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Monday, November 22, 2010

Management Issues in LLC Operating Agreements

Upon forming a limited liability company (LLC), the founding members should have an operating agreement prepared by a lawyer. The operating agreement is the document that will govern the operations of the company and establish the rights and duties of the members. In most jurisdictions the law allows the parties to decide how the LLC will operate (with some limitations), even if a provision in the operating agreement varies from the LLC statute of that state. Therefore, preparing an operating agreement is an opportunity for the founding members to establish their own set of rules and regulations.

The members may want the company to be managed by a single managing partner or by multiple persons. The members need to carefully consider the implications of such shared management and artfully draft the operating agreement to account for potential disagreements amongst the managers and potential manager misconduct. The members also need to decide whether or not the managers will be able to engage in other businesses. If the members do not want the managers to be able to engage in other businesses (especially competitive businesses), the operating agreement must include such restrictions.

Some other issues to consider with regard to management of the LLC are:

1. If there are multiple managers, how will decisions be made (majority vote?)?
2. What will be the duties of the manager(s)?
3. How much power will be invested in the manager(s)?
4. What limitations will be placed on managers and reserved to the members?
5. How can managers be removed?
6. What will managers be paid?

Founding members of a limited liability company should not assume that the law will protect their interests when there are disputes amongst the members and managers. Rather, they need to make sure that the operating agreement clearly reflects their intentions and goals. Few, if any, of the form operating agreements found or purchased on the internet adeq uately address many of the concerns that will be important to the members of the LLC. Every LLC is different, and the operating agreement must be designed to afford the member the best chance for business success and the avoidance of conflict.

The attorneys at Gross & Romanick, P.C. have considerable experience drafting LLC Operating Agreements that effectively resolve management issues endemic to LLC governance. If you have an LLC and are unsure of how to organize the structure of management or want to memorialize the management structure that you have created, contact the attorneys at Gross & Romanick, P.C.

Protecting Confidential Information from Employee Theft

In today’s electronic age, most employers maintain proprietary, confidential information in electronic form accessible to its employees. This access can be particularly problematic when an employee resigns from employment or is terminated. In a matter of minutes, the employee can discreetly copy the employer’s electronic data onto a disk or flash drive. The former employee can use this information to compete against the employer, to solicit the employer’s clients or for other improper purposes. While the law does provide certain protections to an employer against such behavior after the fact, the employer’s business can still be irreparably damaged.

These issues were raised in Tryco, Inc. v. U.S. Medical Source, LLC, et al., a recent case before the Fairfax County Circuit Court. In that case, a sales representative of a small business resigned from employment and accepted a position with a competing company owned by his sister-in-law. Before leaving, he copied onto his flash drive all of his personal files and two documents containing confidential company information. He also sent an e-mail to each of his clients from his company e-mail address informing them that he was no longer with the company; these e-mails were sent as a blind copy to his personal address (and thus, he retained the e-mail address of each of his clients).

Shortly after commencing work for his new employer, his former employer filed a lawsuit against the employee on various theories including breach of fiduciary duty, civil conspiracy and computer trespass. The former employer alleged that the copied documents contained confidential information which was misappropriated and used by the employee and his new employer for competitive purposes. However, the employer was unable at trial to demonstrate that the documents were used for an improper purpose. Making the case harder for the employer was that the employee did not have a non-compete provision in his employment agreement.

This case is a warning to employers that, even when former employees retain their confidential information without authorization, they may not find a remedy in court. This case can be easily contrasted with other Virginia cases in which employers were able to obtain judgments against former employees that used confidential information to the detriment of the Employer. For example, in Banks v. Mario Industries, 274 Va. 438 (2007)  the Virginia Supreme Court affirmed a Circuit Court judgment against a former employee who: (a) had established a competing company, (b) solicited other employees and contractors of the employer to work for the competing company, (c) used the employer’s business plan as a model for the competing company, and (d) used the employer’s business phone book (which contained valuable and confidential contact information for Mario's customers, vendors, and sales representatives) as a resource for the competing company. The evidence in that case also demonstrated that the employee diverted valuable contracts from the employer to his new company. The employer was able to obtain a judgment for lost profits and punitive damages, despite the fact that the employee did not have a non-compete agreement.

These cases demonstrate the ease with which an employee can convert an employer’s confidential information following the termination of his/her employment. If the employee is not bound by an enforceable non-compete agreement, he/she is free to work for a competing business. In most cases, the employer will not know for certain whether or not the employee is actually using confidential information to the detriment of the employer. The employer may be forced to file a lawsuit to ascertain the scope of the misappropriation, to enjoin the use of confidential information and to recover compensatory damages. Without a good non-compete agreement, the employer will have to prove that it has suffered actual damages as a result of the misappropriation, which may not be easy to do. In any event, the employer’s business may have suffered irreparable injury (e.g. loss of customers) by the end of the expensive court process.

