PROTECTING PERSONAL ASSETS AGAINST LIABILITY FOR BUSINESS DEBTS IN CALIFORNIA

Although no business owner ever wants to consider the likelihood of being sued for unpaid business debts, breach of contract, or damages caused by their employees, business activities, or the like, these events do happen. What’s more, if businesses do not plan properly, owners may become personally liable for the debts of the business. This article discusses some ways to avoid personal liability in the unfortunate case that a business’s activities results in litigation.

The business attorneys at Gehres Law Group often recommend a three-pronged approach to aid clients in ensuring they are protected from personal liability for their company’s debts. The first step is to make sure that the business itself is structured as a business entity that protects and separates personal assets/liability from business assets/liability. The second step is to enter into agreements in a manner which will limit a business owner/officer/director’s personal liability. As a final step, obtaining appropriate insurance coverage, over and above what is required by law, that covers common business risks in the company’s specific industry, is also important in controlling personal liability exposure.

BUSINESS ENTITY CONSIDERATIONS

If you’re operating a business as a sole proprietorship, you and your business are, from a legal perspective, the same entity. That means that you personally, in addition to being entitled to the income of the business, are liable for all of your business debts. It also means that all, or most, of your personal assets can be attached, or considered for collection, by your creditors. Likewise, in a general partnership each partner is personally liable for 100% of the business’s debts. Therefore, if there aren’t enough business assets to pay the partnership’s debts, and your partner is broke, creditors can come after your personal assets to pay all of the business’s debts, not just your pro rata share of the debts.

On the other hand, if your business is formed as a corporation or LLC, you and your business are separate legal entities. As such, assuming that you do not otherwise expose yourself to personal liability, and your corporation or LLC is properly formed and maintained, you would have no personal liability for the debts of the business, even if the business can’t pay them. Our highly experienced San Diego Business Attorneys can assist you in determining not only the best type of entity structure for your specific needs, but also in preparing your corporate and other legal documents in a manner which provides you with maximum protection against personal liability for business obligations.

Maintaining corporate compliance once an entity is formed is also critical, such as preparing annual corporate minutes, ensuring the entity is adequately capitalized as required by the California Corporations Code, as well as addressing other compliance issues is also critical to ensure business owners are well protected. See our related articles on this topic here and here.

ENTERING INTO AGREEMENTS ON BEHALF OF YOUR BUSINESS

Once you have settled on the proper structure of your business ventures, it is important to also be cognizant of potential situations where your actions might undermine the protection you have tried to maintain by that formation against personal liability for the business’s debts.

One way that you may inadvertently waive your right to personal liability protection is to sign a personal guarantee for a business loan or line of credit. Any debt that you obtain using this method is yours personally should your business assets not be sufficient to satisfy the debt.

The next way that you might unknowingly expose your personal assets to attachment for business debts is by signing a contract or agreement in your personal name versus on behalf of the Company. For example, John Smith, who is President of ABC Corporation, would need to sign John Smith, President, on any documents related to the business/corporation when he is representing that business. If he simply signs John Smith, without including his capacity as an officer or agent of the Company, he may have just set himself up for personal liability for that debt. Seems harmless, but it could be an expensive mistake.

An additional way for a business owner/officer to subject themselves to personal liability is to use personally owned collateral or credit cards (not in the business’s name) to underwrite or accumulate debt on behalf of the Company. It is very important to remember not to comingle personal assets and debts with business debts.

Finally, along these same lines, if a business owner personally misrepresented or lied about any facts when applying for a loan or credit on behalf of the corporation or LLC, they could be held personally liable for the debt, as well as potential personal exposure for fraud, both civil and criminal. Also, as touched on previously, if a business fails to maintain a formal legal separation between the business’s and the owner/officer’s personal financial affairs, creditors will likely try to have a court hold those owners/officers personally responsible for the business’s debts under a theory known as “piercing the corporate veil.”  

