Handshake between business partners.

Talk about your business relationship, reduce it to a written agreement, sign it, then get to work with your partner.

When assisting business partners form their entities or when my litigation partner is consulting with me on a case I see the following scenario often:

A business partnership starts with a money person and an idea person. The idea person has a fantastic business plan and the money person has the cash. They think it is perfect. They rush to form a LLC or corporation, downloading an Operating Agreement or Bylaws from the Internet. It even might be worst, they do not even bother with a document. After that, they are running their business, but then several months into it they are fighting.

What do Business Partners Fight About?

Usually, they do not see eye-to-eye on major business decisions.  Decisions like:

  1. how much money should each person contribute;
  2. who has the authority to sign checks or what is the dollar limit each partner has for contract obligations;
  3. where should we locate our offices;
  4. when do we pay ourselves;
  5. what happens when one of us wants to leave; and
  6. so many other issues …

Business owners hate hearing this from their attorneys: slow down! They should be deliberative in their collaboration with their business partner. I sometimes remind people that getting a business partner is basically getting married. Also partnering with a friend is different than being a friend, you sometimes do not know their work ethic. This is why we urge business owners to get things in writing with their partners.

The goal when drafting Operating Agreements, Bylaws, and employment agreements* should be what are the processes that governs decision-making, what happens when there is disagreement, or if an owner wants to leave, etc. … Basically, preempt the fights by setting up contractual arrangements. *By the way, if an owner of a business wants to contribute work instead of capital, then the partners should consider an employment agreement. It is solely not just for contract law purposes, but for tax and accounting issues.

Business partners think that their idea will be a money-maker and that their partner is going to make it happen.  They fail to calculate that even in success that their business partner may have other ideas on the direction of the business.  There is nothing wrong with differences of opinion, but when decision-making is paralyzed it could stop the business from moving forward. Further, for its employees, vendors, and service-providers, knowledge of an ongoing dispute amongst the business owners can make them question the survivability of the business.

Protect your Business Relationship by Communicating

It is easy. Talk about it, come to an agreement, and then get it in writing before the business starts. Many people just want us attorneys to give them their documents or download their own forms for the Internet. They think it saves them time and money.  I’d contend that is the wrong way to look at it. The time and money spent on your governing documents is an investment in the relationship. They are a contractual foundation.

If not, you are just pushing disputes to a later date. Consider that when the money has been spent, you’ve worked countless days and nights, and now you are arguing.  Then you realize all you have for your contract rights is a poorly drafted document … or worst yet, you don’t have one at all.  So do yourself a favor, have the conversation now and plan for the future.  Communicating when you are on good terms with a partner is easier, then when you are fighting.

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Chinese Rooster

I’m sure you’ve seen the odd chicken or two crossing Honolulu’s roads!

Happy Lunar New Year All!

If you’ve been following me, you may recall I did a blog post on my old website (also found here) celebrating last Lunar New Year’s animal, the monkey. It was a post about “Can You Own a Monkey in Hawaii?” Keeping with that theme this post discusses the laws of the City and County of Honolulu related to this Lunar New Year’s animal, the Rooster. Or more precisely, chickens.

Can You Keep Chickens?

This post is limits discussion to the jurisdiction of the City and County of Honolulu (the island of Oahu).  Additionally, the post focuses on residential areas only. If you are raising chickens for commercial purposes you have compliance issues regarding zoning and permitting, which is a different discussion then today’s post.

Nuisance Law

When keeping chickens, the law is not related to the animal itself, but more has to do with the City government’s ability to regulate nuisances. Old English common law had it that when some type of action by a defendant was either causing a substantial and unreasonable interference with people’s use and enjoyment of the land (private nuisance) or the action had a materially affect the reasonable comfort and convenience of life of the people (public nuisance). Flash forward to today, our city government has the ability to regulate nuisances, in our case for this post, Animal Nuisances. You can find it in Chapter 7, Article 2 of the Revised Ordinances of Honolulu.

So the laws approach to the situation is to make it unlawful to own poultry, which includes chickens, pigeons, turkeys, geese, ducks and peafowl so long as they are an “animal nuisance”.  See Sec. 7-2.3.

Short answer: yes, you can keep chickens if you are in Honolulu.

Slightly longer answer: yes, you can keep chickens in Honolulu, so long as they are not a nuisance. If they are a nuisance, then you cannot keep them.

So What’s an “Animal Nuisance”?