Therefore, it is important for employers to take preemptive steps to protect against an employee’s unauthorized taking of confidential information. The employer can utilize various protection measures, including but not limited to the following:

Technological

a. limit employee access to proprietary information and documents
b. monitor employee use of computers and files
c. restrict employees from taking laptop computer off-site
d. limit use of smart phones at the office
e. restrict employee sending business e-mails to personal accounts

Legal

a. warn employees that there is no expectation of privacy for data on company computers
b. have employees sign confidentiality agreements
c. have employees sign non-compete provisions
d. include liquidated damages provisions within confidentiality/non-compete agreements to avoid having to prove losses in Court
e. adopt and distribute an employee handbook with clear restrictions on use of documents and other protections for the company
f. in the event of a breach of confidentiality or non-compete agreement, take immediate legal action such as obtaining a restraining order and an order allowing search of ex-employee’s computers/phones
g. take aggressive legal action against offending ex-employee based upon use of trade secrets, conspiracy to harm business, tortious interference, conversion, etc.

Proper Termination Procedures

a. Create termination procedure guidelines
b. Supervise employee use of computers following termination/resignation
c. Check computer logs for downloads and printing
d. Check e-mails that are sent by terminated employee
e. Immediately retrieve all company computers, phones and files
f. Contact your lawyer

Wednesday, November 17, 2010

Contractor's Hit Hard By Taxes/Licenses

If you do construction contract work in Virginia, you may wonder when the taxes end and the profits begin. Both federal and state laws require income taxes, but you may not realize the extent to which localities can pick your pocket. Here is a brief summary of some of the taxes and fees that Virginia counties, cities and towns can levy on your business:

�58.1-3703 - Counties, cities and towns can require a license, impose a fee and assess a license tax.

�58.1-3706 - Under the new BPOL tax restrictions, localities cannot impose a license tax on gross receipts of $100,000 if the locality has more than 50,000 people or $50,000 to $25,000 if the locality has between 25,000 and 50,000 people. For contractors, the rate can be no higher than 16 cents per $100 gross receipts. However, BPOL rates can be set higher if a locality had such rate set on January 1, 1978.

�58.1-3714 - Contractors subject to a license tax can also be required to post a bond and prove maintenance of workers' compensation coverage before getting a business license.

�58.1-3715 - Contractors are exempt from paying to other localities if they pay the required license tax in their office locality. However, if the work in another locality exceeds $25,000, that locality may assess a license tax.

Virginia also has no shortage of licensing requirements, including:

�54.1-1106 - Class licenses are required by all contractors doing work valued over $70,000 in a single contract or project; or $500,000 over a twelve month period.

�54.1-1108 - Class B licenses are required by all contractors doing work valued over $7,500 in a single contract or project but less than $70,000; or a total of $150,000 but less than $500,000 over a twelve month period.

�54.1-1108.2 - Class C licenses are required by all contractors doing work valued over $1,000 in a single contract or project but less than $7,500; or a total of less than $150,000 over a twelve month period.

�54.1-1111 - Before issuing a building permit, a locality can require proof of licensing or an affidavit demonstrating that a license is not required. In addition, an applicant must prove that required license fees and taxes have been paid.

�54.1-1113 - Nonresident bidders cannot bid on jobs in Virginia without appointing the Director of the Department of Professional and Occupational Regulation as their agent for lawful process.

�54.1-1115 - A fine of $500 per day can be assessed for failure to obtain a valid Virginia contractor's license or certificate, as well as conviction of a Class 1 misdemeanor.

�54.1-1117 - Counties, cities and towns can require local licenses if contractors do not have a Class A license.

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The above is not meant to replace legal counsel. If you'd like to speak to one of the lawyers at Gross & Romanick, call our offices at 703-273-1400 or fill out our online Information Request form here.

Wednesday, November 10, 2010

Criminal Defense Practice

Here at Gross & Romanick we're proud of our reputation as an experienced Northern Virginia & Fairfax Virginia criminal defense law firm. Gross & Romanick is led by managing partner Edward Gross, who has practiced criminal defense law in Virginia since 1980. Our Criminal Practice is managed by partner Jeffrey S. Romanick, a skilled trial lawyer who appears in Court on a daily basis. We represent clients in DWI, DUI, reckless driving or other traffic offenses as well as clients charged with assault, drug offenses, computer crimes or other criminal charges. We represent clients in General District Court, Circuit Court and Juvenile Court in Fairfax, Loudoun, Arlington, Alexandria, Prince William and Northern Virginia.

To speak to one of our criminal defense lawyers, call us today at 703-273-1400 or fill out our Online Information Request Form.

Friday, November 5, 2010

The Statute of Frauds

Based on its name you might think that the Statute of Frauds has something to do with criminal or civil fraud, but it doesn't. The name "Statute of Frauds" actually refers to a law passed by the British Parliament in 1677, and the name has been retained through the centuries. It specifies which kinds of contracts must be in writing in order to be enforceable. Its purpose is to prevent the setting up of supposed agreements and then supporting them by perjury.

The most common applications of the Statute of Frauds are as follows:

* Holding a person responsible for the promise to pay the debt of another Contracts for the sale of real estate Leases for real estate over 1 year Agreements which cannot be performed within 1 year Sale of personal property over $5,000 Sale of goods over $500, unless the buyer accepts the goods
* Agency agreements

While the Statute requires a written agreement, almost any writing sufficient to indicate some kind of agreement between the parties will suffice. However, the "writing" must be signed by the party who is being charged. Thus, the venerable Statute of Frauds is still an important and influential part of modern law.

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For more information about contract law or to consult with one of Gross & Romanick's lawyers, contact us by calling 703-273-1400 or by filling out our online Information Request form.