, and
- provide clear language.
We will see how the Iowa Supreme Court handles the inevitable case about “throw in the kitchen sink waivers” written in three-point font. For amusement or consideration, the waiver below from an actual ticket. I used a magnifying glass to read it. Apparently a kids’ concert needed the following waiver:
“warning! Despite enhanced spectator shielding measures, pucks still may fly into the spectator area, serious injury can occur, stay alert at all times including during warm up and after play stops. If struck, immediately ask usher for directions to medical station. Holder voluntarily assumes all risks and danger incidental to the event for which the ticket is issue, whether occurring prior to, during or after the event, including, but not limited to, danger of being injured by thrown, batted, kicked, shot, struck, etc. objects such as balls bats hockey sticks pucks racquets and other objects or equipment or by other spectators or players or by entering a mosh pit. Holder voluntarily agrees that the management, facility, league, participants, participating clubs, Ticketmaster, and all of their respective agents, officers, directors, owners, and employees are expressly released by holder from any claims arising from such causes”
- Christine Branstad
1. Sweeney v. City of Bettendorf, 762 N.W.2d 873, (Iowa 2009)
2. Benton v. Slater, 605 N.W.2d 3, (Iowa, 2000)
3. Joseph L. Wilmotte & Co. v. Rosenman Bros. 258 N.W.2d 317, (Iowa 1977)
4. Huber v. Hovey, 501 N.W.2d 53, (Iowa 1993) (plaintiff injured by fireworks misfiring into pit area of race track); Grabill v. Adams County Fair and Racing Association, 666 N.W.2d 592,( Iowa 2003) (plaintiff injured by detached wheel of race car flung into pit area of race track).
5. Forrester v. Aspen Athletic Clubs LLC, 766 N.W.2d 648, (Iowa App. 2009).
My previous post reviewed non-competition agreements to keep employees from walking away with the kitchen sink – trade secrets, client lists and knowhow. This post focuses on Non-Solicitation Agreements, a more narrow method of keeping other companies from luring employees or clients away. The next post will address non-disclosure agreements.
In the second year of your burgeoning IT business, you have 5 employees. You land a project that requires a temporary workforce of 10 employees. A staffing company offers to provide workers, but a clause in the contract prohibits you from soliciting any of the temporary staff for 2 years. Should you sign?
In its third year, your company competes for a project requiring onsite work. You plan to embed your team, but are concerned that you risk losing the contract if you muddy negotiations with a requirement that the client not solicit your employees. How do you address the issue?
A non-solicitation clause is a normative approach to both situations. Non-solicitation clauses are a common method for setting boundaries with staffing companies, consultants, and trainers.
A non-solicitation agreement with another company may prohibit luring employees. The strictest agreements prohibit all contact, which has led to litigation about whether purely social interaction violates the clause. Additionally, employees may be prohibited from hiring other employees away.
Other non-solicitation agreements prohibit luring away customers. Companies have agreed that, as employees move between companies, each will not solicit the clients previously serviced by the employee for the other company. In the alternative, the non-solicitation agreements may be directly between employer and employee (often in lieu of a non-competition agreement). Those agreements may be narrow (e.g. employee may not solicit clients for whom employee was account manager) or broad (e.g. employee may not solicit any client on company’s client list). The more broad the provision, the more likely it will be scrutinized by the court.
Agreements to limit competition, disclosure or solicitation are, by their nature, restrictions on trade. Iowa courts have long held that any restraint of trade is strictly construed against the one seeking to restrain another from pursuing employment or business pursuits. As one example, Iowa Courts specifically distinguished “selling” and “solicitation” based on who initiated the transaction.
As you consider non-solicitations agreements, consider:
- Is non solicitation good for your business?
- Is it good for the industry in general?
- What time limit should apply?
- What geographic limit should apply?
- Is the agreement limited to a certain type of client?
- Is it limited to a certain type of employee?
- Will it affect your ability to recruit and retain employees?
- Is it fair?
Non-Disclosure Agreements (also called NDAs, Confidentiality Agreements or Secrecy Agreements) have broad use in business.
The “form” NDA is a business myth. Each is designed for a purpose; the provision to protect a trade secret in a severance agreement bears little resemblance to one used when exploring a joint venture. An intellectual property attorney protecting your patent-pending machine in “pitches” to manufacturers uses a significantly different NDA than an employment law attorney protecting your client list from “walking away” with current employees.