Article 2 also defines “animal nuisance.” There are three (3) definitions, but I’m going to focus on the first two definitions which is:

  • Makes noise continuously and/or incessantly for a period of 10 minutes or intermittently for one-half hour or more to the disturbance of any person at any time of day or night and regardless of whether the animal, farm animal or poultry is physically situated in or upon private property;
  • Barks, whines, howls, crows, cries or makes any other unreasonable noise as described in Section 7-2.4 (c) of this article;

See Sec. 7-2.2.

So it is clear that a chicken making noise continuously for 10 minutes or intermittently over one-half hour (30 minutes) is a nuisance, but what is that second definition about?

Again, we are now defining another concept, which is what constitutes “unreasonable noise”. Sec. 7-2.4(c) says that:

Noise is unreasonable within the meaning of this article if considering the nature and the circumstances surrounding the animal nuisance, including the nature of the location and the time of the day or night, it interferes with reasonable individual or group activities such as, but not limited to, communication, work, rest, recreation or sleep; or the failure to heed the admonition of a police officer or a special officer of the animal control contractor that the noise is unreasonable and should be stopped or reduced.

What does this Mean for an Owner of a Rooster that cock-a-doodle-doos at 11:00 p.m. in an Apartment Building?

If we consider the nature and the circumstances: (a) it is a building where everyone is close by; (b) the rooster’s noise is at night; and (c) that most people are sleeping at that time; and (d) that the neighbors would likely call the police or animal control personnel. Then the likely outcome is those officials would instruct the owner to have the animal stop. If the owner did not stop the problem, then it would be deemed as “unreasonable noise.” See Sec. 7-2.4. This turns into an “animal nuisance” and then the owner would be prohibited from keeping the rooster.

What Could Happen if you Violate the Law?

Generally, a monetary fine. If you keep stacking offenses within a certain time frame you actually be imprisoned. Additionally, you can be ordered to go to a training program or retain a contractor to help you train the animal to stop the nuisance. Further, such training programs or contractors are paid for by you. See Sec. 7-2.10

How Many Chickens can I Have?

Sec. 7-2.5(d) states that for chickens and peafowl: “The number of chickens or peafowl shall not exceed two per household.”

So yes, while you can keep a couple of chickens in Honolulu residential areas, they better be quiet chickens!

How do I Handle Chicken Noises Bothering Me?

If you have an animal noise complaint for Oahu, then contact the Honolulu Police Department or the Hawaiian Humane Society. The Hawaiian Humane Society recently has started responding to chicken noise complaints: http://www.kitv.com/story/34311091/hawaiian-humane-society-now-responding-to-chicken-noise-complaints

If you want to find more about Honolulu’s Animal Nuisance law, click here.

Thanks again for stopping by and I hope this is a fortuitous and good year for you!

-RKH

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in this post without seeking the advice of  an attorney in their relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Aloha and thank you for continuing to visit this blawg, I hope your 2017 continues to be off to a great start.

If you are reading this post hoping it is a continuation from last week’s post on communication it is not directly related, but will still follow in the vein on the topic of communication.  Instead, this week, I would like to briefly turn your attention to one of America’s great leaders, Martin Luther King, Jr. as we head into the long weekend celebrating his contributions to the Civil Rights movement.

Read more

communicating in contracts

A New Year, A New Business, and A New Of Hope Of Communication

Aloha and Hau’oli Makahiki Hou!

I hope this finds you all well, and I thank you for visiting our legal blog or blawg. How has your first week of 2017? Ready to dive into new projects?  For those of you thinking this is the year or the time to start a business, well then today’s post and the couple of posts that will follow are for you. Specifically for those of you interested in starting a business, especially with business partners who will own the business with you. The overall theme of these posts is about communicating.  The source of this inspiration for the theme? My own partnership with Trejur launched last year my lecturing for a communications class at HPU, and I always get this question: Can my business partner do that?

Part I, Communicating With Your Business Partners

So today’s post is on communicating with your business partners, the one following this post will be on communicating with third-parties outside of the business entity you form with said partners, such as clients, customers, vendors, suppliers, contractors, etc …, and finally, the last post shall be about communicating with the government and various agencies.

Where it All Begins: Communicating, Not the Paperwork

So many of you that know me or have followed me, know that I started out as a solo practice working with small and medium-sized business clients on contracts and compliance work, such as forming limited liability companies. Over the years, as my workload increased I took on other contract attorneys to assist with the workload. Along the way, I met my commercial litigation partner, Trejur P. Bordenave. Trejur and I worked well together, and a lot of it was based on effective communication. This is the foundation that led us to the partnership we have today. In fact, he and I spent a good portion of the early part of 2016 discussing the partnership before formally launching the partnership itself.