INSURANCE CONSIDERATIONS IN PROTECTING THE ASSETS OF THE BUSINESS AND THE OWNERS/OFFICERS

Over and above the necessity to ensure that a business entity is complying with both statute and contract by maintaining the required insurance coverage, such as workers compensation, vehicle coverage, general liability, including “acts and omissions” when appropriate, and property (real and business). An umbrella policy is often a good choice when underlying liability insurance may not be enough to cover a catastrophic loss or claim. This provides an added layer of protection for your company, and potentially the owners/officers if there is an attempt to obtain personal liability against them for the company’s debts.

Along those lines, obtaining a management liability policy could be invaluable for the following types of situations: 1. Directors and officers — basically this protects directors and officers, as well as the business entity, when there are allegations that their decisions resulted in the mismanagement of the company, causing a loss to others. 2.  Employment practices liability —coverage that protects the directors, officers and the entity when there are allegations of discrimination, harassment and failure to promote and similar employment legal issues. 3. Fiduciary liability — If an officer or director acts in a role for example, the entity’s investment advisory board and there is a loss for the investors or employees, as in the case of a 401(k) plan, this type of insurance generally operates to protect the plan fiduciaries when there are allegations that they failed to fulfill their duties to the plan participants, assuming that there was no fraudulent intent or gross negligence.

In summary, taking steps to limit personal liability when starting and running a business provides peace of mind for a business owner and it is vital to consider at the beginning of the business cycle. Our San Diego Business Attorneys can discuss your concerns and options with you as well as assist you in setting up and maintaining your business entity in a manner designed to ensure the least amount of personal financial exposure possible in your circumstance. Contact us today for your complimentary consultation.

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ISSUES OF FRAUD IN BUSINESS CONTRACTS

Contracts are the foundation that businesses, small or large, depend on daily to carry out their mission.  Most businesses exist by virtue of contracts, agreements of mutually dependent promises and obligations such as partnership agreements, articles of incorporation and shareholder agreements, limited liability operating agreements, service agreements, licensing agreements, and many others.  Businesses hire their employees by contract, or quasi contract, either in writing or orally.  And, of course, business suppliers and customers supply and purchase in conjunction with purchase and sales orders/contracts.  So, it is not surprising that business litigation, for the most part, is centered on the interpretation and enforcement of these agreements, and the recovery of damages for alleged breaches of contract, issues of their formation, or execution of the duties under these agreements. 

As a major subset of contract law are cases where fraud is alleged, either in the formation of a contract or later in the delivery and execution of the terms of the contract–or, in some cases, where an agreement doesn’t rise to the level of a contract, but fraud in the inducement is present. In essence, “fraud” is present when there is dishonesty or deception at some point in the business relationship which is material to the terms of the contract or transaction. Experienced business litigation lawyers know that, when suing for compensation for breach of contract, the addition of legitimate fraud claims can make their client’s case much stronger, especially from a damages perspective. 

In California, for example, to prove a fraudulent inducement claim, a plaintiff must prove the following elements:

• At least one misrepresentation — false statement — was made or at least one important (material) fact was concealed by the defendant, or their agent;
• The falsity/concealment was known to the defendant, or their agent, at the time it was made;
• The party making the false statement made the false statement in order to induce the other party to enter into the contract;
• There was justifiable or reasonable reliance by the other party; and,
• No contract would have been entered into had the truth been known.

The Law of Damages for Breach of Contract vs Damages for Fraud

Breach of Contract:

When contract disputes cannot be resolved by negotiation, our San Diego business lawyers often find themselves having to file or defend lawsuits for breach of contract.  California Civil Jury Instruction 350, which is used by California courts to instruct juries in such cases, provides a good summary of the types of money damages which may be awarded for breach of contract:

350. Introduction to Contract Damages

If you decide that [name of plaintiff] has proved [his/her/its] claim against [name of defendant] for breach of contract, you also must decide how much money will reasonably compensate [name of plaintiff] for the harm caused by the breach. This compensation is called “damages.” The purpose of such damages is to put [name of plaintiff] in as good a position as [he/she/it] would have been if [name of defendant] had performed as promised.

To recover damages for any harm, [name of plaintiff] must prove that when the contract was made, both parties knew or could reasonably have foreseen that the harm was likely to occur in the ordinary course of events as result of the breach of the contract.

[Name of plaintiff] also must prove the amount of [his/her/its] damages according to the following instructions. [He/She/It] does not have to prove the exact amount of damages. You must not speculate or guess in awarding damages.