All non-disclosure agreements should be:
- Realistic: Protecting information should not involve parties agreeing to lock themselves in windowless rooms while dealing with each other. If you are dealing with an unscrupulous person with no assets, an NDA may not protect you.
- Tailored enough. If collaborating, do you expect the other party to disclose information to contractors or employees?
- Broad enough. If you provide a plant tour, is information discovered in the plant tour protected?
- Specific enough. If one party drops out, may the other use information obtained? Is there a specific penalty for disclosure? Is there a penalty for accidental disclosure (e-mail intercepted by hacker, cleaning service theft, et cetera)? Does the NDA adhere to the laws of the state where it is written and to the laws of states where each party does business?
The Iowa Supreme Court sets out a test to determine whether a “nondisclosure-confidential agreement” is enforceable. The courts look at whether the restriction is: “(1) reasonably necessary for the protection of the employer’s business; (2) unreasonably restrictive of the employee’s rights; and (3) prejudicial to the public interest.”
Among ethical business partners, an NDA will set boundaries of conduct and mutual expectations. A well-worded agreement may save future headaches.
But even the best NDA will not make an unethical employee act ethically. In the event of unethical behavior, a properly drafted NDA may be a corporate lifesaver.
Even though the economy has stabilized, American Recovery and Reinvestment Act (stimulus) money continues to flow into expanding and start up businesses. Now is the time to protect your fledgling business from competitors who will not hesitate to take your innovations, ideas and employees with impunity or to sue you for taking theirs. Common rationalizations are based on the perception that because the business is not “first in the field” or “big enough,” finances don’t justify a trademark, patent, Web site protection or a non-competition agreement. Think about the social media networks that came before Twitter and Facebook. Think about the auction sites before eBay, the search engines before Google. You remember these later companies and not their predecessors because these later companies protected themselves from the outset. (I cannot name the earlier companies because I don’t know their names.)
This post concentrates on the threat from within. Trade secrets may be taken by a thief in the night, by a hacker, or by an employee who walks across the [virtual] street with your processes, client lists, templates (and even other employees). If you wait too long, you risk losing everything. The person stealing your company out from under you need not be a stranger. It may be an executive employee or partner. As emphasized in an earlier post, putting your relationship into a written contract is a sign of trust, not mistrust. Your business is more than a lark – it has its own identity. Take selfless steps to protect that distinction. Stand behind your commitments and clearly define your expectations. Writing is friendly. Writing drastically reduces the likelihood of fisticuffs down the road.
A non-compete agreement may provide everyone with assurance as to expectations and may address a wide range of issues including:
- For whom a current employee/partner may work in the future.
- The time limit for that restriction.
- The penalty for breaking the agreement.
- Trade secrets that are protected under the agreement.
- Which state’s law applies to a dispute. 
- The type of work for which the non-compete applies.
- The type of industry to which the non-compete applies.
- Distance from original business within which the non-compete applies.
An unfair or ill-conceived non-compete agreement may be modified or ignored by the court. Therefore, your agreement should not contain:
- Restrictions that last until the employee is greeting customers at Wal-Mart. Many states strike provisions which are unreasonable in duration.
- Restrictions which prevent the employee from ever touching a computer again. Restrictions need a reasonable underlying justification to be enforceable.
- Provisions that restrict the employee from ever competing anywhere but Latvia. Geographic restrictions in the agreement must be reasonable.
For employers, my next blog post will explore two additional possible provisions: 1. A non-solicitation agreement with other companies to inhibit the ability to lure away employees. 2. A non-disclosure agreement to provide protection from the leak of proprietary information that an employee may release to a third party without leaving your employment.
The door swings both ways. If you hire employees with prior industry experience, inquire about the existence of a non-compete or nondisclosure agreement. In some circumstances these may impose liability on an employer. Often the best workers already know the business and enhance your business with their knowledge. Ask yourself, how did they get to be so good?
Finally, if you already hired your employees before you read this article, offer them something extra for signing the non-compete agreement. Some courts do not recognize non-compete agreements if there is no additional “consideration” offered to the employee to sign a non-compete after employment has begun.
 In California, non-compete clauses are not enforceable based on the premise that non-competes prevent the movement of talent from company to company; such movement promotes a healthy business environment.
In the 1980s, bad guys stole Mercedes Benz hood ornaments. Today’s enterprising criminals steal identities. Identities are stolen from homes, from trash cans, from purses and from glances over shoulders.
