Business Law & Civil Litigation

“Business law and civil litigation” is a very broad category of legal services, including business formation and transactions, employment matters, litigation, mergers and acquisitions, and bankruptcy.

This section focuses on some common legal issues related to business law.

Business Formation

I am starting a new business with a couple of other investors. We want a partnership or some other kind of agreement that gives us an ownership interest in the new company but limits our liability exposure. In addition, we will need office space and will need to hire an administrative assistant. What should we do?

The choice of entity (c-corp, s-corp, LLC, LLP, partnership, etc) depends on various issues and tax considerations. In general, you and the other investors can enjoy limited liability by forming a corporation, limited liability company or limited liability partnership. However, there are advantages and disadvantages to all three which need to be considered. Both a lawyer and an accountant should be consulted. A lawyer could also assist in negotiating a commercial lease and walk you through the legal issues surrounding the hiring of employees, such as compliance with immigration and discrimination laws as well as protecting the company’s trade secrets and proprietary information.

We are trying to determine which entity works best for our new business. The total number of initial investors for our business is less than ten. Is there a particular entity that could be a cost effective and advantageous way for us to get started?

Although one should consider various alternatives, formation of a limited liability company is a potentially attractive option. The two basic kinds of formation documents a firm such as ours would assist to help form your business are called Articles of Formation and an Operating Agreement. The Articles set forth certain kinds of information describing the type of business and its initial business address and registered agent, and is filed with the appropriate local state agency. The Operating Agreement is a type of document that is somewhat of a hybrid mix of a contract and Bylaws, which sets forth the internal operative mechanisms and relative equity interests of the company among various other factors. It is important that both documents are carefully completed.

I’ve heard about S-Corporations. Is there a significant difference between that type of entity and a limited liability company?

There are similarities, such as pass-through tax treatment of revenue, but there are important differences as well. For example, the law contains certain restrictions for the operation of an S-Corporation while other operative aspects of a limited liability company may be more flexible. For example, setting up a limited liability company is typically less expensive. Also, many states’ Limited Liability Company Act contains no residency restriction on equity holder, while there may be restrictions on accepting foreign nationals as shareholders of an S-Corporation. Thus, if one of your co-owners is a Canadian citizen, you may wish to consider forming a limited liability company.

Our emerging business plans on hiring a few sales people to help market our software product, which involves unique source code. When forming our new business, how do we protect our sales leads and intellectual property, or should we wait on spending money for that issue?

Some companies set up their business with the approach that contractual protections for employment or intellectual property issues can wait. Such an approach is not prudent. There are immediate and cost effective ways of protecting the important assets of the company. For a limited liability company, the Operating Agreement may contain a non-competition clause. Ideally, the company should consider implementing an employment contract that restricts distribution of data and solicitation of customers.

I like the idea of starting as a limited liability company, but have long term plans to raise venture capital down the road. I’ve heard venture capital firms feel more comfortable doing business with C-Corporations. If I start as one kind of entity, are we stuck with that, or can it be changed later?

Ordinarily, the company can file Articles of Amendment to shift the type of business entity being used. In doing so, however, it would have to consult with counsel to ensure compliance with the legal requirements of the new type of entity and confirm the resultant tax treatment involved.

Business Transactions

I am considering acquiring someone’s business for an agreed payment amount. He says that we can use one lawyer to save money and close on the deal. Is such an approach safe, and what considerations factor into buying an operating business?

While it may be an enticing idea to fold an entire business acquisition into one simple document with one attorney, such an approach is not appropriate. The seller’s counsel cannot validly represent the buyer in the same deal since that would constitute a conflict of interest. From a practical standpoint, a buyer should perform a “due diligence” review process of the business before purchasing to assess, for example, what kinds of potential liabilities he or she is about to buy. Such factors in turn may have a significant impact on the price one is willing to pay for the business.

When considering a purchase of a business, what kinds of items should I be wary of while proceeding down the path of negotiating with the other person? Is there a possible danger in discussing a purchase without legal documents in place?