Notably, as our contract lawyers or business attorneys can tell you, contract damages are limited to compensating for harm which the parties knew or could reasonably have foreseen.

Damages in Fraud Claims Cases:

There are various types of fraud in law, however the principal statute that applies to business contracts is set California Civil Code section 1572, which provides:  

Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

3. The suppression of that which is true, by one having knowledge or belief of the fact;

4. A promise made without any intention of performing it; or,

5. Any other act fitted to deceive.

Fraud is also considered a Tort (a civil wrong that can be found even if a “contract” is not found to exist), and the general “tort” measure of damages is set forth in California Code of Civil section 3333, which provides:

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.

The difference between alleging a breach of contract or the tort of fraud is significant under California law since punitive damages are allowed under tort law whereas they are not under contract law and, in addition, the damages do not have to have been foreseeable.

See California Civil Code Section 3294, which provides, in part:

Exemplary damages; when allowable, definitions

(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

…

(emphasis added).

This opportunity to plead and prove punitive damages, which are typically a percentage of the defendant’s revenue or profits, and meant to punish the defendant, can provide significant leverage for a business litigation lawyer to negotiate a larger settlement on behalf of their client.

If you believe that your business may have been the subject of a fraud, or if you are being sued for fraud, contact our experienced business litigation lawyers today to assist you. There is no charge for an initial evaluation of your case.

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PARTNERSHIP DISPUTES AND HOW TO AVOID THEM

Our San Diego business lawyers have previously written about corporate governance and compliance issues and the many benefits to business owners of addressing their Company’s corporate compliance.  In this article, we focus on another reason to engage in best practices when it comes to corporate governance—Partnership Disputes and How to Avoid Them.

Many clients contact our business litigation attorneys after a dispute arises. When that happens, the costs and stress of resolution, including possible litigation, can mount. Here are some relatively simple and cost-effective measures to help you avoid a partnership dispute down the road.

Planning to Avoid Partnership Disputes

As an initial matter, if you have either no agreement, or one that is silent about how, where and when disputes are resolved, you and your partners will be left to resort to the remedies and relief offered by the various California statutes and case law that govern partnerships in this State. Unfortunately, in most cases, the relief and remedies provided by statute are relatively weak, “one size fits all” provisions designed to provide a minimum standardized set of rules. In contrast, our business law attorneys are adept at preparing customized remedies and processes you and your partners can agree to from the outset, those which clearly define how you want the business to operate and how you will resolve any disputes which may arise. If the partners haven’t agreed to such terms beforehand, then once there is a disagreement, resolution is often hard to come by and costly litigation is more likely. Therefore it is imperative that you plan ahead for disputes.

As we all know, most relationships between people, whether family, friends or business partners, will involve disagreements now and then. It is a reality that is easy, but potentially expensive, to overlook in business. If business owners accept this reality and commit to determining how partnership disputes will be resolved from the outset, they will be driving the train and not vice versa. For instance, the partners should discuss the possibility of including mediation or arbitration provisions in their governing documents, whether that includes an Operating Agreement, Partnership Agreement, Shareholder Agreement, a Buy Sell Contract, or a combination of governing documents. Mediation and arbitration are typically far more cost-effective options than litigation. Without mandating this resolution in a dispute in governing/formation documents there will be no requirement for the parties to engage in alternative dispute resolution.

Other important issues to discuss in the planning phase include what will happen in the event one of the key owners becomes unable to perform his or her obligations to the business partnership, or decides to sell their interest in the business. If your business’ controlling documents don’t provide a roadmap to address these and other common issues, then you could end up with a new partner in the business that you can’t work with, don’t want to work with, or even worse, one who’s interests are not aligned with the well-being of the business. Many business partnerships have failed because of completely foreseeable events simply because the partners did not plan for worst case scenarios.

One additional consideration your business law attorney may recommend that you address includes how to value shares or partnership interest in the company. The governing documents can be very detailed at assisting partners in determining how their interests will be valued when it comes time to sell or transfer them, without having to resort to a lawsuit. This could include language providing non-selling partners, or the partnership itself, with a right of first refusal to purchase a selling partner’s interest.