Why am I telling you this?

One of the biggest issues I see when clients come to me to form a LLC or a corporation is they just want the documents. Yes, as a business attorney, absolutely I can draft your Operating Agreements or Corporate Resolutions, file your Articles of Incorporation, and/or obtain your Federal Employment Identification Number, and so forth, but typically, when someone like Trejur is called up to represent someone the dispute stems from a breakdown in communication and trust, amongst the business partners. There is not necessarily anything wrong with the paperwork, but the business partners did something, not necessarily maliciously or with intent to deceive, but their expectations about how the business would work, how they would get paid, reimbursed, when that would happen were all at different levels.  Let me use two examples of how this can play out to illustrate.

Example Stories

So these following examples are fictional, but they are issues I have seen before in a wide-variety of starting businesses or in the midst of a business dispute. Again, the point here is to illustrate that good communication is the foundation of a good business relationship, which in turn drives the drafting of the legal documentation.

Example One: Majority Member and Unfair Distributions

Kai and Russell open a new restaurant business. They organize a LLC. The LLC Membership Interest (or Ownership Interest) is divided 60% for Kai and 40% for Russell that is because Kai has contributed more cash and equipment (valued at $60,000.00) into the LLC as his Initial Capital Contribution than Russell. Russell just agrees that he will bring some of his old recipes from a prior business with him and agrees to work for the LLC for the value of his Initial Capital Contribution because they are in a rush to open the restaurant they draw up a generic Operating Agreement that recognizes the 60/40 split and that everything from that, including voting, profit/loss allocation, distributions, etc . . . will be 60/40.

Five months later, after the restaurant has been up and running, Russell quits and wants to terminate the LLC. Why? Well, he feels that Kai treats him more as an employee because he feels he owns the majority of the LLC and that Russell needs to work off $40,000.00 or what Kai believes Russell’s fair share of the contribution should be. Further, due to the majority position Kai takes his cash distributions at the beginning of the month, and gives Russell his distributions at the end of the month and if there is not enough for budgeting purposes states the LLC will just owe him later.

Example Two: Discussing Officer Duties Prior to Incorporating

Lisa and Jessie want to start a solar design and installation business. They intend to incorporate a corporation, which shall issue 1000 shares, where Lisa would own 550 shares and Jessie would have 450 shares. Lisa would like to be President as she has more local connections and is the one who can bring in more clients whereas Jessie will likely do the grunt work. However, Jessie is concerned that Lisa is President and has more shares so as a minority shareholder she fees unprotected. Lisa and Jessie meet and discuss this issue.

They decide that through their Articles of Incorporation, Bylaws, and Resolutions that the corporation shall only have the offices of President, Secretary, and Treasurer and that Jessie shall be both Secretary and Treasurer. Further, that Lisa as President must submit a marketing budget for the next fiscal year to Jessie as Treasurer on the June 20th before Jessie will cut checks from the corporation’s expense account to where she will have sole authority to cut checks from. They also agree that all 1000 shares (unanimous consent) must vote in favor of declaring dividends before money is paid out as such.  Finally, both agree to sign Employee Agreements stipulating to what their compensation, benefits, work hours, etc . . . on top of their rights and obligations as shareholders of the corporation.  Both are satisfied with this arrangement and move forward to incorporate.

So What Happened? What Should You Consider for your Business Partnership?

In my first example, the business partners were in a rush, failed to communicate expectations, and felt that once they had the paperwork everything would resolve itself. But as trite as it may seem, they did not talk about their feelings and by signing an Operating Agreement that just split everything according the Ownership Interest percentage it did not really reflect on how they were going to do business with one another. In the my second example, discussing how Jessie felt about her worries and concerns allowed them to create a process, a mechanism of a check and accountability that they discussed and agreed to.

At this point, I’d like to put in your mind a lot of people think that once the file their Articles of Organization or they come up with the Bylaws these are set in stone. That is not necessarily the case, the owners of the business can always amend them if they are in agreement. Also consider if you and your partners are not sure what the final arrangement will look like, that is you are in an ongoing negotiations, but you have stipulated to some terms or have an inkling about where your arrangement is heading, you can always use a Memorandum of Understanding or Letter of Intent or whatever document applies to stipulate to what has already been discussed or agreed to, and agree to return to the matter at a later time to finalize. Communicate and trust each other, but keep a record of it.

