Archive

Posts Tagged ‘contract law’

Business Law Update: Another Call to Clear Contract Drafting.

September 26, 2017 Leave a comment

It is Artprize again in downtown Grand Rapids! See one of the exhibits on Monroe Avenue in front of the Venue.

2017-09-14 13.08.48

 

Question:

Did you know: “Shall” has a different meaning then “May”?

One is mandatory.

The other is permissive.

In business, it pays to be clear in the contract language you use.

 

Check out this recent Michigan Court of Appeals decision on why you need to take care in drafting contracts.

 

 

This case was a dispute over a commercial lease contained in a “letter agreement” – and the legal concept of contra proferentem that ambiguities in contracts should be construed against the drafter.

 

 

According to the Court of Appeals: “the primary question presented in this case is
whether the following paragraph of the letter agreement precluded plaintiffs from filing this lawsuit:
“10. The failure of either party to perform the preliminary duties outlined in
this agreement will permit the obligee of the duty to declare a default and
terminate this preliminary agreement to lease or other remedy that may be agreed
to by the parties.”

The trial court found that this language precluded the tenant from suing.

The court of appeals disagreed.

The Court of Appeals evidently found this language to be ambiguous.

“It is an elementary rule of construction of contracts that in case of doubt, a contract is to be strictly construed against the party by whose agent it was drafted.” Shay v Aldrich, 487 Mich 648, 673; 790 NW2d 629 (2010).

This rule of construction is known as “contra proferentem”.

The contra proferentem rule is applicable only as a last resort, when other techniques of interpretation and construction have not resolved the question of which of two or more possible reasonable meanings the court should choose. It is a tie breaker when there is no other sound basis for choosing one contract interpretation over another.”
Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 460, 663 N.W.2d 447, 449, 2003 Mich. LEXIS 1224, *1 (Mich. 2003).

However, in this case, the Court seemed to make much of the fact that the drafter, who was a party to the contract, was an attorney.

The Court of Appeals reversed the trial court decision and found that the language did not preclude the tenant from filing suit and the case needed to proceed to trial.

 

Conclusion:

Small business owners often times are wearing many “hats”. They are working with limited cash flow and are forced to make many choices. Many of these choices are in areas outside of their expertise.

Oftentimes startups and small business owners will “cut corners” to be more efficient and cost-effective.

When it comes to signing a legally binding contract – it is simply not worth cutting corners on.

The cost of what you do not know can be significant.

Question? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

 

 

Advertisements

Business Law Update: Lessons From Court on Deadlock Between Business Owners.

July 12, 2017 2 comments

This morning was rainy and gray in Grand Rapids.

It is one of those days that prompted me to write on a topic that can be downright depressing – when relationships between shareholders go bad.

I had a client come in recently and ask me to set up an LLC for him.

rainy dayClient planned on owning the LLC 50/50 with a business partner. Someone he trusts (right, because no one goes into business thinking it will end in a lawsuit.) Regardless of the best intentions between these business partners, The 50/50 ownership can be problematic.

For an example, look no further than the May 11, 2017 Court of Appeals Decision in Shamee Catwilmat, LLC v Shamee Development Company, LLC et al.

The Shamee case originated out of Kent County’s Business Court Docket. (A little pride here, for our esteemed business court).

 

Shamee was a convoluted case regarding default on a Note, Mortgage and collateralized business assets – and ended in a mess for both sides. In essence, the Bank erroneously  foreclosed on only a portion of the Property that was otherwise secured by the mortgage.

However, of particular note for the purpose of this post is how the LLC was owned and the resulting problems:

50/50 ownership between members – Shah and Mead.

According to the Court:

“At some point, Shah and Mead began to disagree about the management of Shamee Development. Unable to reconcile their conflicting viewpoints, they reached a “membership deadlock” that prevented Shamee Development from continuing to service its debt to the Bank and from taking the necessary steps to refinance or renegotiate such debt. After Shamee Development failed to make payments as agreed, the Bank accelerated the debt, including the mortgages, and instituted this action against
defendants.”