Hiring an Experienced Business Law Attorney to Avoid Partnership Disputes

Once you have started thinking about and discussing your options for addressing your partnership issues, it is in your best interest to hire an experienced business law attorney to help you reduce your agreements to writing, in order to ensure they are legally enforceable and meet your company’s particular needs. The key to lasting continuity of your company’s operations, and its continuing success, often lies in well-drafted legal documents, from Partnership Agreements, Operating Agreements, Shareholders Agreements, Buy/Sell Agreements, or other documents as your company’s needs dictate.

Then, if disputes arise, as they often do, the partners can look to these documents for guidance; they should inform the owners of the process by which they are bound to resolve their disputes, for example mediation and arbitration, as we previously referred to. Our business law attorneys usually do recommend mediation provisions, at a minimum, as well as language that permits the prevailing party to recover their attorney’s fees and costs in the event of a dispute. Without them, potentially destructive litigation is often the result.

In summary, planning ahead for partnership disputes is what business lawyers are trained and experienced in handling. Put our experience and knowledge to work for you and let us help you avoid a costly partnership dispute. Feel free to contact our business lawyers for a free evaluation or browse our website for more information.

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Formation of Contracts in California

Introduction

San Diego business law attorneys and litigation lawyers alike regularly deal with the law of contracts. Whether you are negotiating a contract or have hired a trial lawyer to pursue a breach of contract lawsuit, it is helpful to know some of the basic principles and laws governing contracts. In this article, we’ll discuss the elements required to form an enforceable contract, express versus implied contracts, and written versus oral contracts, as well as the covenant of good faith and fair dealing.

What is a Contract?

In its most general broad terms a contract is an agreement among two or more individuals or entities to do something, or to refrain from doing something, that they don’t have a legal duty to do or not to do. Civ. Code §1549. For a valid enforceable contract to exist, what the parties have agreed to do or refrain from doing must be legal; otherwise, the contract is void, or to put it another way, there simply is no contract. R.M. Sherman Co. v. W.R. Thomason, Inc. (1987) 191 Cal. App. 3d 559, 563. An example our Gehres Law Group business litigation attorneys like to use on this point is one where there is an agreement among competitors to fix prices at a certain amount, which is a violation of both California and Federal antitrust laws and is, therefore, illegal and void.

It is essential to the existence of a contract that: 1) Parties are capable of contracting (age, mental capacity, agency issues apply to this requirement); 2) The parties consent to all of the terms must be clear; 3) The subject of the agreement must be lawful (as discussed above); and, 4) There is something of value given that is not illegal and for which there is not already an existing duty to provide.

How is a Contract Formed?

There are four requirements for the formation of a contract: (1) a lawful object, (2) an offer, (3) an acceptance of the offer, and (4) “consideration.” Civ. Code sec. 1550.

An offer is a promise to do something or to refrain from doing something. For instance, “I will pay $5000 for your car,” is an offer to do something, namely, purchase a car.

Contracts may be “bilateral” or “unilateral.” A bilateral contract is one in which contract is formed by mutual promises made by each party to the other. A unilateral contract is one in which one party makes a promise in exchange for an expected act by the other, rather than a promise by the other.

If a buyer says to a prospective seller, “I will pay $5,000 for your car,” and the prospective seller replies, “Okay, I will sell you my car for $5000,” the seller has made a mutual agreement (accepted the offer) by agreeing to sell his car to the buyer, and a bilateral contract has been formed; each party has agreed to do something for the other.

If person A says to person B, “I will pay $500 to anyone who finds my lost dog,” and B finds and returns A’s lost dog, B has accepted the offer by doing the thing requested, namely, finding (and returning) A’s lost dog, and a unilateral contract has been formed. Acceptance of the offer is by the act of finding and returning the dog not by a statement of agreement.

If courts have doubts as to which type of contract was formed, the presumption is that it was a bilateral contract. The reason that matters is mostly in when the contract becomes enforceable. With a bilateral contract it is enforceable immediately. However, with a unilateral contract, it isn’t enforceable until the condition precedent to payment, for example finding the dog and offering him to person A, has been performed.