Often times, people do not slow down to consider how they want to structure their decision making processes, their rights and duties to each other, to the business. Their feeling is that making money will resolve all that, but then the issues come up overtime like . . . Why do you get reimbursed for parking when I take the bus? I bring in all the clients and you do all the work, and marketing and networking is work. The recipes I brought with me are the value of the food company so I should get a majority interest. I’m the older brother so I dictate the operations just like the way our father and grandfather did it. And so on and so forth . . . if you thing your dispute is ridiculous with your business partners, I’m pretty sure there are ones even more crazy.

Sit Down and Discuss Expectations

What isn’t crazy is sitting down and discussing what you expect out of the business relationship and what you expect out of your business partners before forming the business entity and doing business. In many ways having a business partner is like getting married it is for better or worst, and business divorces are ugly affairs like regular divorces. Therefore, it is worth the time to sit-down and talk it out, and then if you are wondering can we arrange our business partnership according to what was discussed that’s when you can give me a call and we can work out . . .

What is the difference between a Member-Managed and Managed-Managed LLC? Can I contribute services in exchange for stock ownership? What are the differences in liabilities for a General Partner versus a Limited Partner? Can we have percentages of Ownership Interests that do not match Distributional Interests? What about having two-levels of Ownership Interests? Should we limit the powers and authority of the President?

Mahalo for reading this post. I hope you have a Happy and Fortuitous New Year! See you next time!

-RKH

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in this post without seeking the advice of  an attorney in their relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Formalities

From: “Let me provide the formalities.”

Hew and Bordenave

To: “Let us provides the formalities.”

From Old Solo to New Partnership

Hey everyone, thanks for visiting our Blawg. I am just letting you know that all the posts prior to January 1, 2017 are from my solo practice. They are from Ryan K. Hew, Attorney at Law, LLLC. In particular, the old: hawaiiesquire.com. I brought the posts to our new site because a lot of the legal information is helpful for business owners and truth be told I loved doing Draw the Law, Boilerplate Blurb, and all the other content. So please continue enjoying them, but I do hope you like the new content from Trejur and me. Mahalo!

-Ryan K. Hew

*I posted this to my Facebook yesterday for the Federal income tax return deadline, and forgot to put it to my blawg! To busy dealing with my taxes and clients’ transactional issues during this hectic tax period.  Anyway, a little less relevant today, but remember 2015 Hawaii income tax returns or requests for extension are due tomorrow (4/20/16), so still slightly relevant. Cheers and good luck to you! 

I hope your Monday, this final day for submitting your U.S. federal income tax returns (at least without an extension), is not that stressful, but I share this interesting quote with you by one of my favorite U.S. Supreme Court Justices from the past, Oliver Wendell Holmes, Jr. He was a great jurist and in his time was known as the I hope your Monday, this final day for submitting your U.S. federal income tax returns (at least without an extension), is not that stressful, but I share this interesting quote with you by one of my favorite U.S. Supreme Court Justices from the past, Oliver Wendell Holmes, Jr. He was a great jurist and in his time was known as the “Great Dissenter”. I selected this quote, as apparently this quote appears on the IRS building in Washington D.C. So with that, I wish good luck on your taxes, as I do empathize with all of you, especially fellow self-employed small business owners! Anyway, if you are interested, you can find a nice short biographical history for Justice Holmes here: http://www.pbs.org/wnet/supremecourt/capitalism/robes_holmes.html

Happy Lunar New Year! It is the year of the Fire Monkey! Supposedly, fortune tellers say it is an ear of market volatility, so it is best to make contingency plans and not monkey around! However, enough punning, this post is about owning a monkey in Hawaii.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Further, no tax advice is given in this post, and you are urged to seek a tax attorney, accountant, and/or tax professional to help you with your tax and accounting needs. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Happy Lunar New Year!

I hope it shall be a prosperous one for you! To celebrate that this is the year of the Fire Monkey, I decided to do a fun post,  as I am born in the year of the monkey (I am sure you can now guess my age, haha). So for this post, I thought a fun question to answer is one that that comes up and now and then among pet-loving friends: “Can I own a monkey, here in Hawaii?”

The answer is: yes, but not as an individual … and certainly not as a pet. 

Hawaii Department of Agriculture and Importation of Animals

As you probably could guess this is a regulated area. So it is not as easy as in you can fly in any monkey you want, then take it home, especially given that Hawaii laws are aimed at preserving nature and preventing invasive species.  Obviously, monkeys are non-native species to the island, so you are you going to have to import one and play by the rules. So none of that “see no evil, hear no evil, speak no evil” shenanigans with the government agents.