One possible stumbling block involves the question of whether a person has legally bound himself to actually purchase the business as negotiations are proceeding. A prudent course may call for a Letter of Intent, sometimes referred to as a Memorandum of Understanding. In such a document, the basic contours of the potential deal would be outlined to assure everyone is literally on the same page. Critically, such a document should make clear from the buyer’s perspective that satisfactory completion of a “due diligence” review is a condition precedent to one’s obligation to close any binding deal.

I am purchasing a business that has several offices located in the Washington metropolitan area, but my main current business location is Rockville, Maryland. The owner of the business I am negotiating with is retired and currently lives in Florida. What can I do to prevent a situation where later possible disputes could be dragged into courts located in other states, which would greatly increase my worries and future legal bills?

 One would be wise to consider such an issue when considering whether to buy or sell a business. When preparing transactional documents counsel ordinarily includes a provision called a “forum selection clause.” Simply put, a Maryland purchaser does not want to be dragged down to Florida to litigate a dispute when the business is located regionally. A clause making the location of dispute resolution clear can easily avert this problem.

I am selling a business to an individual, who told me the other day that our deal should include a provision that if there is a dispute regarding the transaction we’d agree to binding arbitration. Is that a good idea?

There are pros and cons to arbitration. Arbitration sometimes has the reputation of supposedly being faster and cheaper, but that is not always the case. Arbitration is a less formalized process with loose evidentiary rules, and your case can be adjudicated by one person, the arbitrator, who may not understand your business and could reach the wrong result. Even worse, the person who loses arbitration has no distinct right of appeal, so you may be stuck with a result that is incorrect. In contrast, the traditional state and federal court system has clearer evidentiary rules and permits appeals to correct reversible error. In some state and federal courts, like many in Virginia, the courts can be faster and more cost effective than arbitration.

Our company wants to acquire another business. Will doing so make our company be liable for the debts and liabilities that business?

It depends on the nature of the acquisition transaction. In general, if a company purchases the assets of another company, it will not be liable for the debts or liabilities of that business. However, there are exceptions to this rule. In Virginia, a company may be liable if it expressly or impliedly assumed such responsibilities, if the circumstances of the transaction qualifies as a de facto merger of the two companies, if the purchasing company is a mere continuation of the other company, or if the transaction was fraudulent. It is extremely important to have the advice and counsel of an attorney in the acquisition process to avoid such pit-falls.

Employment Matters

If our company begins using employment contracts, does it mean that we can never fire employees for poor performance, or for some other reason?

In the absence of any contract, most states recognize an “employment at will.” This means that the company can terminate an employee for almost any reason. Understandably, many senior employees demand a written contract to give them some security. When a company uses a written contract, the terms of the contract will govern. Therefore, companies need a carefully written employment agreement that provides it with protection, but still allows it to terminate an unwanted employee. In general, companies should include a provision setting forth that the employment relationship is at-will, which will allow you or the employee to terminate the employment relationship, at any time, for any reason, so long as there is no violation of applicable federal or state law. In the event that the company wishes to provide the employee with some assurance of continued employment greater than an at-will relationship, such as with an executive or high level manager, the employment agreement should still contain a list of conduct which would allow the company to terminate the employment relationship.

Does our company have a claim if an employee leaves our company, and we discovery that while he worked for us he was starting a competing business?

There may be several bases for a claim, one of which may be derived from a non-compete agreement signed by the employee. However, even with a non-compete agreement in place, an attorney’s review is usually necessary to determine whether the agreement will likely be enforceable in court. If the former employee did not sign a non-compete agreement, the company may still have a claim against the employee if he used company time to start his competing business in breach of his fiduciary duty of loyalty. Again, consultation with competent legal counsel is crucial should your company encounter this problem.

What if an employee leaves our company and takes some of our proprietary information with him when he leaves. How do we protect our business?

There are a variety of factors that must be considered when protecting your business from a misappropriation of a trade secret or proprietary information. The proactive approach is to have your employees sign trade secret and nondisclosure agreements. Even with this, your legal representative will need to move quickly to protect unauthorized use of such information, and it may be necessary to immediately file an action in court to prevent the use of such information. However, prior to taking these actions, it is best to conduct a thorough, but expeditious, investigation into how the material was obtained by the employee, what specifically was taken and how it is being used to the company’s detriment.