 

Thus, one equal member had the power to halt business operations, fail to service its debt, and the result was this lawsuit foreclosing on real estate and an appeal.

There are several ways the members could have avoided this scenario, here are just a few:

  1. Create an Operating Agreement that contained a deadlock provision.  This provision could call for mediation/arbitration, or even a buy-out in the event that equal owners halt the business from making key business decisions.  Going back to my client mentioned above, that was my solution for him. Creating a deadlock provision in his Operating Agreement.
  2. Negotiate different ownership prior to forming your business: someone  has majority control, someone has minority.
  3. Set up the LLC as a manager-managed LLC – give certain powers to a single manager to take care of the daily business affairs of the Company – and retain some of the “major” decisions, such as amendment of operating agreement, admission of new members, dissolution, etc… to the members.

 

Lesson:

When setting up a business, you should always have the end in mind. How does a business owner get out of the business?  You should also make sure that one member does not have the power to halt business operations, like in the Shamee case.

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

Business Law Update: Unfair Competition may not be Preempted by Michigan’s Uniform Trade Secrets Act

April 21, 2017 Leave a comment

Greetings on this cloudy Friday in downtown Grand Rapids, Michigan.

 Business owner: I’m going to give you a scenario.

Let’s say your business wants to engage the services of another business to sell its products.

Q: When a business wants to engage the services of another business that will necessarily involve the business divulging confidential infoIMG_1513rmation what do you do?

A: Enter into a Non-Disclosure/Confidentiality Agreement.

Another question:

Q: What happens when the business that received the confidential information goes on to develop a product eerily similar to your product after learning about your confidential information?

A: Potentially, a lawsuit.

Yesterday I read a new published decision from the Michigan Court of Appeals,

Planet Bingo LLC v VKGS, LLC

In the words of the Court of Appeals:

the relevant procedural history is complex“.

Therefore, I won’t delve into the history. Suffice it to say, the parties filed lawsuits based upon the same claims in several different courts across the country.

“This case arises out of Video King’s use of a software program (“EPIC”) that was developed by Planet Bingo’s subsidiary Melange, Video King’s subsequent development of a competing software program (“OMNI”), and plaintiffs’ allegation that Video King wrongfully developed OMNI using confidential information gleaned from EPIC.” Id. pg 1.

The parties entered into a confidentiality agreement.

According to the court –  the parties entered into a contract in 2005 that “had a substantial confidentiality clause:”

Such agreements are necessary to protect in a broad manner all confidential information disclosed to another party in a business agreement.

In a nutshell, Planet Bingo claimed Video King had access to Planet Bingo’s confidential information for its software program EPIC. Thereafter, Video King allegedly used that confidential information to create its own competing software program.

Planet Bingo sued VKGS (Video King) for –

breach of contract (confidentiality agreement),

unfair competition, and

unjust enrichment.

What is unfair competition?

“unfair competition” may encompass any conduct that is fraudulent or deceptive and tends to mislead the public.  See Atco Indus. v Sentek Corp., Lexis 1670, page 7 (July 10, 2003).

This court went back and forth among several courts/jurisdictions and eventually, the Trial Court in Ingham County dismissed plaintiffs’ claims. Among other things, the Court said that the Michigan Uniform Trade Secrets Act (MUTSA)  MCL 445.1901 et seq, preempted – or replaced the common law claim of unfair competition.

The Court of Appeals reversed.

According to the Court:

MUTSA generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret,” Id. pg 6.

“It has been recognized from common law, on the other hand, that unfair competition encompasses more than just misappropriation. See In re MCI Telecom Corp Complaint, 240 Mich App 292, 312; 612 NW2d 826 (2000) (“[T]he common-law doctrine of unfair competition was ordinarily limited to acts of fraud, bad-faith misrepresentation, misappropriation, or product confusion.”) (Emphasis added). Id. pg 7.