To begin with, the importation of non-domestic animals is under the jurisdiction of the Hawaii Department of Agriculture (DOA). See HRS 150A-6.2.  Some animals are banned outright, while others are allowable by permit. Monkey importation is allowable by permit but has an extra step. That step being bonding.

I had to use this image for this post. It is a monkey in a suit at a desk with paperwork. I know what people think of attorneys. Further, I think it was apt for this post. Lastly, I paid licensing fees for the image and had to make use of it (don't worry one post I will devote to licensing fees for you graphic designers, photographers, etc . . . but enjoy and laugh! I had to use this image for this post. It is a monkey in a suit at a desk with paperwork. I know what people think of attorneys. Further, I think it was apt for this post. Lastly, I paid licensing fees for the image and had to make use of it (don’t worry one post I will devote to licensing fees for you graphic designers, photographers, etc . . . however, enjoy and laugh!

 

Hawaii Administrative Rules Chapter 4-71 and Bonding

We turn to the Department of Agriculture’s Administrative Rules, in particular, Chapter 4-71, as the objective of these rules are to implement HRS Chapter 150A. See HAR 4-71-1.  So what do the specific rules say about monkeys?

If we go to HAR 4-71-6.5, we see that we would need a permit, but more specifically we see in Section (a)(3) that certain animals need the securing of a bond, as specified in 4-71-7.  Scurrying down to HAR 4-71-7(1) it indicates that an applicant (for the permit) shall secure the appropriate bond for:

Monkeys, apes, baboons, chimpanzees, gibbons, lemurs, pottos, wallabies, and any other animal that the board or chairperson may require to be bonded as a condition for importation or possession;

Bonding Procedure and Conditions for Bonding

So how do you get a bond, and are there specific requirements? Well, the Administrative Rules continue from 4-71-7 to 4-71-8, Bonding Procedure and 4-71-9, Conditions for Bonding.  In these two sections, you will see much of the specifics you would need to fulfill to get a bond, which would go with the permit, which would, in turn, allow you to own a monkey.

Of course, even if you meet these requirements, and successfully import and own a monkey, you have to realize you have to comply with all the bond conditions. Failure to do so would mean the Department could seize it, as given their power under HAR 4-7-10.  Interestingly enough, if your monkey were to escape it is your responsibility to recapture it, and you have a week to do so, or else the Department will use its resources to recapture. Additionally, they can sell, ship, donate, or destroy it.  See HAR 4-71-10.

Are there Any Other Restrictions?

Yes, one of the biggest caveats to all this is that monkeys as a species are placed on the DOA’s List of Restricted Animals – For Private and Commercial Use.

What does “Private and Commercial Use” mean? In the case of the definition section of the Administrative Rules “Private Use” is for example, non-profit research, but is specifically not for “individual possession of an animal as a pet.” Further the restrictions makes clear that all members in the order of primates can only be brought into the state for primate sanctuaries or for research by universities or government agencies, exhibition in municipal zoos, etc … Also a primate sanctuary must maintain a 501(c)(3) not-for-profit federal tax-exempt status and have any permits or licenses required by federal state, or municipal law.  Therefore, if you are intending to bring a monkey into the State of Hawaii it has to be with the purpose of this Private and Commercial Use, which in turn you can see means you will have to jump through additional regulatory procedures (i.e. setting up a non-profit corporation and gaining tax exemption status).

Clearly, “owning” a monkey in the State of Hawaii not a process of monkey see, monkey do like with dogs or cats, but a Department of Agriculture procedure of permitting and bonding and understanding that an individual cannot possess the monkey as a pet, but that the importation of them would be solely for Private and Commercial Use.

Mahalo for reading!

-RKH

 

“Why do I have to pay taxes on money that did not get distributed?!”

This is a question that many LLC owners (know as “members”) ask me. The confusion (and obviously frustration) of paying out taxes on money that you never received is real, but much of it stems from the lack of understanding that in the realm of LLCs there are “allocations”, which handles how profits and losses are allocated among the members and there are “distributions” the actual distributing of cash or property from the LLC. Many business owners like to conflate the two concepts together, which is not the case, and thus creates their confusion.

I provide an informational sheet for readers to take a look and get the basic understanding of the difference between allocations and distributions (see below).  The tax matter aside, the divvying up of allocations and distributions that is a discussion that business owners should have prior to organizing a LLC and then having an operating agreement drafted for them because of not just the tax issue, but due to the flexibility of LLCs of having allocations and distributions not match ownership interest, and the timing of distributions.

