Question: If a business is run by a board of directors and a board member is suspected of stealing money from the business, can the other board members be held accountable if they do not report it? Can the employees?
Answer: A director has two duties to the entity that he/she manages - duty of due care and duty of loyalty. Normally the entity is a corporation but there are other types of entities such as non-profits and LLCs. I will explain the duties in more detail later but these duties are imposed on each director and officer of the business entity, but not on employees that operate below an officer. How can you separate the officers from employees? Normally a board of directors appoints officers and officers hire employees. Although there are exceptions to this simple test it should provide you with a simple guideline. Now that you know that the duties only applies to directors and officers let me go over the two duties. Duty of Due Care Defined: Officers and Directors owe a fiduciary duty to the corporation and must discharge their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs. Here the duty of due care applies because the individual is a director. So this Director must conduct his affairs with the entity with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs. Here the Director is suspected of stealing money from the entity and if that was the case then the Director would violate his duty of due care to the entity. This duty would also applies to officers and other directors as well. If the officers and other directors knew of the Director’s actions and did nothing about it would they be discharging their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs? If these facts are true then the answer would be no and they have breached their duty of due care. Duty of Loyalty Defined: Officers and directors are held to a fiduciary duty of loyalty in all of their dealings with the entity so as to promote the interests of the entity without regard for personal gain. Here the duty of loyalty applies because the individual is a director. So this individual must conduct his affairs with the entity so as to promote the interests of the entity without regard for personal gain. Here the director is suspected of stealing money from the entity and if that was the case then the director would violate his duty of loyalty to the entity. This duty would also applies to officers and other directors as well. If the officers and other directors knew of the Director’s actions and did nothing about it would their dealings with the entity promote the interests of the entity without regard for personal gain? If these facts are true then the answer would be no and they have breached their duty of loyalty. Summary In conclusion, if the facts as you presented were true, the Director breached his/her duties to the entity and so did the officers and other directors if they knew of the Director’s actions and did nothing about it. A couple of comments here. The Director’s actions, if true, could also be the criminal act of embezzlement and the police should be notified. Finally the act of stealing by a director many times is not black and white. For example the Director could have done some work for the entity from which he/she expected to receive payment or that the board agreed to provide compensation to the Director. I strongly suggest that you meet with an attorney to discuss all of the facts of this matter as I have only given you general guidelines here.
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Question: Is it against the law to buy a product, repackage it with my company's brand/product name and then sell it online and/or in stores?
Facts: I would like to buy in bulk products from a company, repackage the product using a different container with my company's brand and product name, and then resell it on my company's website as well as in stores. The product will not be changed in any way. Does this violate any laws? Answered: Like many of the questions posted here by individuals such as yourself there is just not enough information to come to a conclusion. I will present you with some guidance so that you will understand some of the legal issues being raised here. However I would strongly recommend that you sit down with an “Intellectual Property” attorney and disclose in detail your plans. An ounce of prevention is worth a pound of cure they say and that applies here. Making the wrong decisions may impact your relationship with your supplier and your customers and cause harm to your business. One area of law raise here is Trademarks. Many people think of logos that identify a company when considering trademarks. However that is just one a small part of the laws regarding trademarks. The Aspen outline on Intellectual Property describes trademarks as follows: “Trademarks permit consumers to identify the source of goods or services. The purpose of trademark law is to ensure that consumers are able to rely on marks in exercising their purchasing preferences by prohibiting competitors from using marks in a way that confuses consumers about the source, sponsorship, or affiliation of goods or services.”. Here you are presenting to the consumer a product as if you were the source product because you are repackaging the product with your company’s brand and product name. A consumer purchasing the product would not realize that the source of the product was your supplier and not you. Another area of law raised here is Patents. A patent owner is granted by the Federal government the exclusive right to prevent others from infringing on the patent. A patent may be infringed by even selling a patent protected product without its owner permission. There may be other areas of law raise by facts that you have not included here. In general I would recommend that not resell your supplier’s products in your own packaging unless you have obtained their written consent to do so. Speak with an Intellectual Property Attorney. They will be able to help you in drafting the agreement so that your rights are protected and your business will not be harmed by this practice. Question: Do I own ideas and research that I have put together off the clock?
