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Common Legal Mistakes Businesses Make

In honor of this being the Book of Lists issue of the Business Journal, what follows is a list of some (but by no means all) common legal mistakes that businesses make.

1. FAILING TO PROTECT TRADE SECRETS. Broadly speaking, a trade secret is any process, business model, customer list, or other information that has value because it is confidential. Especially with customer lists, such trade secrets may be one of your company’s most valuable assets. How can you protect such information? First, if it can be patented or copyrighted - - do it now! Visit www.uspto.gov and/or www.loc.gov/copyright for more information on the process. Second, there are other avenues of protection for trade secrets not subject to copyright or patent law. However, most businesses lose that protection because they fail to take “reasonable precautions” to keep the information secret. Although this is a subjective standard, the following steps offer some guidance:
  • Obtain written confidentiality agreements from all employees and others who have access to the confidential information.
  • Do not disclose the information other than on a need to know basis, “lock” the information up from prying eyes (perhaps with a computer password), and inform those with access of the need to maintain secrecy.
  • Conduct exit interviews with departing employees, have them return all confidential information, and inform them about their continuing duty to keep the information secret.
Failure to meet the reasonable precautions requirement may mean that your most valuable asset is public fodder. Even with a confidentiality agreement, a court may find that the failure to take other reasonable precautions means that the confidentiality agreement is an impermissible restriction on free speech. In that event, you are left with no protection.

2. THINKING THE PROBLEM CAN BE SOLVED LATER OR WILL GO AWAY. This is short-sighted logic. Many problems will get worse unless the proper steps are taken immediately. Deadlines may pass, evidence may disappear, and witnesses may recall things “differently” six months down the line. Generally speaking, it will cost much less to get it right at the beginning rather than to try and sort it all out down the road.

3. FAILING TO COMPLY WITH STATE AND FEDERAL SECURITIES LAWS. Once your company is up and running, you may be tempted to finance expansion by selling shares to friends, family, and employees. When doing so, be aware that various state and federal laws have created a regulatory jungle. You must either “register” the shares with the appropriate regulatory body or satisfy one of the available exemptions. In either case, the rules can be quite technical. Proceed cautiously, as the consequences can be severe. Ignorance of the law is no excuse! 

4. VIOLATING NON-COMPETE AGREEMENTS. This mistake is usually made when someone starts his or her own business while employed by someone else, or when a company hires someone employed by a competitor. Increasingly, employees are required to sign non-competition agreements as a condition of employment. Often, these provisions are buried in rather innocent looking documents signed on the first day of employment. Before taking either of those steps, you should examine the relevant contracts and seek legal counsel to make sure that no violations will occur. Moreover, not all non-competition agreements are enforceable. Your lawyer can help explain the limits of your rights and responsibilities. Many non-compete agreements also require the losing party to pay the winning party’s legal fees. It’s best to do your homework now rather than facing the consequences later. Don’t forget Mistake Number 2!

5. FAILING TO MAINTAIN ORGANIZATIONAL RECORDS. Although this is one of the more mundane tasks of running your business, those who fail to keep proper organizational records do so at their peril. If you are a corporation, you should have current by-laws, articles of incorporation and minutes of all meetings of the board of directors and shareholders. Also, hold the annual meetings. If your business is a Limited Liability Company, the document requirements are fewer, but you should still have a current operating agreement and a written record of all major activities undertaken by the manager. In either event, keep an accurate record of share or other equity ownership. Other types of entities have their own special requirements. Your lawyer can help you with these tasks, and the fees should be reasonable. Failure to observe these requirements could result in your entity losing the legal protection otherwise afforded it – namely, the limited liability of the owners for the entity’s debt! And, if you ever take your company public (or obtain venture capital financing), such documents will be required. Again, avoiding Mistake Number 2 will make your expansion that much easier.

These are all common and easily made mistakes. Now that you know them, learn from them and remember that the only real mistake is the one from which you learn nothing.
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