Again, communication is fundamental for business owners and a lot of discussion and pre-planning goes a long way to avoid the deterioration of the relationship because these were not hashed out prior to the formation of the business. As discussed in previous posts, LLC owners starting out would want these agreed upon terms on allocations and distributions reduced to writing, and is usually found in the Operating Agreement.

If you would like to see the information sheet, click here and then look for the downloadable pdf entitled, “For LLC Owners: Difference between Allocation and Distribution”.

Mahalo for stopping by and reading my blawg!

-RKH

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

So I am going start this post with one of my favorite movie villain’s quote: “You may dispense with the pleasantries, Commander. I am here to put you back on schedule.”

Except instead of building a space station, I am here to help you build your business by recognizing that while you can skip the pleasantries in business, you should NOT ignore the legal formalities.  I realize some of you business owners find your attorney, CPA, compliance officer, and the like as pains in the butt by sometimes being overly cautious, but please understand that these advisors suggest caution because they see how bad it can get when you don’t follow their advice.  So this post and several that will follow shall focus on legal formalities that I have seen business owners fail to follow.  By failing to observing these simple formalities these owners spent great time and expense trying to fix them, and some of them are unfixable.

Sign Your Papers

So today’s post what am I talking about?  Well, for this post I am talking about something so basic.  Namely, don’t forget to sign your agreements.   Before you laugh, consider how many times some asks you to do something so simple, you procrastinate on it to the last minute because you think it is so simple take care of later.  Consider in that in today’s technological world it is easy to text, email, etc . . . so some people feel, why bother signing a piece of paper?  Let me share a story that I see constantly among current and past clients: the unsigned Operating Agreement/Bylaws/Partnership Agreement.

I have had clients who have gotten into disputes with their business partners.  It might be suspicions, poor communications, changed expectations, but in general the relationship is deteriorating and these former allies, now want the other side out of the business or they want their share bought out.

So by the time the distressed business partner comes to me I will ask, “Where is your Operating Agreement?” I will be using a LLC as an example, but this applies to corporations, partnerships, and in general many relationships.  They usually have an Operating Agreement and aside from the host of other problems, such as lack of adequate protection, incorrect names or usage of terms, etc . . . I get to the end of the document and find it is unsigned.

What’s an Operating Agreement?

Before I continue, let me explain something about an Operating Agreement. This document acts as internal document that sets up the rules and procedures among the members (the owners) of a LLC, and may dictate how one becomes a member, sells their ownership interest, and handles voting, profit-sharing, etc . . . Suffice it to say, you should have an Operating Agreement if you have a LLC, regardless if it is member-managed or manager-managed.  It gives you the rules of interaction.  I have even seen problems where clients did not even bother having an Operating Agreement drafted, which is just worst than not even having one unsigned.

The Problem with Unexecuted Paperwork

Anyway, when your Operating Agreement remains unexecuted (unsigned) or any paperwork for that matter, it would indicate to an attorney that the parties had no intent to be bound by the document.  After all, “why didn’t you sign it?” is the question that comes to mind.

Unsigned documents are just paper with pretty words.  In the law we expect you to take an active act to be bound by those pretty words, and that active act is signing the documents.  The signature serves as evidence.  Consider for a moment that is why even in our electronic world, we make you go through hoops to “click”, “check the box”, or “electronically sign”, basically showing that you “read” the terms and by your action you agree to be bound to them.

So getting back to this situation where the parties have a dispute, but have unsigned paperwork the question remains what were the terms of the contract.  It is true in a lawsuit you can prove there was intent to be bound under the agreement by showing that the parties took active steps to be bound by the unsigned document.

However, don’t you think it is easier just to produce a signed document as evidence rather than cobbling together various pieces of evidence to demonstrate that the parties meant to sign it?

With an unsigned Operating Agreement, you may find yourself stuck with the default rules at law to guide your dispute with regard to fellow members in a LLC.  The defaults rule set at law are very broad and offer very little help in resolving a dispute among members.  So if you are going to take time to prepare a proper Operating Agreement that covers all your bases in a LLC relationship, don’t forget to get it signed by your business partners and sign it yourself, that way at least you know what to look at for guidance when problems start.

