3399 Lenox BuildingAtlanta, Georgia 30326

Telephone: (404) 841-3200www.ctflegal.com

By: John L. Watkins

Contact: jwatkins@ctflegal.com

Common Legal Mistakes Businesses Make and How to Avoid Them

Chamblee Business AssociationMay 21, 2009

Disclaimer This presentation is for informational purposes only. The

presentation is based on general principles of Georgia law as of the date of preparation (May 21, 2009). Georgia law is subject to change, and the law may differ in other jurisdictions. Reviewing or downloading this presentation does not create an attorney/client relationship with the author or his law firm, Chorey, Taylor & Feil, A Professional Corporation. The author and his firm provide legal services only pursuant to written engagements. Legal advice must be tailored to the particular circumstances and the applicable law. Those seeking legal advice should consult an experienced attorney.

It’s Dangerous Out There!

Limiting Risk is Possible ….

If You Know What You are Doing

And Sometimes with a Little Professional Help

Mistake No. 1: Not Following The Prime Directive

• It is almost always cheaper to address a legal issue on the front end than to fix it on the back end– Getting the contract right

on the front end is cheaper than litigating on the back end

• There probably is an exception, but I have yet to see it

Mistake No. 2: Not Protecting Limited Liability

• Most think: A corporation or an LLC protects your personal assets

• True, to a point:– Generally protects personal assets from

corporate debts and contract obligations– Generally protects personal assets from

liability caused by the acts of others– Does not shield against personal tort liability

Not Protecting Limited Liability• But limited liability can be lost

– Personal Guaranty– “Piercing the Corporate Veil”

• Disregards corporate entity or LLC protection if entity is used to commit fraud

• Indicia include:– Improper mixing of personal and business expenditures– Failure to maintain separate bank accounts – Failure to maintain separate and proper accounting records– Failure to maintain corporate formalities (meeting minutes,

resolution)– Undocumented loans between officers/shareholders and

company– Not making clear that company is the party

How to Avoid “Piercing”• Use the corporate or LLC form on business

cards, advertising, correspondence and contracts– i.e., “Inc.” or “LLC”– Sign for the company

• As officer, member, etc.

• Maintain separate personal and company bank accounts

• Maintain correct and separate books of account

How to Avoid “Piercing”

• Maintain annual report and registration

• Maintain corporate books and records– Annual meeting (or unanimous consent

resolutions)– Meeting minutes– Authorizations

• Document company/shareholder loans

Mistake No. 3: Consequences of Sales Talk

• Lawyers love salespeople

• Salespeople:– Make statements regarding the capabilities of

their product– May provide a “payback analysis”– May provide an analysis of cost savings– May tend to “gild the lily”

Sales Talk May Create Liabilities• Express Warranties: O.C.G.A. § 11-2-313

– Any “affirmation of fact” that “relates to the goods” and is “part of the basis for the bargain”

– Any description that is part of the basis of the bargain– Any sample or model that is part of the basis of the

bargain– Not necessary to say “warranty” or “guarantee”– General affirmations or “puffing” are generally OK

• “Our widgets are the best in the world”

Avoiding the Unintended Express Warranty

• Avoid unequivocal statements in sales literature– “Estimate” or “illustrative” only

• “Your mileage may vary”

– “Does not create a warranty”

• Written terms and conditions– No warranties beyond the writing– Signed by customer if possible– Best if prepared or reviewed by counsel

Mistake No. 4: Not Disclaiming Implied Warranties

• Implied warranties are not your salesperson’s fault

• Created by law, unless excluded or modified– Implied warranty of merchantability. O.C.G.A.

§ 11-2-314– Implied warranty of fitness for a particular

purpose. O.C.G.A. § 11-2-315

Avoiding Implied Warranties• Excluding Implied Warranties

– Exclusion language must be “conspicuous”– For merchantability, must mention

“merchantability”– For particular purpose, must be in writing

• Should be in writing and reviewed by counsel

• Note: Additional rules/concerns for consumer products

Mistake No. 5: Not Protecting Trade Secrets

• Intellectual property can be patents, copyrights and trademarks

• But for many businesses, it consists of confidential information and trade secrets

• Many types of information are potentially protectable as a trade secret– Must be secret– Must have actual or potential economic value– Must be subject to reasonable efforts to maintain

secrecy

Not Protecting Trade Secrets

• Confidential information not a trade secret can be protected by contract– If not a trade secret, must have a term of

years

Protecting Trade Secrets/Confidential Information

• Use, maintain, update and enforce non-disclosure agreements (NDAs)

• Have procedures to protect trade secrets and confidential information– Password Protection– Limited Disclosure– Confirm return in writing when the person

leaves– Are many other possible measures

Further Information: Trade Secret and NDAs

• CTF podcasts on trade secrets and NDAs– Three part series

• www.ctflegal.com/podcasts.html• www.ctflegal.blip.tv

Mistake No. 6: Ignoring Key Contractual Provisions

• Warranty Provisions– What is covered and not covered– Implied warranties excluded– Length of warranty period– Limited Remedies?

• i.e., repair or replacement

Ignoring Key Contractual Provisions

• Indemnity: If one party is sued, the other party will “hold harmless”– Defense obligation– Obligation to settle or pay judgment

• Issues– Breadth of indemnity

• Does it include the other party’s negligence?

– Is it insured?• Ask your insurance broker

– Is there a cap on liability?

Ignoring Key Contractual Provisions

• Limitations of liability– Is one side’s liability limited or capped?– Exclusion of incidental and consequential

damages• Lost profits, lost opportunities, etc.

– Damages cap– Generally, enforceable

Ignoring Key Contractual Provisions

• Termination Provisions (“Exit Strategy”)– How long does the contract last?– What rights do you have to terminate for non-

performance– Rights and duties upon termination

Not Understanding Key Contractual Provisions

• Dispute resolution provisions– Forum selection clauses

• Generally enforceable

– Arbitration provisions• Almost always enforceable• Pros and cons

Mistake No. 7: Assuming It’s Non-Negotiable

• Many small businesses assume that the other side’s form is non-negotiable

• Generally, that is not true– Key: Getting to the decision-maker

• Consider: If they will not even discuss T&Cs, do you want to do business with them?– “Some of my best deals are those I never

made”

Mistake No. 8: Using Internet Forms

• One size does not fit all

• Remember the prime directive

• Do you really know what you are doing?

• Professional help does not have to cost an arm and a leg

Mistake No. 9: Letting Salespeople Vary Terms

• Do not let your best salesperson change your key terms– Such as the forum

selection clause

• Do you really want to be sued in Montana?– Well, maybe, if you already

live there …• Or really like elk …

– It’s a great place, but I’d rather be in Georgia.

How to Find a Good Lawyer• Resources

– Referrals from other lawyers– Law firm websites– Martindale-Hubbell Law Directory

• www.martindale.com or www.lawyers.com

– www.avvo.com

How to Find a Good Lawyer• Interview

– Seek experience in the area you need– Discuss fees frankly and up front

• Fees should be confirmed in a written engagement letter

Conclusion• Thanks for coming!

• Questions?