I recently resigned from my job, and now I want to start a business that is similar to that of my former company. Can I start such a business? Can I solicit the clients that I worked with at my former company?

The answers to these questions depend upon what agreements you signed with your former company. Many times an employee will not recall that they signed a non-compete or other restrictive agreement with their former employer. This puts their status in doubt with respect to starting a new, competing business, or signing on with a competitor. This also puts a competitor business who wants to hire the employee in a difficult position, because they do not know if that employee is bound by an agreement that will prohibit them from competing with the employee’s former company or from soliciting the former company’s clients.

One of our managers recently left our company to start his own business. While working for our company, the manager was in charge of a large account. When his contact on the account asked why he was leaving, the manager bad-mouthed our company, and we have since lost the account. That account was worth 40% of our business. Can our company sue for the lost revenue?

It appears that your employee may have breached his duty of loyalty to the company during his employment. The general legal concept is that employees must prefer the interests of their current employer to their own. While they are employed with your company they are not allowed to solicit future business or interfere with your business relationships. Therefore, your company may be able to sue the former employee for the lost revenue for this breach.

Business Law and Civil Litigation

Our company had a contract with another company to deliver a product. We delivered the product, but they refuse to pay because they say the product did not meet the specifications of the contract. We strongly disagree and want to sue for the money owed to us, but the other company is located in California. How can we enforce our rights?

First, you should look to the contract to determine whether there is a provision that governs where either party can bring a claim in case of a dispute arising out of the contract. In the absence of such a provision, you should assess whether the California company had sufficient contacts with your state which would allow you to sue them locally to collect your money, and avoid the extra costs and hurdles of out of state litigation.

My business partner and I each hold a 50% ownership interest in our company. We have been having a number of disagreements over the future direction of the company, and he is threatening to sue me if I do not give in to his demands. Is this something the courts will get involved with?

As any business owner can attest, disagreements between business partners are quite common in the business world. Unfortunately, many business partners do not take adequate steps at the formation of the relationship to plan for resolving these inevitable disputes. As a result, partners are often forced to turn to the courts to resolve their problems. One way to avoid the likelihood of litigation is for business partners to have an ownership agreement that all the owners sign setting forth how the company will be run and how disputes will be handled and resolved. For corporations, this is usually called a Shareholders Agreement, while for limited liability companies it is an Operating Agreement. But no matter the name, the purpose is the same and they are critical for every company to have in place. Without these in place, litigation can sometimes be the only other means of redress.

My company orally contracted with a construction company to build out a gym in a leased space. The contractor failed to complete all the work, and some of it didn’t even pass inspection. We had to delay opening for several months to fix everything. I’ve learned that he didn’t have a contractor’s license and that other people have had similar problems with his company. Can I sue them? If so, would we be able to recover all the money we’ve paid him, our rental expenses, the lost profits, and attorneys’ fees?

The courts are filled with these construction type lawsuits. In most instances, these disputes are governed by the contract terms agreed to by the parties. In certain cases, you may be able to bring a claim of fraud, but the courts are generally inclined to view these in terms of contract. The big mistake in this case was not to have a written contract in place so there could be no dispute between the parties as to precisely what was agreed upon. As far as potential damages, it may be possible to recover rental expenses and lost profits if you can show they were directly caused by the other side’s conduct and were reasonably foreseeable at the time the parties contracted for the job. As far as recovery of attorney’s fees, this will depend on whether such recovery was agreed to specifically in the contract.

I own an IT company and all employees have to sign an employment agreement containing a non-compete. One of our top selling employees recently resigned to start up a competing business. He’s calling all of our clients and bad-mouthing the quality of our work. My company’s profits are down this quarter and I think this is why. Can I sue him and recover the lost profits?