“Thus, MUTSA does not preempt all common-law unfair competition claims, only those that are based on misappropriation of “trade secrets” as defined by MUTSA.” Id.

“The pertinent question, then, is whether plaintiffs’ unfair competition claim was based on misappropriation alone or also on fraud, bad-faith misrepresentation, or product confusion.” Id.

Conclusion:

We can glean from the Planet Bingo Case that a claim of unfair competition can be brought when based on:

  • Fraud
  • Bad-faith misrepresentation; or
  • product confusion.

If a claim for unfair competition is brought solely related to misappropriation of Trade Secrets, then the MUTSA is the controlling statute.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

twitter: @JeshuaTLauka

Business Law Update: When are Non-Competes Enforceable?

March 20, 2017 2 comments

Welcome to Spring! I took this photo from my office, the first day of Spring. It is fitting that the ice rink in Rosa Parks’ circle is melting.

With spring comes new opportunities – including employees leaving their jobs.

What happens if the employee signed a non-competition agreement during the course of employment? Are non-competes enforceable?IMG_1456

 – it depends.

 

A few years back I posted on an article written by Above the Law titled – Jimmy John’s Serves Up Sandwiches And Oppressive Non-Compete Agreements.

See the link from the “Above the Law Blog”

In Michigan, Non-Competes are enforceable to protect legitimate busines
s interests.

MCL 445.774a provides:

“1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests…”
Further the Agreement must be reasonable:
  • “as to its duration,
  • geographical area, and
  • the type of employment or line of business.”

In November I posted an article about a possible change to Michigan covenants not-to compete statute, you can see that article here – no new movement on th
at HB. It appears that it got stuck in committee and left to die…

Of note, a bill was proposed earlier this month that would require employers to offer Paid Sick Leave

At any rate, going back to the topic at hand…

The question posed by the Above the Law article is a good one – ok, Jim
my Johns, you have a non-compete agreement, that may be valid…so,

to what end?

What is the point? What type of legitimate business interest is Jimmy Johns trying to protect here?

Going back to the initial topic of this post – when can a business enforce a non-compete?

One Answer:

When a business has a legitimate interest to protect.

 

A recent Michigan Court of Appeals on the topic of Non-Competition Agreements provides some illustration on this point.

BHB Investment Holdings v Ogg

I won’t delve into the details, but the first paragraph of the Opinion is telling:

“Steven Ogg took a job with Aqua Tots Canton after being terminated by its competitor, Goldfish Swim School of Farmington Hills. Ogg’s actions breached a noncompetition agreement he signed with the Goldfish franchisee, BHB Investment Holdings. BHB sought to preliminarily enjoin Ogg from working with Aqua Tots, but presented no evidence of irreparable harm. BHB later failed to establish that the agreement protected a legitimate business interest to support the issuance of a permanent injuncti
on. Nor did BHB substantiate that it suffered any damages as a result of the breach.”

 

Is restricting a former employee from swim instruction a legitimate business interest?

The Court on page 3 recognized a number of factors in the analysis in denying enforcing the non-compete, including:

  1. the position was a low-level position;
  2. employee had no access to confidential information;
  3. employee didn’t take any information;
  4. employee didn’t solicit customers;
  5. interestingly, the employer didn’t previously enforce the non-compete when other employees left.

One other interesting piece of information – the Court rejected the employer’s allegation that its swimming lessons were proprietary information. The Court’s rationale?

the employer “placed its methods in the public domain because this was a public building and the students parents, as well as any member of the public, could watch the lessons and glean the methods.” pg 8.

Having no proprietary information, the employer “could not establish a legitimate business interest it needed to protect.” Id.

 

Lessons:

  1. Non-competes will not be enforced unless they protect a legitimate business interest.
  2. Non-competes are less likely to be enforceable against low-level positions with no access to proprietary information.
  3. If you are going to seek an injunction in court, it helps to have some evidence that your former employee is unfairly competing.