The last requirement for formation of a contract is “consideration.” Lack of consideration is a defense often asserted by our San Diego business litigation attorneys in contractual disputes. Consideration can basically be viewed as a quid pro quo — you do something for me, and I will do something for you.

Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise. Civ. Code §1605.  In the above examples, for instance, the person making the offer and the person accepting the offer are each doing something for the other. A party to a contract provides “consideration” by providing the other party with something of value. In the above examples, the car, the payment for the car, and the finding and returning of the dog, are all things of value.

Express and Implied Contracts

Contracts may be either express or implied. Civ. Code §1619.  An express contract is one in which the parties’ agreement is expressed in words. Civ. Code §1620.  An implied contract is one in which the agreement of the parties is shown by their conduct, rather than by their words. Civ. Code §1621.

Implied contracts may be either implied-in-fact or implied-in-law. An implied-in-fact contract is one in which the parties’ conduct has created a reasonable expectation of certain performance by both parties. Consider this example from our San Diego business litigation attorneys: Farmer and grocery chain enter into several express contracts over a period of time for the sale of bushels of apples by the farmer to the grocery chain for $22 a bushel. Thereafter, the grocery chain orders 100 bushels of apples from the farmer, and the farmer ships 100 bushels of apples to the grocery chain, with an invoice for $2200 ($22 a bushel x 100 bushels). Even though the farmer and the grocery chain have not expressly agreed that the grocery chain will pay $22 per bushel for one hundred bushels shipped to it by the farmer, based on the parties’ former dealings, an implied agreement was created that the grocery chain would pay the farmer $22 per bushel for all apples shipped by the farmer to the grocery chain at the grocery chain’s request.

An implied-in-law contract is sometimes referred to as a “quasi-contract.” It is not a real contract, but is one implied by law to prevent unjust enrichment of one party, at the expense of the other party. When one party has conferred a benefit on the other, which the other has knowingly accepted in circumstances in which it would be inequitable for the other party to retain the benefit, without paying for its value, the law implies the existence of a contract.

As an example, in Halperin v. Raville (1986) 176 Cal. App. 3d 765, Plaintiff was friends with father who owned a business, and made various loans to father to help father keep his business going. Son assisted Plaintiff in liquidating Plaintiff’s assets so that Plaintiff could loan money to father. Son worked for the business and also loaned money to father to pay the business’s debts. Son referred to the business as a “father and son” business or “our” business. Plaintiff sued the son as well as the father for failure to repay the loans he had made to father. Although it was clear that Plaintiff had not loaned money to son, and there was no contract between father and son, the court found son liable, ruling that son had benefited from the loans and would be unjustly enriched if he were not required to repay the loans. This case underscores the importance of having a local San Diego law firm like the Gehres Law Group review your business arrangements with you and recommend and draft express contracts that will protect your interests and help you avoid implied terms and conditions and contracts that might not be in your business’s best interest.

Written versus Oral Contracts

The general rule is that contracts may be written or oral, and an oral contract is just as enforceable as a written contract. Of course, as with the issue of implied contracts, it is better practice to reduce oral contracts to writing, so that there can be no dispute at a later time as to what the terms of the contract are. However, certain oral contracts are not enforceable, either because of the significance of the type of contract, or because the contract is of a type conducive to fraudulent claims. For a list of these contracts, click here.

It is important to note the distinction between a contract that is not valid or void and a contract that is simply not enforceable. As a business litigation lawyer will tell you, a contract that is not valid, or is void, if it is missing an essential element, which can be legality. In other words, no contract is legally formed. On the other hand, a contract that is unenforceable appears to contain all of the essential elements of a contract but because of vague language, the statute of limitations, the term limit of the contract, or a superseding law that overrides it, a defense that the contract is unenforceable is available to the parties.

A contract may not be void, but could be voidable. With the latter it means that one of the parties can, because of the operation of fact or law, choose to unilaterally cancel the contract. For example, a minor who enters into a contract, can, because they are not old enough to enter into a contract, choose to cancel the contract. The differences between a void contract and a voidable contract can be significant in other ways as well. For instance, the law prohibits third parties from interfering with contracts.  Herron v. State Farm Mut. Ins. Co. (1961) 56 Cal. 2d 202, 205. If a contract is void, it is invalid and does not exist. Therefore, a third party cannot interfere with it. However, if the contract is merely voidable, it is a valid contract, and a third party may not interfere with it – i.e., cause a party to the contract to refuse to comply with it. Buckaloo v. Johnson (1975) 14 Cal. 3d 815, 824.