And, unfortunately, often from businesses. There are many ways individuals protect themselves from identity theft Unfortunately, many businesses are not so conscientious. When clients and customers hand over birthdates, social security numbers, addresses and credit card numbers to businesses, they trust the business to protect their identity.
Every business must have a method to secure and protect paper and electronic information . . . from the instant the information enters the business through final disposition.
Customers expect identity protection.
Failure to implement an information security plan may cost your business: clients, revenue, and time. One breach and clients will avoid your business as if there was police tape across your front door. In most cases, if identity is stolen from your business, you are not only liable for the ensuing damages, you are also required to assist in the investigation including: finding and providing applications and business transaction records or account records.
Penalties for those who fail to protect identity vary by state. The Texas Attorney General initiated suits against businesses for failure to protect identity of customers. (One suit settled for $220,000.00 against a business that disposed of sensitive information in dumpsters). The law upon which one of the Texas suits is based mirrors an Iowa law.
Implementing a security plan involves several steps:
1) Review your document retention plan to decide what you need to have.
2) Review your electronic documents to determine what you have. Don’t start deleting until you have a plan. Have you checked online storage? flash drives? Employees’ home computers?
3) Review your paper documents to determine what you have. (Stop, no shredding until you have a plan.)
4) Review specific agency requirements for your business.
5) Review specific privacy requirements for your business.
6) Determine where/how to store your electronic documents.
7) Determine where/how to dispose of electronic documents.
8) Determine where/how to store your paper documents.
9) Determine where/how to dispose of paper documents.
10) Review how you receive electronic documents. Is your website secure?
11) Review how you receive paper documents. Most identity thefts take place before the information is recorded.
12) Write down your plan and go over it. Set timelines and reminders.
None of this matters if your storage is not secure. Physical storage is easier: lock it, hide it and treat every document like cash (it may be). Electronic storage is becoming increasingly complex. Network security experts (and expert criminals) are everywhere. As a business owner, you must understand Internet Law. You must know terms like firewall, encryption, breach detection and offsite back up. You must also have a plan to update your security regularly. State-of-the-art security from five years ago is now as easy to breach as your grandparent’s old screen door.
The Federal Trade Commission has a detailed but usable 15 page guide for businesses to protect client information. You would not leave your cash on the counter. You wouldn’t post your own social security card on the front window. Don’t leave your clients’ identification or money exposed either.
My posts deal with avoiding litigation. My last post addressed the benefit of putting business dealings in writing. Once you put something in writing, the next logical determination is how long to save that document.
Prior to going Enron on your corporate records, take a look at the IRS’s Starting a Business and Keeping Records. The Record-keeping section addresses records for taxes. To address concern about potential lawsuits, work with your attorney to design a record retention plan. Be sure the plan covers paper records and electronic data. Once you have a record retention (and destruction) plan, integrate that plan into your business processes.
What if you don’t follow the plan?
Under Iowa law [Iowa Civil Jury Instructions contain a model instruction] if a jury concludes you intentionally destroyed or failed to produce evidence, it can assume that evidence would have been unfavorable to you. The jury may see the missing evidence as the :”smoking gun.” A saved receipt may nail your case down; a prematurely destroyed receipt may become a nail in the coffin. Well kept records may be more productive than winning lawsuits; they may convince opposing parties not to sue you in the first place.
How do you devise and regularly apply a sound plan to avoid problems?
In Iowa, most oral contracts have a five-year statute of limitations [section 614.1] to enforce a contract (or to be sued for a breach). Depending on your business, you may wish to retain supporting documents for five years after the contract ends.
In Iowa, most written contracts have a 10-year statute of limitations [section 614.1]. Does your record retention plan keep the contract for 10 years after performance of the contract ends? How long do you keep record of payments made or received? Should you keep emails about the contract?
Under Iowa law, as a designer, manufacturer, distributor or seller of a product, can you be sued 10 or 20 years after production and multiple re-sales if the product causes damage? What are the time limits or Statutes of Repose [614.1(2A)] for such claims? What if your product is a Web-based application? How long must you keep the records of product testing? Of use? Was your product sold with warnings or safety devices, or for a Web-based application, was a warning included with installation or initialization? Do you have records that show your product was altered?
Although the questions are complex, setting consistent policy will make later involvement in litigation less likely or, at least, less painful.
Record retention is important. Failure can subject you to legal presumptions that could end your business. Find out the factors that affect your particular business. Implement a record retention and destruction policy. Put it in writing. Stick to it.
Or wait until you have a problem. Then come see me.