Stop back and I will talk about some of the problems you may face forgetting to do your Annual Filings or missing a renewal date!  Mahalo for reading!

iphone6

So were you one of the lucky ones this morning?  Were you able to pre-order yourself an iPhone 6 or an iPhone 6+?  I was successful in getting an iPhone 6, a gold one with 128 GB if you are interested.  However, I was also able to get a copy of my Wireless Customer Agreement with AT&T, which I find interesting.  Usually, when I make large purchases online, I like to copy and paste the agreements in an MS Word document so that I can analyze them and truth be told consider utilizing their language in my agreements.  Attorneys are always looking for drafting language, copying and pasting speeds up the process for clients, but also for the attorney; it allows us to see how other agreements try to encompass a transaction and reduce it to writing (at least for a business attorney).  Further, when we are developing a new transaction for a client, it helps to see what is out there already in the marketplace. Do we have something novel or is someone else already doing it that way?

Anyway, this post is not about analyzing attorneys, but rather I thought it would be interesting to see how a giant wireless company drafts its agreement and what you are agreeing to, as I find for smaller businesses they are always curious what the “big boys” do for their agreements. Also as I stated, transactional attorneys will use drafting language from another company’s agreement if their client is doing the same or similar, then modify to the client’s needs (not to mention in B2C agreement, if the customer already understands a competitor’s agreement it makes it easier for them to understand if the language is the same).  My last rationale is that in our TL;DR social media culture, I thought I would highlight some provisions I thought were interesting if you were just curious as a fellow user of wireless services.

So here is the pdf version of the Wireless Customer Agreement that popped up on my screen that AT&T made me agree to get my iPhone 6 on preorder so that you can follow along.

I. 2nd Paragraph = Please Read – Are we Tracking You? And You are Agreeing to Arbitration.

Right off the bat, in the second paragraph, in big, bold letters, AT&T’s agreement states:

PLEASE READ THIS AGREEMENT CAREFULLY TO ENSURE THAT YOU UNDERSTAND EACH PROVISION, INCLUDING OUR USE OF YOUR LOCATION INFORMATION (SEE SECTION 3.6). THIS AGREEMENT REQUIRES THE USE OF ARBITRATION ON AN INDIVIDUAL BASIS TO RESOLVE DISPUTES, RATHER THAN JURY TRIALS OR CLASS ACTIONS, AND ALSO LIMITS THE REMEDIES AVAILABLE TO YOU IN THE EVENT OF A DISPUTE.

A. Privacy Issue

So what’s all of that mean? Well, if we go down to Section 3.6, we soon discover that this all about how they handle information that they receive from your “Device” (your phone). One of the relevant parts states the following:

We use that information, as well as other usage and performance information also obtained from our network and your Device, to provide you with wireless voice and data services, and to maintain and improve our network and the quality of your wireless experience. We may also use location information to create aggregate data from which your personally identifiable information has been removed or obscured. Such aggregate data may be used for a variety of purposes such as scientific and marketing research and services such as vehicle traffic volume monitoring. It is your responsibility to notify users on your account that we may collect and use location information from Devices.

Interestingly, the language here tracks with many privacy policies that other companies use and they’ve incorporated it into the agreement.  Additionally, AT&T recommends you see its privacy policy on its website by stating:

Please review the terms and conditions and the associated privacy policy for each Location- Based Service to learn how the location information will be used and protected. For more information on Location-Based Services, please visit att.com/privacy. 

I’ve discussed the differences between a contract and a policy in a Slideshare presentation before if you are curious.  In this case, some of the policies are firmly settled into and a part of the agreement; this is always a decision to ponder when drafting of whether or not to incorporate policies into an agreement, thereby making them a part of the contract.

B. Arbitration

So here is one fun part (well, at least to me), throughout this agreement AT&T strives to make it clear through all capitalization or bolding of letters that you agree to binding arbitration. “What’s ‘arbitration,’ Precious?!?” (Pardon, the dorky humor.)

Well, AT&T tells you what it is exactly in Section 2.1 of the agreement.  Arbitration is NOT court; it is a form of “alternative dispute resolution.”  It is less formal than a court proceeding and tends to be faster in reaching a resolution in a dispute than going to court. With that being said, generally speaking, many feel that arbitration tends to be favorable to the business and anti-consumer.  I’m not here to judge whether or not that is true, but what is clear is that AT&T has its consumer’s waive the ability to go to court (other than small claims) and has also barred class arbitration and class actions.  “Class” actions or arbitrations are where a large number of people who have suffered that same injury from the same person (a business entity is a legal person) band together to pursue a claim.  This type of provision is also seen as anti-consumer by consumer advocates.  For my part and this post, I’m just going to address the question: can they do that?

Yes, the Supreme Court of the United States (SCOTUS) has made clear in recent rulings the applicability of the Federal Arbitration Act to these types of agreements. So if you have a dispute with AT&T beyond small claims court limitations, you are going to have to arbitrate: there is not another option.