Facts: I am presenting an idea for a new division for my company. I have countless presentations and financials that I have put together on my time. If my company decides it is not a route they want to go, do I still own the idea and research? Answer: First look at any agreements you signed with your employer when you started. Most employer / employee agreement have a clause basically saying that all intellectual property (IP) you create, regardless if you are on the clock or not, belongs to the employer. If the IP you create outside of work is in a different field of work than what your employer is in you may have an argument in court to say that the IP belongs to you. However from your facts it seems that the IP is in the same field of work that your employer is in so their legal position is stronger than yours. If there are no agreements between you and your employer then your legal position is stronger but it would still be weaker than your employer's legal position. The courts usually take the view that IP created by an employee belongs to the employer. Note that this view does not apply to independent contractors where the result is the opposite unless the independent contractor was hired specifically to create the invention. However from your facts you seem to be an employee. In summary, considering you fact that the IP you created on your own time is in the same field of work as your company is in, it is likely that the IP you created belongs to your company. I would recommend that if your ideas are rejected by your company that you ask your company to release those ideas to you. This may involve some negotiation and an agreement will have to be created. Contact an IP attorney to help you in this matter. The advantage of this approach is that it will reduce the risk of litigation later on if you do use the ideas. Another advantage is that the consideration you have to provide your company to release the ideas will be less than what you would have to pay later on if you do use the ideas and they were successful. An example of this is Facebook. If Mark Zuckerberg, founder of Facebook, got an agreement from the Winklevoss twins to release the idea to him I am sure he would have had to give them far less consideration than the millions he paid them after Facebook was successful. Question: I formed an LLC in one state to provide software consulting services from my home in another state, do I need to register as a foreign LLC with my home state?
Answer: You will need to register as a foreign LLC in every state that you do business in. Each state defines "doing business" differently. However if you or an agent of your LLC physically perform any sort of business in the state or you have income from that state then it is likely that you are "doing business" in that state. Maintaining bank accounts, selling through independent contractors, holding shareholder meetings, or responding to lawsuits are example of activity that is not consider as "doing business". I have given you just some rough guidelines. Meet with a business attorney in your state for a more accurate answer. Question: What to do about a member of an LLC making unauthorized distributions to themselves?
Facts: I made a cash capital contribution to become a 20% member of an LLC where the other members each own 40%. One of the members immediately wrote herself a check for several thousands of dollars from this contribution claiming it was salary for her hours worked in getting the business off the ground. What can me and the other partner do about this? We did not discover this until after the fact. She also took cash withdrawals from the bank for over $1k. Can we dissolve her from the LLC? Are her actions illegal? Answer: The first place you need to look is in a document called the "Operating Agreement". Most LLCs are created with such an agreement that specifies how the business is to be operated. Moreover this agreement will take precedence over the "default" laws provided by your state. For example, your state likely has a default law that distributions are proportioned the same as each member's percentage of shares to the LLC. Your operating agreement could change that to some other percentage and override the default state law. A common term in this agreement is when and how distributions are to be made. Whatever is written into your operating agreement regarding distributions is what you will have to follow. If such an agreement does not exist or does not contain any terms related to distributions then you will have to look to the corporate laws of your state to find your state's default law. Here in California the default law holds that an LLC may only make a distribution from its profits, you cannot put creditors at risk by making a distribution, and that all members are entitled to the distribution. From the facts you presented the member in question acts would not be in accordance with the laws of California as it was a distribution made only to one member without the agreement of the other members. You could sue for a court order to require her to return the money. As far as removing her from the LLC again look to your operating agreement as it should specify how members are removed, otherwise look to your state’s codes on this subject. Question: Does youtube or any other website receive ownship of the copyrights to your original work if you upload your work on to their website for public viewing?
Answer: When you create an account on YouTube, and many other websites like YouTube, you are asked to read and sign an agreement. You will need to read that agreement to determine if you "assign" your copyrights to YouTube when uploading the work. Assignment is the legal term used when you transfer rights in something you have to another. You can ask YouTube to show you the agreement or by going to your account you may be able to see it online. Question: If a former colleague is refusing to send me back a hard drive containing valuable information, is there any legal pressure I can apply to get it back?
