Legal Protections Protect Nothing If You Can’t Afford to Enforce Them

If you’re an entrepreneur, you’ve probably heard somewhere that you need a non-disclosure agreement when you share your company’s “secret sauce” with prospective investors or contractors. Or that you need to make sure that your key employees are under a non-compete agreement (or at the very least, non-use/non-solicitation/no-hire agreements). Or that you need patents or trademarks for your company’s IP. So you spend the time and money to get these legal protections in place (you probably spend even more to get an attorney to do it). And once it’s done, you think you’re protected and covered.

But what happens if someone decides to break those covenants they’ve made with you? Simple, you say – take them to court. But do you know how expensive litigation can get? The answer is: very. And now that agreement you thought was protecting your business isn’t worth the paper it’s printed on if you can’t afford to enforce those protections. Of course, this isn’t to say that you shouldn’t make sure that you have protections like these in your agreements. Sometimes it is worth the cost of the fight to take someone to court enforce your rights. And if your business is successful enough you will actually have the resources to do so – and something worth protecting as well.

The point here is not to simply rely on your legal agreements to protect you if you don’t have the resources or willingness to enforce those agreements if someone wants to break them. Moreover, this is also a gentle reminder to vet who you’re dealing with more carefully, rather than relying on legal agreements to protect you from other parties who may be setting off red flags in the back of your mind. No legal agreement in the world is going to protect you from an unscrupulous party who will look to break your agreement at the first sign of an advantage because they know you can’t afford to fight them. Those are just people you don’t want to be doing business with in the first place, agreement or no. But if you take efforts to make sure you’re working with upright parties on the other side, then you’ll never need to worry about the cost of having to enforce the legal protections in your agreement.

Your Employees May Have the Right to See Your Company’s Books

Most startups are usually very private about their books and financials — one of the benefits of being a small, private company instead of a publicly-traded company is that you don’t have to show anyone your books. However, if your company is a Delaware corporation (as many startups are), that may not necessarily be the case, particularly if you’ve issued stock to your employees.

Section 220 of the Delaware General Corporation Law permits any stockholder of a Delaware corporation, upon written demand, to inspect and copy the corporation’s stock ledger, a list of its stockholders, and its “other books and records”, which can include financial records, for any proper purpose. Recently, employees of startups have been exercising their right under Section 220 to inspect their companies’ financial records for the purpose of determining the true value of the equity compensation they’ve been given. 

While some startups do provide their equity-compensated employees with regular statements of business and financial health, if your Delaware-incorporated startup does not do so, be mindful of the fact that your stockholding employees can, under Delaware law, demand to inspect and copy your company’s books. Of course, this is also another reason why it is a best practice to make sure that your employees (particularly your key employees who are compensated with equity) are signed to employment agreements that include confidentiality provisions. In any event, if your company is a Delaware corporation and a stockholding employee does ask to see the company’s books, it may be a good idea to make sure that the information you divulge is protected under a confidentiality agreement.

Further Reading: http://www.wsj.com/articles/startup-employees-invoke-obscure-law-to-open-up-books-1464082202

Regulatory Issues for Your Company’s Website

Whether your company’s website is just a facet of your business, or is the whole point behind your business, your company should be aware of a number of laws and regulations surrounding website, and make sure that your company and website are compliant with them.

DMCA — The Digital Millennium Copyright Act, which was implemented to amend copyright law in response to the growth of the internet. The DMCA can be particularly important for operators of websites that feature user-created content, since users can (knowingly or unknowingly) include copyrighted material in their submissions (website operators are especially on the hook, given that the DMCA’s main innovation was to exempt internet service providers from liability for copyright infringement that occurs through their service). Accordingly, you should make sure that your website has a DMCA takedown policy (typically published as part of the Terms of Service/Use), in which copyright holders can notify you if they believe their material is on your website and permit you to take it down.

COPPA — The Children’s Online Privacy and Protection Act imposes regulations and requirements on operators of websites that are directed at children under the age of 13 (or where the operators have actual knowledge that their website is used by children under the age of 13). Specifically, COPPA requires applicable websites to obtain verifiable parental consent before collecting personal information (even including a name or an email) from children users. COPPA also prohibits applicable websites from presenting advertising for “adult” products, such as alcohol or tobacco.