It is worth noting here AT&T had a case before SCOTUS on this matter in AT&T Mobility v. Concepcion, 563 U.S. 321 (2011).  Basically, SCOTUS ruled that the FAA preempted state laws (in this case California’s law) that prohibit contracts from disallowing class-wide arbitration, thus allowing businesses to include arbitration agreements eliminating a consumer’s ability to bring a class action suit. So it should come as no surprise with a SCOTUS victory, they are going to include this in their agreements.

II. Section 6.0: Data – Why all the CAPITALIZATION and Bolding?!

So another area that caught my eye, and probably purposefully so by the drafter of this document is Section 6.0.  Why did it catch my eye?  When scrolling down the text one cannot, but help notice the large amounts of bolding and capitalization in Section 6.0.  And of course they are going to do that, it has to deal with one of the biggest contentious areas that people have with their wireless carriers, the data usage plan.

A. 6.1: Overage Charges; No Rollover; and Terminate with or without Cause

So this isn’t exactly news, as many of you already understand this, but I thought I would pull out the line in the agreement that states it for you:

On Data Services with a monthly megabyte (MB) or gigabyte (GB) data allowance, once you exceed your monthly data allowance you will be automatically charged for overage as specified in the applicable rate plan. All data allowances, including overages, must be used in the billing period in which the allowance is provided. Unused data allowances will not roll over to subsequent billing periods.

You will be charged for overages if you are on a rate plan where that is possible, so those of you grandfathered in will probably cling to your rate plans that have no overage charges till you become a grandfather.  Also, no rolling over unused data into another billing period.

Then we have this sentence at the end of Section 6.1:

AT&T RESERVES THE RIGHT TO TERMINATE YOUR DATA SERVICES WITH OR WITHOUT CAUSE, INCLUDING WITHOUT LIMITATION, UPON EXPIRATION OR TERMINATION OF YOUR WIRELESS CUSTOMER AGREEMENT.

Basically, AT&T may terminate your data services, and they do not need a reason to once your wireless customer agreement ends whether it expires or terminates. 

B. Section 6.2: Don’t Do this Stuff as It’s Not the Point of the Wireless Data Service (i.e. Prohibited Uses)

Ok, I am not quoting Section 6.2 (as the relevant part I want to discuss is long), and you are probably getting tired reading this post as it is long, but for those of you have stuck it through all this, much appreciated.

Anyway, for this wall of bolded text, basically, it is AT&T’s intent to prohibit certain behaviors as those uses are probably illegal, harms AT&T’s infrastructure, damages AT&T’s ability to profit, or exposes them to some other liability.  It’s pretty detailed and lists a lot of examples. Also, they save themselves on making sure you understand that the list of examples are not the only ones of Prohibited Use by stating that their listing is “without limitation.”  Of course, if AT&T “believes” you are using their Service in one of these prohibited manners, it may terminate the agreement.

III. Section 10.0: Doing Business in Multiple Jurisdictions.

So I am going to round out this post at the end of AT&T’s Wireless Customer Agreement (seems to be a good place as any to stop), as I tend to do this blog for business owners (small and large), and Section 10 to me highlights what businesses face when they operate in multiple jurisdictions.

Most businesses start off in one state, and then as they become more successful they grow, and that growth is sometimes beyond the state they started in.  Depending on the situation, sometimes you can avail yourself of your home state’s laws and other times when you do business in another state you are bound to follow their laws.  For large businesses, like AT&T they have a myriad of laws that they must follow at the federal level, but individually as to all the states that they have customers in.  Sometimes those state laws force a company to stipulate to things in their agreements, in particular when it is with consumers, due to some states passing consumer protection laws.  Here, in AT&T’s Section 10.0 we see that California, Connecticut, and Puerto Rico (which is not a state, but I’ve been using “state” here for my own convenience) have special provisions.

Therefore, this brings me to a point for all you businesses that have operations in multiple states. While for the sake of ease, and that variations in your operations and systems cost time and money, it is sometimes inescapable due to a state’s laws that your agreements will be regulated.  So you should consider, especially when it comes to your consumer agreements, knowing what the consumer protection laws are if you intend to a comprehensive catchall agreement as AT&T has done here.

Anyway, I think this makes up for my lack of posts for several months.  I will strive to be less wall-of-text on you readers next time and spruce up the next post with pictures, possibly my doodles for a Draw that Law when I get back to it.  As always, mahalo for reading.

-RKH