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Friend of the Devil: Why Small Businesses Need Quality Relationships with Legal Counsel

“Please allow me to introduce myself” is the classic opening for the Rolling Stone’s anthem, Sympathy for the Devil. . . . and, some would argue, for many law firms. While no one will say their lawyers are really the devil – at least we hope not – lawyers are a necessary evil in the long term strategy of an aggressively growing business. Most growing businesses need experienced business litigators to serve as a sword and a shield for their business. As a business evolves from startup to a star player in its market, the collaboration between a business’ management team and their counsel is necessary. Everything from knowing the various partnership and management interests and protecting newly developed products or services, to litigating threats to the business, a trusted business lawyer serves as a sword and a shield to their business clients.

Maintaining a long-term relationship helps the law firm understand the various interests at play in the business. For example, is the business being managed by the founders, by officers or managers, or does it even have a formal management hierarchy? Most closely held businesses operate somewhere between these three prongs. Business attorneys can help structure the operational protocols of the business to allow for dynamic management, allow the business to employ more formal decision-making strategies on larger transactions, or allow more of a scrum management on working up projects for the business’ customers. A good corporate lawyer should also understand any new players involved in the business. As a business grows, it usually brings in more diverse talent. Sometimes, new talent will want to trade a higher salary for a lower pay scale with equity. While this may be an incentive for some businesses, it will be catastrophic if the trade for equity also requires changes to how the business is managed, expenses booked or profits distributed. Short terms benefits can mask the long-term detriment to the business. Having counsel evaluate the proposed joinder of the outside party will, at the least, serve as a sounding board, and at most, prevent the existing partners / shareholders from giving up rights and benefits that will hamstring the business.

Many of the businesses that we, at the Vethan Law Firm, P.C. represent, are involved in cutting edge projects, in creating new products, or refining a specialized service. Important decisions inevitably involve protection of intellectual property when a business has a product or service which gives it a competitive edge against its competitors. While everyone has heard of patents, trademarks and copyrights, trade secrets and trade dress are also hugely valuable business assets. A business lawyer typically advises his or her client on how and when to protect the keys to the kingdom. A business lawyer should know how the business has been developing its proprietary information and deliverables. Does it have an R & D department, or do inventions result as a solution to problems in the field? Does the business have protocols built in to claim ownership to inventions by its employees and contractors? If ownership of valuable and proprietary information ever becomes an issue, the business lawyer should be familiar with the steps the business took to protect that information, and should be involved in the processes employed to ensure a competitor does not illegally misappropriate valuable information.

When faced with litigation, whether on a non-compete, breach of fiduciary duty against a former manager or partner of the business, the business lawyer must understand and articulate, in very short order, what harm the former employee, manager or partner’s conduct may have on the business. If quick action is required in court or in arbitration, the business lawyer will already have full knowledge of the business, the personalities at the company, and understand the historic strengths and weaknesses of his or her client’s position. A business attorney can craft arguments and trial strategy in response to the information known about the client.

Whether a business may merely needs a second set of eyes to review a deal, or needs gladiator to be its champion in court or arbitration, having a long term relationship with a competent and trusted business attorney is more than a convenience. It may be imperative to the continued viability and operation of the business.

Cobbling Together ‘Contract Documents’ Beyond the Contract

When Four Corners Become Eight: The Single Instrument Rule

Sometimes lawyers use the term “four corners” when describing a contract. This shorthand simply means that you look at a written contract to determine each party’s rights and obligations. The “four corners” refers to the four corners of a page of paper. The simplest example is a written purchase agreement, such as Bob will pay John $2,500 in exchange for John’s 1993 Ford Tempo. John may include the words “As Is” and disclaim any promise that the car is in fit condition to drive. If the car turns out to be a junker, John will not be liable to Bob.

But appearances can be deceiving. Suppose Bob is short on cash? Suppose Bob wants to pay John $1,000 down and $500 a month for three months to pay the full $2,500? To document that part of their agreement, John may require Bob to execute a promissory note, setting out the promise to pay, the amount of the down payment, and a payment schedule. Thus, there is a written agreement for John to sell Bob the car for $2,500, and Bob’s written promise to pay $500 a month for three months. Two separate documents, two separate contracts, right?

Not so fast. Under Texas law, multiple written agreements executed as part of a single transaction are treated as one instrument. Thus, four corners become, in the above example, eight. The picture becomes more complex when you add layers to a transaction. For example, suppose John knows Bob’s credit isn’t so good, so he asks Bob’s father Dave to guarantee the debt, thereby promising to pay the note if Bob defaults. That can result in a third document, called a guaranty agreement. Again, all three documents are considered to be one instrument for purposes of the transaction. Your four corners are now twelve.

Unless carefully drafted, multiple documents related to a single transaction can have unintended consequences. For example, in loan agreements it is common to define what constitutes an “event of default” which will result in acceleration of the loan so that the full amount becomes immediately payable. Sometimes a contract provides that a default in any single provision results in a default in other provisions. For example, Bob owns three businesses, Acme Appliance, Widget King, and ABC Electric. He decides to obtain a $500,000 line of credit usable by each business from First State Bank (FSB). FSB drafts three separate line of credit agreements and, because it wants to take a lien on each company’s inventory, three security agreements and three UCC financing statements. FSB also wants Bob to provide a personal guaranty on each line of credit, so it drafts a single guaranty agreement that identifies each line of credit by account number. The single guaranty agreement ties all nine other documents together into a single transaction, and provides that a default by one company constitutes a default by the other companies. Thus, if Acme defaults on payment, it triggers a chain reaction resulting in Widget King and ABC Electric also being in default, even though their payments are current.