The Implied Covenant of Good Faith and Fair Dealing

Finally, although not technically an element of a contract per se, in California there is an implied covenant in all contracts, whether written or oral, that neither party will do anything that would deprive the other party of the benefit of their bargain. Pasadena Live, LLC v. City of Pasadena (2004) 114 Cal. App. 4th 1089, 1092-1094. This is known as the implied covenant of good faith and fair dealing.

Consider this example: Seller and Buyer agree that the Seller will sell his car to Buyer for $5000. Buyer needs time to obtain the money to purchase the car. Seller and Buyer agree that Buyer will bring a check for $5000 to Seller’s office no later than noon on a specified future date and states that they will take payment any time by or before that time and date. Buyer then arrives at Seller’s office at 10 AM on the specified date, but the office is closed. Consequently, Buyer is unable to pay Seller for the car by noon on that date and Seller refuses to sell Buyer the car stating that payment wasn’t made within the specified time. In this instance, Seller has breached the covenant of good faith and fair dealing. Implied in the parties’ agreement is the Seller’s promise that the office will be open during the morning on the specified day and the Seller will be in his office on that day, so that the Buyer can make payment for the car within the time agreed upon. The Seller’s breach of the implied covenant renders Seller liable to Buyer for breach of the contract.

While these are some basic principles of contract law, your business litigation lawyer or business law attorney can explain how some of the finer points of contract law may affect your particular situation at any stage of forming or enforcing a contract.

 

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Pitfalls to Avoid for Small Businesses, Non-profits and Start-ups in California

Many small business owners and non-profits are unaware that their organization may not have the legal right to enter into contracts, prosecute a lawsuit, or defend against a lawsuit if their business does not maintain a qualified status with the California Secretary of State’s office (SOS) or the Franchise Tax Board (FTB). Contracts entered into during a period of disqualification are typically voidable by the other party or parties, and, in some instances, criminal penalties may apply. To avoid these and other pitfalls, call the trusted business law attorneys at Gehres Law Group for a complimentary consultation.

1. Domestic Companies

Pursuant to California case law, a company which was formed in California but subsequently suspended or otherwise disqualified by the FTB or SOS to do business in the state not only loses the ability to enter into contracts, but it also forfeits the ability to defend against one as well. See Damato v Slevin, 214 Cal. App. 3d 668, 673 (1989). In Tabarrejo v. Superior Court,[1] the California court of appeals recognized that:

“A corporation’s powers, rights, and privileges may be suspended if a corporation fails to file annual statements of information pursuant to Corporations Code section 1502…” (See Corp. Code, § 2205). And, “[a] corporation suspended under the Corporations Code, like a corporation suspended under the Revenue and Taxation Code, is also disabled from participating in litigation activities.” Citing Palm Valley Homeowners Assn., Inc. v. Design MTC (2000) 85 Cal.App.4th 553, 556, 560.

Therefore, a disqualified company could be subjected to a judgment against it without having the opportunity to defend. A result many small businesses, non-profits, and start-ups can ill afford.

2. Foreign Companies

For companies formed in another state but doing business in California, the pitfalls are similar. If the foreign company does not register to do business with the SOS, fails to pay an annual franchise tax, or fails to pay income taxes owed, they may forfeit all “corporate power, rights and privileges” in California, including the right to enter into contracts and to maintain a lawsuit in the State. See Cal. Corp. Code §§2105, 2203 and Cal Revenue and Tax Code §23304.1. While a foreign company which is disqualified to do business in the State may defend itself in a lawsuit filed against it here, service of process may be achieved in any such suit by servicing the SOS instead of the company directly. See Cal. Corp. Code §17708.07. Therefore, a default judgment could be obtained against a foreign company which is not qualified to do business in the State even before it is aware of the lawsuit.