ADA — The Department of Justice has been working on rules for applying the ADA, or Americans with Disabilities Act, to websites that are subject to the ADA. However, the DOJ has recently reversed its position that websites wouldn’t be subject to the ADA until final rule making is complete, bringing enforcement actions against websites for universities, museums, county courts, and grocery delivery services. Moreover, the DOJ has stated that websites must be accessible to the general public, not just to the actual users of the website. If your company’s website is where your company actually engages in commerce (i.e. where you sell your product; the website itself is your company’s product), then you may want to consider adopting the Web Content Accessibility Guidelines. 

Enforcing Your TOS — Finally, it is important for website operators to remember that their Terms of Service are the contract between them and their users. That being the case, you don’t want to end up like one of the many “browserwrap” cases that have been making headlines over the past few years. Many websites that have tried to enforce their ToS against violating users have had those ToS invalidated by the courts on the basis that the website could not demonstrate that the user affirmatively assented to the to the ToS. As a result, it’s not enough to say that mere use of a website constitutes a user’s acceptance of the ToS. Instead, best practices seem to dictate that users should be presented with the actual text of the ToS, and be required to click an “I accept” or similar button; the website should also have a mechanism for recording the user’s consent.

Fiduciary Duties in a LLC

Entrepreneurs who are organized in a limited liability company may not realize they have fiduciary duties to the company and to their fellow members. When we talk about fiduciary duties in a LLC, we typically mean the duties of care and loyalty — that is, to work in the best interest of the company and its members, and not for one’s own self-interest to the detriment of the company and its members. The issue of fiduciary duties in a LLC usually come up in the context of a member with a controlling interest using that control to benefit himself or herself at the expense of the LLC or fellow members, or the context of a member starting a venture that competes with the LLC.

Different states impose fiduciary duties upon actors in a LLC in different circumstances, although the general rule provides that managers of a manager-managed LLC, and members of a member-managed LLC owe fiduciary duties to the LLC and its members, while non-managing members of a manager-managed LLC do not owe such duties. However, it is unclear whether, in a nominally member-managed LLC that is in practice or by operating agreement managed by fewer than all of the members (such that the LLC effectively has “silent partners”), “non-managing” members are subjected to fiduciary duties. Finally, regardless of how the LLC is managed, some states also impose fiduciary duties upon a member that has a controlling membership interest (such as a majority of the equity or voting interest, depending on how the operating agreement, if any, is written).

The Different Kinds of Contracts

This article isn’t going to talk about “different kinds of contracts” in the sense of sales contracts vs. employment contracts vs. real estate contracts. Instead, I’ll be talking about express, implied, and quasi-contracts.

Express contracts are the contracts that parties affirmatively intend to enter into. When you go to buy a car, you sign a contract that is an agreement to purchase the vehicle, so that you and the dealer enter into an express contract for the purchase and sale of the car. But not all express contracts need be written. Oral contracts, generally speaking, are just as effective a form of express contract as printing out a written agreement and signing on the dotted line. If I stop by your house and offer to paint it for $1000, and you agree to have me paint it for $1000, we have entered into an express oral contract.  

However, while oral contracts are generally equally as enforceable as written contracts, there are certain types of agreements that must have a signed writing in order to be enforceable — no oral contracts. This doctrine is known as the “statute of frauds”; although the exact list of agreements that must have a signed writing may vary from state to state, the types of contracts that are typically covered by the statue of frauds include contracts for the sale and purchase of an interest in real estate, contracts for the sale of goods over $500, and contracts that are intended to definitely last longer than one year (if the contract is of indefinite duration or it is not definite that the contract will last longer than a year, this “one year rule” may not apply).

The next kind of contract is the implied contract. Implied contracts arise from the conduct of two or more parties that demonstrates that they intend to be bound by some sort of agreement, although no express written or oral agreement exists. For example, let’s say I come by your house and mow your lawn, and you pay me $50. I then keep coming back every two weeks to mow again, and you keep paying me $50 each time. As a result, we may have an implied contract for me to mow your lawn every 2 weeks for $50 every time I mow. Implied contracts are just as enforceable as express contracts, although it is often more difficult to discern the terms of an implied contract since they arise from the parties’ conduct, rather than having express terms written or spoken between the parties.

The final kind of contract technically isn’t a contract at all. It is a legal doctrine known as a “quasi-contract”, and is a form of equitable relief used by courts to avoid unjust enrichment by a party, when that party has something of value conferred upon them by another party in the absence of an express or implied contract.