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Preventative Lawyering: why it is good to know an attorney before your business has an issue

 

Preventative Lawyering (Halloween Edition): Avoiding Legal Mistakes That Could Come Back To Haunt You

DISCLAIMER: NOT LEGAL ADVICE. FOR INFORMATION ONLY. DO NOT RELY ON ANY ADVICE YOU RECEIVE ON THIS FORUM. Legal advice comes after a complete review of the facts and relevant documents. An attorney-client relationship, with all the privileges associated with it, can only be formed through a written engagement letter which cannot occur in this forum. Mr. Howell is licensed to practice in the Commonwealth of Virginia only and his thoughts are rooted in Virginia Law or general legal principles, not any other specific state’s laws. You should speak with an attorney licensed in your state, to whom you have provided all the facts before you take steps that may impact your legal rights. 

You’ve probably heard this one: “Talk is cheap. . . until lawyers get involved." Unfortunately, this kind of thinking often keeps business owners from calling an attorney until things really go sideways and they’re facing a worst case scenario: costly litigation or devastating bankruptcy.

In contrast to popular perception of attorneys, our office believes in the power of preventive lawyering. In our experience, seeking advice from trusted counsel at the beginning can avoid a ton of pain at the end.

In honor of Halloween, I offer two terrifying tales of how a small business owner’s efforts to save money by not consulting an attorney in the early stages came back to haunt them. The names and facts have been borrowed from several different cases and adjusted where appropriate to protect confidentiality.

Scary scenario 1: Creating contracts from the Internet

A business, we’ll call it Acme Plumbing, needed an employment agreement for its employees to sign upon hiring. Rather than seeking out an attorney, the company opted to cut and paste some language they found online to draft a short, three-page employment agreement. The agreement contained a covenant intended to prohibit employees from competing against Acme or soliciting its clients for business after the employee’s departure. Big mistake.

This already would be a red flag for any attorney, as non-competition and non-solicitation agreements occupy a suspect position under Virginia Law. Virginia courts have struck down such agreements on the basis that it is merely possible that they cover activities that are overly broad or unduly burdensome on the employee, even if the employee in question is actually violating some legitimate interest of the business. This creates a major pitfall for businesses seeking to protect themselves.

Adding to the company’s problem was that the language they decided to use was pulled from a different kind of agreement, one intended to protect sensitive information exchanged between two businesses evaluating a potential partnership. Unfortunately, under Virginia law, a partnership between two businesses invites far less scrutiny than an employment relationship. To make matters worse, the geographic scope of the Internet agreement extended throughout the entire Commonwealth of Virginia, while Acme’s customers did not, making it far broader than necessary to protect the company. Finally, the agreement contained no clear time limitation. Instead, it referred to a section of the original agreement from which it was borrowed to establish the term. As a result it was impossible, as a matter of law, for the employee subject to the agreement to determine how long it was in effect.  

What happened next was predictable. After working for the company for several years and learning all of Acme’s customers and marketing methods, the employee in question terminated his employment and sought to utilize that knowledge to start his own operation and pursue many of Acme’s customers.  Acme sought an attorney only after it lost tens of thousands of dollars in business. A substantial retainer was paid and a lawsuit was filed, but there was no getting around the defects in the document. After spending thousands in legal fees, the case was settled for a fraction of Acme’s damages due to the weaknesses in the imprudently obtained document.

Had Acme called an attorney to draft the document instead of using free language off the Internet its experience could have been far different. The mistakes in the document, subtle to the untrained eye, would have been plainly apparent to an experienced attorney. A stronger agreement could have been drafted that spelled greater risk for the employee at trial. This may have encouraged a more favorable settlement or allowed Acme the confidence needed to take the case to trial and recover its damages.

Verdict: A cut-and-paste job from the Internet will not provide the legal protection you need. An attorney could have affordably drafted a better document and saved tens of thousands in litigation costs and lost business.

Scary mistake 2: Purchasing an existing business without the advice of counsel

Jane Doe, as we’ll call her, wanted to buy a small business — in this case, a sports bar and grill in a local shopping center. A broker had suggested the business as a good opportunity and Jane agreed. But because she was just starting out and a little short on cash, she did not hire her own attorney to represent her.

The broker had put her in contact with the seller’s attorney who provided her with a variety of materials, including a stock sale agreement, profit and loss statements for the past year, and a 75-page lease agreement for which Jane would be responsible as a part of the purchase. The seller’s attorney cautioned her that he could not provide her with legal advice because he represented the seller. However, he did share his belief that she would find the purchase agreement and lease terms “pretty standard.”

After reviewing the profit and loss statements, she was slightly concerned that money would be tight after paying rent, employee wages and payments upon the loan needed to purchase the business. However, she had heard from another store manager in the shopping center that two new anchor stores were coming and she thought surely they would bring in more business. She skimmed the documents, signed the lease, and began operating her new business.

Fast forward to a year later. The anchor stores never came and the shopping center actually lost foot traffic and the revenue that came with it. Because the purchase agreement structured the deal as a stock sale, Jane’s purchase of the business came with all the prior owner's liabilities and she had to pay out significant unexpected liabilities for two lawsuits of individuals who contracted food poisoning under prior management. Jane also learned the hard way that the profit and loss sheets she reviewed included substantial revenue from several video gaming machines which the lease allowed the previous owner to remove when they left.

As a result of these difficulties, Jane ended up several months behind on rent and utilities to the tune of $50,000. One day, she came back to her business to find a lock on the door. When she contacted her landlord to protest, the landlord advised her that her lease contained a self-help provision allowing them to simply lock the door if she failed to pay. Hoping to work out a deal with her landlord, Jane explained that she needed access to her business to make money to pay the backed amounts or she would be forced to declare bankruptcy. Her landlord’s response: “Do what you have to do, but you have personally guaranteed the lease. If you fail to pay we will place a lien on your home and whatever else you personally own.”

When Jane’s landlord filed suit against her, she finally did what she should have done from the beginning: contact an attorney. She then learned she had made three costly mistakes: Believing the other store manager’s claims about the supposed new anchor stores without trying to verify the information; believing the seller’s attorney that the terms were “pretty standard,” when in fact they favored the landlord; and believing that the profit and loss statements told the whole story, when they may have excluded valuable fixtures that contributed to the business’ bottom line. A good attorney could have protected Jane Doe from all these problems.

Verdict: Although this scenario combines examples from several cases in which I have been involved, the lesson is still the same. First-time business owners who try to save money by going it alone in the initial purchase process do so at their peril.

DISCLAIMER: NOT LEGAL ADVICE. FOR INFORMATION ONLY. DO NOT RELY ON ANY ADVICE YOU RECEIVE ON THIS FORUM. Legal advice comes after a complete review of the facts and relevant documents. An attorney-client relationship, with all the privileges associated with it, can only be formed through a written engagement letter, which cannot occur in this forum. Mr. Howell is licensed to practice in the Commonwealth of Virginia only and his thoughts are rooted in Virginia Law or general legal principles, not any other specific state’s laws. You should speak with an attorney licensed in your state, to whom you have provided all the facts before you take steps that may impact your legal rights. 

October 27, 2017 

Jeff Howell