 

questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Key Terms to Consider in Business Contracts.

January 13, 2017 Leave a comment

If you’ve followed my posts for any amount of time, you probably aren’t surprised that I  like reading and writing about the latest Michigan court cases.

Particularly if they are relevant to business or real estate. I always find there are some lessons to be learned.

As another aside – I also like to include photos I took of downtown Grand Rapids, Michigan – overloimg_1360oking Rosa Parks Circle. This one, from today, shows the Zamboni smoothing out the ice for skaters looking to enjoy some weekend ice skating.

The latest case on my mind:

Summit Diamond Bridge Lenders, LLC v Philip R. Seaver Title Company, Inc.

This dispute really has to do with:

Forum Selection Clauses in a Contract.

Backing up a step, why do we prepare written contracts for business transactions?

Contracts are about risk allocation.

In any business transaction, business owners need to  have set in stone terms that answer one question:

who bears what risk?

A Forum Selection Clause would include language indicating that no matter where a dispute about the contract occurred, the contract will be interpreted under (in our case) Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) The parties then would agree to submit to the jurisdiction of said Courts.

Therefore, if your contract contains a forum selection clause, and, for instance, you are owed money by a company in Florida, you would not need to retain a Florida attorney for initiating a lawsuit in Florida. Just initiate the lawsuit in good ole’ Grand Rapids.

So as a general principle, if your business operates in commerce in other states or countries, it is wise to have such a clause.

 

However, the Summit Diamond Bridge Lenders case tells us that although generally such clause is enforceable, it isn’t always the case.

FACTS:

This case involved an escrow agreement with a  forum selection clause that “provides that California law governs any dispute arising from or related to the escrow agreement. The parties also designated the state of California in the agreement’s forum-selection clause.”

Plaintiff brought suit in Michigan alleging defendant, title company, breached its fiduciary duty as escrow agent of the loan funds by dispersing the funds without an approved letter of credit. Id. at page 2.

Defendant filed a motion to dismiss – arguing that Plaintiff sued in the wrong state. California was the proper forum for the dispute under the plain language of the escrow agreement.

The trial Court agreed. It dismissed the case.

The trial court held that California was the proper forum based upon the plain language of the forum selection clause.

The Court of Appeals reversed.

The Court of Appeals noted on page 3 of its decision that “In Michigan, public policy favors the enforcement of such clauses and, absent certain exceptions” citing Michigan Statute, MCL 600.745(3)(a)-(e).

Those excepts are:

(a) The court is required by statute to entertain the action.

(b) The plaintiff cannot secure effective relief in the other state for reasons other than delay in bringing the action.

(c) The other state would be a substantially less convenient place for the trial of the action than this state.

(d) The agreement as to the place of the action is obtained by misrepresentation, duress, the abuse of economic power, or other unconscionable means.

(e) It would for some other reason be unfair or unreasonable to enforce the agreement.” Id. at pg 5, citing MCL 600745(3).

The Court looked to California Law to determine whether or not the forum selection clause applied. California had a statute that ” precluded from bringing suit against a defendant who is a foreign corporation unless …(2) the agreement relates to a transaction involving at least $1,000,00.” Id. at page 4.

Because the agreement does not relate to a transaction involving at least $1,000,000, because defendant only agreed to hold in escrow $700,000 of plaintiff’s funds.

Essentially, the court of appeals held that since California would not entertain the lawsuit – because it did not meet the monetary threshold – the parties couldn’t obtain effective relief in California – satisfying the exception under subsection b.

 

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case Summit did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to litigate in California in an inconvenient forum. They were fortunate that an exception applied and allowed them to maintain their suit in Michigan.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, Summit had the perceived contractual duty to pursue its dispute in California. However, its attempt to avoid abiding by the contract worked out – but it was costly. It was initially dismissed. It took an appeals court to find that a narrow exception applied.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka