Wisconsin Business Law and Litigation
A blog dedicated to Wisconsin business law and business litigation matters, authored by Chris Moander of the Moander Law Firm.

As additional information to my most recent lease post, fellow attorney Sean Sweeney added a post discussing why you should at least try to negotiate your lease terms (a good idea)….so, since you are a business owner, give it a shot and take that risk!

Chris Moander is an independent attorney based in Milwaukee who is passionate about helping growing business navigate the legal waters of Wisconsin.

Phew!  We made it through two sections of an operating agreement in my last post.  Now that you know who is a member and how profits and losses are spread, what about management?

Focus area #3 - Management

In Wisconsin, LLC’s are subject to two management schemes: a member managed structure and a manager managed structure. 

Member managed means just that - the members run the company.  For effective member management of an LLC, voting procedures are extremely important because, without voting systems, chaos rules - members get upset at other members, accusation fly, and the LLC is at risk if collapsing because nothing gets accomplished.  You can determine which matters require majority, supermajority, or unanimity for approval.  It

Committees can be established to grease the decision-making process or to handle any other internal matter (ex: operations, finances, etc).  Included in committee structures are rules on appointment, removal, and resignation of committee member - administrative stuff that demands in-place procedures.  The ability to legally bind the company must also be outlined, such as who can sign checks or contracts on behalf of the LLC - the left hand should always know what the right hand is doing in a business.

Manager managed LLC’s are quite a bit different.  A manager (or managers), selected by the members, runs the LLC.  Several points are important here: (1) how the members select the manager(s); (2) the term served by the manager(s); (3) and the authority of the manager(s).  Other relevant matters include compensation and removal processes.  In some cases, LLC’s find it useful to have a committee of managers, due to the company’s administrative and operational complexity.

Focus area #4 - Dissolution and related matters
An operating agreement outlines when the LLC will dissolve (in short, not exist any more).  Historically, Wisconsin’s statutes outlined these events, but the power was shifted to the LLC’s themselves.  Often, dissolution events include death or severe injury to a member, but there are better ways around such unfortunate events.  Buy-sell agreements can be built in to prevent the LLC from folding.  Buy-sell agreements can involve insurance policies on each member so that the LLC and the member are guaranteed some form of economic survival should inopportune events arise.  Further, the members can control who might replace the lost member and not face issues with the former member’s spouses and children.  The reality is that well-drafted language regarding events of dissociation and dissolution can prevent painful headaches and massive litigation bills if relationships crumble amongst the LLC members and managers. 

General Thoughts:

- It’s easy to get excited and move forward with a business before business matters are properly resolved.  The honeymoon between all LLC members eventually comes to an end.  Think preemptively at every turn.
- Always, always, always get things in writing; again, think preemptively.
- You will sleep better knowing that your business has procedures in place and in operation from Day 1 - reliable procedures allow a business to run more effectively.

Now, I’ve illuminated a few important areas where a good operating agreement can sustain a growing company.  There are many other areas necessary to create a good operating agreement that I left untouched.  Regardless, consider the value a good operating agreement can bring to your budding business.

Chris Moander is an independent attorney based in Milwaukee who is passionate about helping growing business navigate the legal waters of Wisconsin.

Forming an LLC, as a general rule, is pretty easy.  You contact the Department of Financial Institutions, file some paperwork, and *poof*…you have an LLC.  Actually, you don’t.  You have what amounts to an empty shell, a house with exterior walls.  Yes, you have ideas, some equipment, and maybe even funding, but the one factor, the one adverb you are missing is…how.  How will your company operate?  What is the internal machinery that will guide your company through its potentially infinite lifespan?  Enter the Operating Agreement. 

Because of the diversity in types of businesses and variety of potential markets to be accessed, operating agreements can differ drastically in content and design.  Factors such as the number of potential LLC members and the degree of business sophistication of each member can impact how an agreement is assembled.  In the next few posts, I will outline areas I think are essential to a good operating agreement.  Bear in mind that I could drone on and on about the finer details of operating agreements, but my intention here is to give some general information to show you why an operating agreement is worth getting for LLC’s with more than one member.

Focus Area #1 - Initial Capital Contribution

A good operating agreement requires a listing of issue interests and the allocation of those interests between listed members.  Period.  No debate on this.  If no record is made as to who-paid-what-and-when, huge problems arise. 

One reason I am so adamant about capital contribution descriptions is a simple one: it simplifies the dissolution process.  All the members agreed to the description, so it is clear how many shares each member owns - this accounting helps determine the internal power structure of the LLC, assuming it is member-managed versus manager managed. 

The capital contribution section can also delineate issues such as interest on capital contributions, the form of capital if it is returned to a member, or specific banking measures for each member’s capital investment.  However, the main point is make sure that each member’s capital investment is put into the operating agreement.

Focus Area #2 - Distribution of profits and losses

It is that simple.  Actually, it isn’t.  There are a number of ways to allocate profits and losses, but in doing the allocation, litigation costs are reduced and procedures solidified - time and again people want to fight over how much money they get, so why not formalize it in your operating agreement.  Further, members tend to feel better when they know the nuts and bolts of how they will get paid (assuming you are turning a profit). 

General Thoughts:

- It’s easy to get excited and move forward with a business before business matters are properly resolved.  The honeymoon between all LLC members eventually comes to an end.  Think preemptively at every turn.
- Always, always, always get things in writing; again, think preemptively.
- You will sleep better knowing that your business has procedures in place and in operation from Day 1 - reliable procedures allow a business to run more effectively.

Chris Moander is an independent attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

The recent economic downturn is the catalyst for a lot of people to leave their current employers - no raises, potential termination, and general unease result in folks wanting to go independent.  Aside from determining what one will do for fun and profit, locating space to work is a close second in terms of concerns.  Thus enter the commercial lease. 

Commerical leases are, in my mind, one of the harshed legal instruments out there.  Many contain provisions to the effect that tenants are responsible for maintaining the leased property no matter what the reason may be for damage. Responsibility ranges from minor repairs to flat-out complete rebuilding if the building is flattened.  Further, the mandatory insurance responsibilities of the tenant can be very large because they get to do the rebuilds and so on. 

Wisconsin views commercial leases as contracts and thus generally free of residential lease regulations.  Tenants are assumed to be sophisticated and capable of negotiating deals with landlords.  If you are about to sign a lease, consider the ramifications of binding yourself to a building that you don’t own. 

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

Three different blogs, all focusing on business legal matters, have touched on a common (but foolish) business habit: copying other web site’s terms of use.

Terms of use are contracts between the owner of the site and the person viewing the site. As I’ve discussed before, contracts must be drafted with precision or they will not have the intended effect - namely, the contract can’t help you reach your economic goal nor can the contract adequately protect you or your business. Therefore, it is well worth the cash to get customized terms of use drafted, especially when you have a unique and specialized!

H/T: Rush Nigut, Jonathan Friedan, and Brett Trout.

Moander Law Firm

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

Unfair competition
The tort of Unfair Competition encompasses a variety of wrongs that occur between competitors. These wrongs fall into two major categories: (1) Intellectual property concerns and (2) misleading actions.

Examples of IP issues include infringement/dilution of trademarks and service marks, theft of trade secrets, copyright infringement, and other misappropriation of another business’s IP. I’ve written a bit about these areas here, here, here, and here, so I won’t go into detail on them. Suffice it to say that it is a prudent move to have someone (preferably and attorney) evaluate your IP ideas before you use them, especially if a new employee introduces you to a fantastic idea that might have come from a prior employer - lots of money at stake in IP matters.

A business has one major concern under the “misleading actions” category. Commercial defamation, also known as product disparagement, when a business makes false communications regarding another business or another business’s products. If a communication deters individuals or businesses from dealing with the business subject to the communications, whoever made the communication is liable for damages. Communications can come in print (libel) or via oral statements (slander). Bear in mind that a statement is defamatory if it tends to harm the reputation of another so as to lower him (it) in the estimation of the community or to deter third persons (or parties) from dealing with him (it).

I have not delved into all the potential business competitor torts out there because business torts, as is frequently the case with the law, are highly fact dependent. However, it is good business sense for a business owner to know about potential bases of liability. I hope my posts at least open some eyes of Wisconsin business owners.

Moander Law Firm

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

Tortious interference with a contract
This tort is the most common tort used in lawsuits between competitors. The story usually goes something like this: the plaintiff claims the defendant swiped a customer or vendor, while the defendant declares that it was just competing in the marketplace. And so the litigation ensues.

Here are the elements of tortious interference with a contract: (1) the plaintiff must have had either a contract or a prospective contractual relationship with a customer/vendor/etc; (2) the defendant interfered with that relationship; (3) the defendant’s interference must have been intentional; (4) a causal connection must exist between the interference and the damages; and (5) the defendant must not have been justified or privileged to interfere with the relationship.

Before anyone panics about this particular tort, understand that if the interfering business does not act with the purpose of interfering, no liability attaches to the interfering business even if the other business loses a contract. This is good news for businesses that legitimately compete and act with no ill will.

In the spirit of American business, competition in and of itself is not a basis for an interference claim, so long as no restraint of trade occurred (ex: unenforceable non-compete agreements), no wrongful means were used in competition (ex: violence or threats of violence), and the business acted to advance its own economic interests.

Prong 5 of the elements refers to “privilege.” In the context of this tort, privilege means that the interfering party has an actual right to interfere with contractual relations. A good example would be when a contractor or employee is required to report the performance of another employee. In that case, should the employee subject to the report get canned, the reporting employee is privileged and thus free of liability for interfering. The defendant has to prove privilege to the court if it asserts privilege as a defense.

Moander Law Firm

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

I recently covered the issue of business torts in the context of customers, but now we’re going to take a peek at torts between competitors. Most business lawsuits focus on the main legal tool of american business: contracts. However, there are torts out there designed for application to interactions between businesses, mostly in the absence of a contract.

The three primary areas of competitor-focused torts are:
Civil conspiracy,
Tortious interference with a contract, and
“unfair competition” and its various subsets

Civil Conspiracy
Civil conspiracy is a really odd tort. Most folks, including myself, think of conspiracy in terms of criminal matters (or Fox Mulder), but there is a tort under Wisconsin law (§ 134.01) that makes it illegal for two or more persons to act together to maliciously injure another person’s reputation, trade, business, or profession, with a key focus on the maliciousness of the individuals’ actions. What’s more, this tort also appears to be a crime, too! Again, rather unusual.

The elements of the tort are fairly basic after a “civil conspiracy” is defined: a combo of two ore more persons by concerted action to accomplish an unlawful purpose or to accomplish by unlawful means a purpose not in itself unlawful (in other words, not a crime). The elements are: (1) the formation and operation of a civil conspiracy; (2) the wrongful act or acts done pursuant thereto; and (3) damage resulting from such acts.

Moander Law Firm

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.

Phew, we’ve covered the “big” torts regarding consumers. Alas, there are a few more torts that, as a business owner, you need to know of:

The Wisconsin Deceptive Trade Practices Act - this statute is also known as the fraudulent advertising statute, which indicates the commercial wrong it addresses (although it covers an array of other issues aside from fraudulent advertising). Essentially, if a salesperson makes a misleading, false, or deceptive advertisement (including face-to-face statements) to a consumer, the salesperson’s business will be liable for damages. Luckily, silence is not covered by the statute and neither is the usual sales “puffery.”

This statute is particularly pernicious to businesses because it has what is known as a fee-shifting provision. What does this mean for you, the business owner? It means that not only does the injured consumer get to recover any economic damages s/he suffers from the allegedly bogus representation, s/he also gets to recover attorney fees from you - if you lose, you get to pay the consumer’s reasonable legal fees. A very harsh penalty, indeed. Under this law, there is great value in honesty and silence.

Invasion of privacy - most folks think of the Constitution and the government when privacy is mentioned, but businesses can be liable for privacy invasion in certain instances. By and large, health-related industries are the most likely targets for invasion of privacy suits because they deal with extremely sensitive information about individual’s health matters.

Here’s the framework: (1) the business disseminates information about the plaintiff to the public at large, which can be done in a number of ways, including acts ranging from publishing internal memoranda to press releases to the local news outlets; (2) the information disseminated is private (ex: that someone has HIV); (3) the information disseminated is the kind that a reasonable person of ordinary sensibilities would find highly offensive (again, HIV diagnoses); and (4) the business acted unreasonably or recklessly with that information, given the information’s sensitive nature (a lack of a legitimate need for the public to know about such information). Other laws often come into play in invasion cases, such as federal health laws and the First Amendment. Further, companies often have privacy elements in contracts with customers which can further exacerbate an invasion tort matter.

Negligently provided services - a/k/a “malpractice” for non-professional service providers - the basic negligence rules apply here: (1) you have a duty of care your customers to not negligently perform your services for them; (2) you breach that duty of care to the customer; (3) there is a causal connection between your alleged negligence and the injury suffered by the customer; and (4) the customer suffered an actual injury. The lesson here is that your are under an obligation to perform your services with extreme care - don’t skimp on the work or you will run the risk of paying up.

As my three “consumer tort” cases show, businesses must walk a fine line when dealing with customers. Consumers in Wisconsin have many legal options available to them when they feel wronged by a business. However, one theme rings true through all of these business torts: honesty matters. Good sales skills are essential for a profitable business, but the law lays out boundaries. As always, the assistance of an attorney can prove invaluable in avoiding consumer lawsuits.

As a general matter, misrepresentation = a consumer was told a fact (not an opinion) about a product that misled the consumer into buying the product. Put another way, if the manufacturer flat out lies about a key quality of the product to get the consumer to buy it, the manufacturer exposes itself to misrepresentation liability. Normal sales puffery such as “this machine will last for years and years” is not enough to create misrepresentation liability - facts are the key. Specifically, you will always need (a) the manufacturer to make a “representation of fact” to the consumer; (b) the representation must be false; and (3) the consumer relied, to her detriment, on the false representation.

Wisconsin recognized three specific types of misrepresentation classifications, which we’ll take a peek at: (1) intentional misrepresentation (aka fraud); (2) negligent misrepresentation; and (3) and strict liability.

Intentional Misrepresentation - fraud requires, in addition to the original three elements, that the manufacturer know his statements are false and that s/he intended to deceive the consumer. All of these elements sound avoidable because it simply requires a seller to not lie.

However, things are not that simple - in some cases, the producer has a duty to disclose latent defects in a product. The rub here is that there is no clear-cut rule on when this duty exists. The lesson: if there is some huge gap in bargaining power between the manufacturer and the consumer, a duty to disclose probably exists on behalf of the manufacturer. From a sales standpoint, the duty to disclose is pure torment. Generally speaking, if a product has a latent defect, either don’t sell it or disclose it.

Negligent misrepresentation - obviously, negligence is required with this flavor of misrepresentation. The required negligence must occur in the making of the representation - the key is that everyone doing sales/etc must be made fully aware of benefits and drawbacks of product, otherwise, a manufacturer may be held liable for its negligence in not notifying sales staff of those facts.

Strict Liability misrepresentation - always bad news for a business. Negligence and state of mind do not matter; if the manufacturer or seller should have had personal knowledge of the details and the product and stood to gain financially from the sale, strict liability exists.

Misrepresentation liability is, from a business standpoint, somewhat nebulous. Yet, it is also possesses some clarity. As always, it’s good to check with an attorney as to what passes muster and what does not. I mention “preventative medicine” for businesses and this is a prime area for such measures.

Moander Law Firm

Chris Moander is an Attorney handling business law matters, business litigation, and collections matters throughout Wisconsin.