Facts: I am a freelance video producer. I mailed my client's hard drive containing proprietary video content to another video producer hired by the same client. Said video producer was let go, for reasons unknown to me, and they gave me the job. Since then the other producer has refused to send me back the drive, keeps saying he will but never does. This has put me in a tight spot and threatens my reputation with the client. I just want the hard drive back with the footage. The value of the hard drive is $200, the value of the footage is at least $1500, my reputation is priceless. Answer: It is unusual to have enough facts so that I can present to you an “open and shut” case so in my analysis I have included legal definitions so that you can better understand the legal issues involved. As a result my answer will be long. From the facts you have presented it seems as if the Other Video Producer (OVP) may be liable for the tort of “Conversion”. A tort is a wrongful act, not including a breach of contract, that results in injury to another's person, property, reputation, or the like, and for which the injured party is entitled to compensation. The tort (wrongful act) that OVP may be liable for here is the tort of “conversion”. Conversion is the intentional exercise of wrongful dominion and control over the property of another without consent or privilege. Conversion Here we have the property of another because the hard drive does not belong to the OVP but to your client. Moreover it is without consent because you have asked for it back. Although OVP may argue that you gave him consent to have the drive because you mailed it to him the counter is that OVP has exceeded the consent you gave him as you have asked for it back. As for privilege OVP may have the necessary privilege to keep the drive if your client wants him to have it or if it was his drive but from the facts it seems that OVP has no privilege to keep the drive. In addition OVP has dominion and control over the drive because it is in his possession and he is refusing to release it from his possession. His dominion and control is wrongful because the drive belongs to the client and as discussed above he has no consent or privilege to keep it. Finally his act is intentional because he says that he will return it but refuses to perform the acts necessary to return it. In summary you can see that from the facts you presented it seems that OVP may be liable for the tort of conversion. If so what can be your remedy? Remedy In a tort action the remedy is to put the plaintiff, you, in the position they would have been in had the tort never occurred. Since the content of the drive is unique your best remedy is what we call a “mandatory injuction” which is an order from the court commanding someone to do something. If they refuse the order from the court we call this “Contempt of Court” and the court may fine them or even send them to jail. However for the court to issue a mandatory injuction you will have to prove the following: 1. That the defendant did commit a tort. Here OVP may be liable for the tort of conversion thus satisfying this requirement. 2. That the “legal remedy” is not adequate. “Legal Remedy” means that the plaintiff will be restored to the position they were in prior to the defendant’s tort if the defendant paid them money. So say someone hit your car. Assuming that your car is not a one-of-a-kind car the defendant could just pay for the repairs. Although OVP could argue that the hard drive is replaceable and that he could pay you $200 to do so your argument will be that the information on the drive makes the drive a “one-of-a-kind” and that money alone will not replace what is on the drive. So the “legal remedy” of just having OVP pay you money will not restore you to the position you were in before the tort. You need the drive itself. 3. That the court order be easily enforceable. The courts do not like giving orders that are difficult to enforce or that would amount to slavery. For example the court would not order you to complete a video production for your client because how could the know if you would have put in your best effort? Also requiring you to work for someone else would smack of slavery. However here the mandatory injunction is easily enforceable as all that is required is to order OVP to return the drive back to you. 4. That without the court order you will suffer irreparable harm. Here you will have to prove to the court that without the drive you will suffer irreparable harm. The loss of your reputation is irreparable as it is difficult to acquire and so easily lost. 5. That in balancing the hardships between you and OVP that you will suffer the greater harm. Before the court will issue an order they will balance the hardships. For example say that a landfill is upwind from you and that on days you could smell that landfill. If you asked the court for an order to stop that landfill from operating they would balance the hardship on the community to move the landfill or on you to live with the smell. The court would likely find that the community would suffer more than you and would not issue such an order. However here OVP will not suffer any hardship at all since the drive is not even his and you would suffer greatly as you have original work on the drive. Thus the balancing of the hardships would fall in your favor. So in summary it seems that you could ask the court for a mandatory injuction ordering OVP to return the drive to you. By the way, the technical term for this remedy is called “Detinue” but the judge would understand mandatory injunction as well. However OVP could raise defenses to your charge. Let me talk about a couple of them. Defenses Latches Laches is an unreasonable delay during which time the defendant's situation has changed to the extent that an additional and unnecessary detriment would result if the mandatory injuction were allowed. Here I do not believe that OVP could raise the defense of Laches because he will suffer no harm if he were to lose possession of the drive. Unclean Hands The "unclean hands" defense is usually confined to the plaintiff's inequitable (unethical, immoral) conduct directly related to the subject of the litigation. Here if OVP could prove to the court that you acted unethically, say you told your client lies about OVP, the court may refuse to issue the mandatory injunction. However from the facts you stated it seems that you acted ethically. I do not believe that OVP could assert this defense. Summary Therefore it does not seem that OVP could raise any defenses and that you could ask the court to issue a mandatory injunction ordering OVP to surrender the drive to you. Question: How often does a Board of Directors have to meet per year?