3. Criminal Prosecution

In addition to the risks already mentioned, misdemeanor charges may also be filed against any person attempting to exercise “the power, rights and privileges of a corporation that has been suspended pursuant to the California Revenue and Tax Code, § 23301, or who transacts or attempts to transact…business in this state on behalf of a foreign corporation.” See Cal. Rev. & Tax Code, § 19719.

4. Effect of Reviving a Company

If your company has been disqualified from doing business in California, it may regain its rights by complying with a process known as revivor, which includes the payment of any fines and penalties assessed by the State. Once a company is revived, it regains the power to enter into valid contracts, as well as to prosecute and defend against lawsuits. Any court pleadings that were filed during the period of disqualification may thereafter be found valid by a court. However, any contracts entered into during the period of disqualification remain voidable by the other party or parties, which can potentially devastate a small business.

Summary

This article includes just a few of the pitfalls inherent in doing business in California, whether you operate a for-profit or not-for-profit company. To avoid these and other potentially costly pitfalls (including failing to maintain corporate meeting minutes or other corporate governance records, or inadequate capitalization)[2], seek counsel from the business attorneys at Gehres Law Group, P.C. With offices in downtown San Diego, La Jolla and Irvine, California, our team can help keep your organization on track. Schedule a free consultation today for more information.

[1] Cal. Ct. App. Nov. 24, 2014.

 

[2] See also, Piercing the Corporate Veil: Avoiding Personal Liability for Company Debts.

 

 

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5 Key Differences Between California State Court and Federal Court

If you are involved in business litigation in California, the court system in which your case is heard can have a significant impact on the outcome. The California State Court system differs notably from the federal courts in California in many ways, particularly surrounding the following factors.

 

1. Jurisdiction

In order for a court to preside over a case, it must have jurisdiction in the matter. Federal courts have jurisdiction over cases involving a purported violation of a federal statute or a constitutional matter, such as a party challenging a state or federal law based on the United States Constitution.

 

Federal courts also hear cases with diversity jurisdiction, meaning the plaintiffs and defendants have their principal places of business in different states. The amount in controversy in a diversity jurisdiction claim must exceed $75k in order to reach federal court. For example, if a business in California fails to pay a New York-based vendor $80k for services rendered in a signed agreement, this breach of contract could invoke federal diversity jurisdiction.

 

Diversity jurisdiction becomes much more complicated with multiple defendants, new defendants arising during a case, and motions to remove from state to federal court. It is important to hire an experienced California business attorney to navigate these nuances.

 

2. Judges

California judges are elected, while federal judges are appointed. Because of this difference in authority, federal judges are typically required to possess deeper experience and higher credentials than state judges. That is not at all to dismiss the experience and credentials of state judges, but rather, highlight the fact that federal court is the pinnacle of the profession.

 

3. Formality

Because federal judges have often held positions with prestigious law firms, run highly successful private practices, and/or served as federal prosecutors, they are much more rigid—as is the federal court system in general, even at the clerk level. They are strict with their rules, and by the book with their processes and documents. Federal courts are usually unbending in their application of the Federal Rules of Evidence, whereas California state courts adhere less strictly to the California Evidence Code. California has a reputation for being relaxed all around; this can, to an extent, be said of its courtrooms compared to federal court.

 

4. Cost

The rigidity of federal court makes a federal lawsuit more expensive to litigate than a state lawsuit. No lawsuit is cheap, of course, and alternative dispute resolution such as mediation is often recommended prior to going to court. It is usually wise to include an arbitration or mediation clause in your business contracts to make litigation the last resort in a claim against your company, or prevent courtroom litigation of most issues.

 

5. Jury Pool

In California State Court, you will be assigned to the courthouse that is nearest geographically either to your place of business or to the place of the incident in dispute. Your jury pool will be drawn from that same judicial district. If you file a lawsuit for a transaction that took place in North County San Diego, for instance, your case will likely be heard in Vista, Calif., where the San Diego Superior Court is located. The jury pool, then, will be from Vista and the surrounding area—a dramatically different demographic than that of, say, Downtown San Diego.

 

A federal court, meanwhile, will draw jurors from throughout the county where the case is heard rather than a single concentrated area. There are fewer federal courthouses than state courthouses in California, usually one federal courthouse for each county, although that one courthouse may have dozens of courtrooms. Litigators need to be cognizant of which jury pool will be best suited for their client, among many other factors.