Another way the multiple instruments rule can cause problems is where one of the agreements contains a binding arbitration clause. In binding arbitration, the parties agree to submit any disputes to a decision by a neutral arbitrator or arbitrators selected by agreement or pursuant to the rules of an organization such as the American Arbitration Association. In cases where multiple documents, such as a sales contract, a promissory note, a guaranty, and a security agreement, an arbitration provision in one of those documents could result in a dispute that arises under one of the other contracts being submitted to arbitration. In the above scenario, where Dave guarantees Bob’s note, if the sales contract between Bob and John contains an arbitration clause and Bob defaults, John can make a demand for payment on Dave, and if Dave refuses Dave could find himself submitting to arbitration, though he did not agree to do that in the guaranty agreement itself.

Finally, contracts often include an integration clause. An integration clause generally says that the contract is the sole source of rights and obligations of the parties to the transaction, and that any prior agreements, oral or written, are no longer binding and do not affect those rights and obligations under the contract. Integration clauses also provide that the written contract cannot be modified except in writing with the consent of all parties. This eliminates verbal side agreements, or misunderstandings under prior, incomplete documents, or statements made during negotiations, from becoming part of the final transaction. But buyer beware, if drafted properly an integration clause can also bar a later lawsuit for fraud based on misrepresentations made prior to the signing of the contract.

When drafting multiple documents related to a transaction, you should always seek the advice of a business law attorney to ensure that the final product clearly defines your rights and obligations in the transaction, and avoids any unexpected pitfalls. You must “mind the gap” or you may find yourself crushed between two documents you thought would protect you.

Vethan Law Firm, P.C.’s business lawyers routinely deal with fixing and finalizing contracts and representing our clients in B2B contract disputes. Our contract attorneys work with our clients to protect their bargained for contract rights.

Trademarks Awaken

The First Order seeks to restore the Empire and all that it entails. As part of the First Order’s plan, it wishes to make sure that its name is not lessened by any non-permitted use of the name. To that end, the First Order registers a trademark for the name First Order.

Meanwhile, for the past several years, Rey has been operating First Order Salvage on the planet Jakku. Being a small business owner, Rey never took the time to register her trademark. However, Rey’s hard work running the business has paid off; First Order Salvage is now the largest salvage company operating on the planet, and is a household name on the planet.

When First Order forces land on the planet, they are shocked to discover that their name has been taken. Assuming General Hux doesn’t simply destroy the offending party, what are his options?

Types of Trademark Rights

What this example shows is that there are two types of trademark rights – common law and statutory. Common law trademark rights are acquired automatically upon normal business use in the specific geographic areas in which they have been used, but only in those areas. These rights are effective only as long as they are in use – common law trademark rights can be abandoned by non-use. In this example, by operating her business, Rey has acquired common law trademark rights, but only on the planet Jakku, and these rights are only effective as long as she continues to operate the business.

The First Order, by registering its trademark, has acquired statutory trademark rights. These rights were acquired upon registration of the trademark, and are not restricted to the areas in which the name First Order is actively used. Moreover, statutory trademark rights are not abandoned through non-use. The only exception is that these trademark rights do not apply in areas where someone else has a pre-existing common law trademark right. In this case, that means everywhere but the planet Jakku, where Rey had previously acquired common law trademark rights. However, Rey’s trademark rights are restricted to that planet, and are effective only so long as she operates the business.

In the United States, the primary trademark law is the Lanham Act, which allows for registration of the trademark at the federal level. Federal registration of a trademark creates a nationwide trademark right that does not require active use to be enforceable. A registered trademark is enforceable through federal courts and federal agencies; however, that trademark does not erase pre-existing common law trademarks in the areas those trademarks have been acquired.

Trademarks do not have to be registered to be effective. However, the level of protection a trademark receives, depends upon whether or not that trademark is registered. It is important therefore to register your trademark, and to do so in a timely fashion. At the Vethan Law Firm, P.C. our business attorneys can help you protect your trademark rights.

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Trademarks Awaken May 26, 2016

The First Order seeks to restore the Empire and all that it entails. As part of the First Order's plan, it wishes to make sure that its name is not lessened by any non-permitted use of the name. To that end, the First Order registers a trademark for the name First Order.

READ >

Cobbling Together 'Contract Documents' Beyond the Contract May 26, 2016

When Four Corners Become Eight: The Single Instrument Rule. Sometimes lawyers use the term "four corners" when describing a contract. This shorthand simply means that you look at a written contract to determine each party's rights and obligations.

READ >

Friend of the Devil: Why Small Businesses Need Quality Relationships with Legal Counsel May 16, 2016

"Please allow me to introduce myself" is the classic opening for the Rolling Stone's anthem, Sympathy for the Devil... and, some would argue, for many law firms.

READ >
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The Business Law Attorneys at Vethan Law Firm, P.C. in San Antonio, Texas, are pleased to serve clients in the counties of Kirby, Leon Valley, Converse, Live Oak, Universal City, Schertz, New Braunfels, Pleasanton, Seguin, Canyon Lake, Hondo, San Marcos, Kyle, Kerrville and Lockhart.