Answer: The general answer to your question is that the Board of Directors do not have to meet at all. Check the rules for your state to make sure. Some corporations, in place of annual meetings, will pass resolutions by mail. However it is important to note that holding regular annual meetings will lend legitimacy to the corporation and make to more difficult for creditors and tort judgment holders from suing shareholders in a "piercing the corporate veil" type of suit. Besides regular annual meetings a corporation should hold a meeting whenever an action is outside the ordinary course of business for the corporation. Question: If I want out of my business with my partner and we have no exiting contract, what are my options?
Facts: I went into business about a year ago and I want out and my partner is saying no. What are my options and can I take the stuff that I purchased in my name as a loan to the business until it was able to purchase it's own equipment and furniture? Answer: All too often people enter into business with each other without establishing, in advance, what is to happen when certain events occur. It is so important to consult with an attorney when the business is forming to discuss situations such as this one. Your attorney will know what events can lead to hardship between partners and can put into place an agreement on how to deal with these events. Your story is an all too common occurrence. Basically you will have to look at your leaving the business as a possible breach of contracts you may have between yourself and your partners. Note that you may have “implied” contracts between yourself and your partners along with “express” contracts, both in writing and oral. Implied contracts are contracts that are created from a party’s reasonable reliance on the other party’s words or actions. Then you will have to look at the harm you will be causing your partner by breaching those contracts. The more serious the harm the more your partner can sue to recover. You only mentioned one possible contract in your fact pattern - “Can I take the stuff that I purchased in my name as a loan to the business until it was able to purchase it's own equipment and furniture?” This seems to be a valid contract as you gave money to the venture in return for an interest in the venture. Barring an agreement otherwise, money that is brought in by the partners determine their percent interest in the business. It is not considered a loan. For the equipment to have been a “loan” you will need to show the court that you and your partners agreed that your money was to be a loan that was to be repaid by the business and that your money was not an investment into the business. If this is a “loan” then, according to the terms of the contract, have to wait until the business profits so as to pay you back. If you take the equipment away then your partner can sue for damages or for an order from the court for you to return the equipment. If this is an investment then you will have to wait until the business has profits. You can ask your lender to replace your name with the name of your partner. This is called a “Novation”. However all three parties, you, your lender, and your partner, will have to agree to this change. My advice would be to consult with an attorney and bring to the consultation all agreements, both implied and express, between you and your partner. Then after the consultation talk with your partner and negotiate an exit strategy for you. No one wants to be in business with a disinterested partner but on the other hand your breach should not cause your partner any undo hardship. Question: How do I insure a business conversation remains confidential?
Facts: I am looking to start a new business service in order to improve the idea I looking to talk to owners of small businesses. Is there some sort of agreement or form that can be used to insure everything that is discussed will remain confidential. Answer: There exists a set agreements called "Nondisclosure Agreement" and "Nonuse Agreement". A search on the internet will turn up a number of hits on example agreements. Although I cannot endorse any of them and they would need to be modified to your specific needs they will provide you with a good starting point and an attorney can make any necessary final adjustments. It is important to note that if a business could prove that your idea is ordinary, obvious, or that they were already in possession of it, they could argue that there was no agreement formed because they got nothing of value in exchange for their promise not to disclose. The reason for this is that the law of contracts holds that an enforcable bilateral contract is a contract where promises are exchanged for consideration. So basically you are promising to give valuable information to the business in exchange for their promise not to disclose or use it. If you do not give valuable information to the business then the business would be free to disclose it or use it. A valuable idea is an idea that is novel. You can search the patent database at patents.google.com to see if your idea is novel. If your idea is indeed novel then a provisional patent application will do a better job of protecting your idea than a NDA would. My advice is to do some research on the internet on these agreements and on your idea. Then meet with an attorney to draft an agreement that will be enforceable in court or help you file a provisional patent application to better protect your idea. |
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