 

Choosing a California Business Attorney

Where you file can be just as pivotal as what you file; seek counsel from the San Diego business attorneys at Gehres Law Group, P.C. Our team is extremely familiar with both the state and federal court systems, and can explain to you the potential risks and benefits of each option. It is worth every bit of our time and energy to consider the court that will give you the greatest advantage and/or the least disadvantage in your case. Schedule a free consultation today.

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Is it Copyright Infringement? Let’s Find Out

When you produce a unique work from your own vision and ideas, naturally, you are inclined to protect it from being reproduced and/or attributed to someone else. The self-fulfillment of contributing to the world is the reason creative expression has been at the heart of culture since the beginning of time. Factor in the potential commercial value of creative works, and a “copycat” is simply unacceptable.

It’s not just musicians and artists who must protect their work. Today, businesses of all types and sizes turn to copyright law to safeguard their brand assets. Whether you are the former or the latter, this brief guide will help you identify instances of copyright infringement.

 

What Type of Work is It?

United States copyright law protects literary, musical, theatrical, choreographic, motion picture and audio-visual works. Architectural works, engineering designs, and software code are also protected under Title 17 of the U.S. Code, which governs most copyright issues. In order for any of the above to qualify for copyright under federal law, the work must be fixed or tangible, meaning it is preserved in some form that is capable of being reproduced.

Works that you are not able to copyright include typography, symbols, contents lists, processes, procedures, common property (such as charts or calendars), and works in the public domain. Names and slogans cannot be copyrighted and must instead be registered as trademarks. Copyright law can be confusing when it comes to deciphering what can and cannot be copyrighted. Therefore, it is best to consult a business attorney that specializes in copyright registration to determine which works are subject to copyrights.

 

Is the Work Registered?

It is true that common law grants copyright immediately upon publishing a work. However, common law copyright does not provide the same protection as a federally registered copyright with the U.S. Copyright Office. In order to file a lawsuit for copyright infringement and seek statutory damages, your work must have a federal registration on file.

 

Did the Other Party Have Access to the Original Work?

If you have a federally registered copyright and believe your work has been infringed upon, you must be able to prove that the infringer had access to the work. Any opportunity for the infringer to be exposed to your work constitutes access. In today’s connected world, access is usually the lowest barrier to pursuing an infringement claim (especially considering works published digitally). Nevertheless, access must be present and demonstrable in order for an infringement claim to move forward.

 

Is the Copied Work Substantially Similar to the Original Work?

While access is often relatively easy to prove, similarity is where copyright infringement earns its notorious name for debate. There are certainly cases in which large or critical portions of a work – such as a song melody – are egregiously reproduced. More often, though, the “substantial” or “striking” similarity lies in a grey area. Because there is rarely direct evidence of the work being physically copied, copyright law involves several tests surrounding the “ordinary observer,” concept, feel, pattern and other guidelines.

In short, a successful infringement claim will require proof that the work was not only copied, but, moreover, copied in an identifiable and meaningful way.

 

Is it Fair Use?

With the volume and infinite nature of creative works, copyright and free expression can, at times, be opposing forces. The fair use doctrine permits use of copyrighted material, without permission or license, in certain cases. These cases include education, research, news, and parodies. There are four factors considered in determining fair use:

• Purpose and character of the use – Courts typically allow non-commercial use, especially when the reproduction is transformative.
• Nature of the copyrighted work – Courts will consider the level of creative expression.
• Proportion of use – Using a sample of a copyrighted work usually aligns more with fair use than reproducing the work in its entirety.
• Effect on original – If the reproduced work harms the market for the original work, fair use might not be granted.

To learn more about fair use, click here.

 

Do You Have the Right Attorney?

We cannot stress enough that copyright is one of the most complex areas of law. Just as consumers need to be aware of the seriousness of copyright infringement, businesses should properly register and police their work accordingly. Applying years of experience in copyright and business law, Gehres Law Group, P.C. can assist with copyright registration and, when applicable, pursuing a copyright infringement lawsuit. Click here to learn more, or call us at 858-964-2314 to speak with one of our San Diego business attorneys.

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