You can absolutely sue him, and this is precisely the scenario that should compel every business owner to put in place non-competition and/or other restrictive covenants to protect your hard-earned business. Your claims would be a combination of breach of contract for the non-compete, as well as various torts such as interference with existing business contract relationships, defamation, and potentially common-law or statutory conspiracy to injure business. Lost profits are routinely awarded by courts if these violations are proven, though they will often require the use of an expert witness if the case goes to trial.

An employee at my company is threatening to sue for sexual harassment. She claims that a male colleague made increasingly vulgar sexual comments to her over the course of a year, but she never told anyone. The company’s policy is to report this type of conduct to management so that we can investigate. This is now causing a lot of negative discourse among employees that we feel could have been avoided if she had followed procedure. Does she have a valid claim against the company? Can we fire her for failing to follow procedures?

This case highlights how critical it is that companies have effective procedures in place for handling and investigating employee claims of discrimination/harassment. The company here would have a good defense to the employee’s claim since she failed to follow the established reporting requirement for her complaint. However, the company should definitely not fire the complaining employee or take any other adverse action against her, since to do so would likely give rise to a viable claim for retaliation.

I recently resigned from my job at an information technology company. I had only worked there six months. I’ve been in the IT field for over 30 years, and realized that I could do this work on my own. So, I started my own company. Apparently, my former employer found out that I was calling its clients for work because I got a threatening letter in the mail. The letter said that I was violating a non-compete agreement and if I didn’t cease and desist, they would sue me. What should I do?

The first thing is to check the terms of the non-compete agreement, and consult with experienced business and employment counsel to see what the agreement allows you to do to and not to do. If the company did sue you, the likely first step would be for them to seek an injunction against you, which would be a court order prohibiting you from further violating the terms of your non-compete. The problem here is that the employee has already invested so much in his new company and there is a chance the court could shut it down as violating the non-compete. Employees who are thinking about leaving and starting their own companies would be well-advised to consult with experienced counsel well before they actually invest a lot of resources in the endeavor to weigh the risks of any applicable restrictive agreements.

Creditor’s Rights / Bankruptcy

Our company recently won a judgment in Virginia against a company located in Washington, D.C. However, that company refuses to pay the judgment. How can we collecting on the judgment?

There are various avenues for collection. An important initial step is to become a secured creditor by obtaining a lien on the debtor’s property by docketing your judgment in the county where the company owns any property. Thereafter, you may be able to force a judicial sale to satisfy the debt. If you discover that the company has depleted its assets to avoid paying your judgment, you may pursue an action to reverse the transfers or conveyances.

Our company had a contract with another company who breached the contract and has since gone out of business. I think the people in that company formed a new company. Can I sue the new company for the contract breached by the company that went out of business?

Yes you could sue the new company if it is operating as a successor in interest to the defunct company.

Someone owes me a significant amount of money. When I asked him for payment, he told me that he transferred some of the money to a family trust, and the rest to his wife. He told me that since the trust and his wife never had any obligation to me, the money is now gone and I can’t collect. Is that true? What can I do to get my money now?

A debtor cannot ordinarily conceal assets away from a creditor by transferring it somewhere else and getting off the hook. Most states have statutory provisions making it clear that if a person owing money to another tries to shift his or her assets away to avert the debt, such transfer can be reversed if certain legal steps are taken by the creditor. Many states would consider such a transfer to possibly constitute a preferential transfer or fraudulent conveyance, which are prohibited. The creditor should obtain counsel to implement the steps to reverse such transfers and get his money.

I obtained a judgment against a company in a Virginia state court, and that company moved to Maryland. The person who runs the business changed the name of the company and its location, but is still doing the same type of business with the same staff. I get the feeling he has other judgments that he may be trying to avoid. Can a company skip out of liability by changing its location, and how can I enforce a judgment from one state in an entirely different state?

This is not uncommon. Some companies try to avert paying their debts by switching office locations and names. If the “new” company is not really new at all but is still essentially doing similar work with similar staff, and is owned by most of the prior owners, it may be subject to “successor liability.” Creditors counsel may be retained to attack the company and perhaps its owner as well to prevent it from skipping out on payment obligations.