Posts by: Levin Ginsburg

Essential Legal Matters: What Foodservice Operators Must Know

As any foodservice operator knows, the food business is changing daily.  Margins are thin, competition is fierce and fickle consumer demand and constantly changing dietary fads create increased daily pressure on operators. There numerous legal issues you should consider to give you a leg up. 

Type of Business Entity 

While many food service companies may operate as sole proprietorships, it is always better to operate under the umbrella of a legal entity that will protect you as the owner from personal liability.  This is particularly so in the food service industry where you are feeding people (or distributing to those who do) and interacting with a multitude of guests and employees.  Typically, a corporation or limited liability company (LLC) is the way to go.  And if you open in more than one location or operate separate food service businesses, you would be well advised to set up a separate corporation of LLC for each operation; this way only one entity’s assets will be at risk in the event of a lawsuit.

Intellectual Property Rights

Nearly every food service business creates intellectual property, and these assets can be very valuable in the highly competitive foodservice industry, particularly when your business becomes successful.

One of the most commonly used methods of protecting your food service business intellectual property rights is obtaining trademark protection for any distinctive marks, emblems or symbols or form of words.  The protected mark must be something that distinguishes your business from others and be distinctive, i.e., not something generic like “great food.”  In order to obtain the right to use a trademark, an application must be filed with the United States Patent & Trademark Office.  Most businesses retain an attorney to file the application.

Another form of intellectual property common in the foodservice sector are copyrights.  The purpose of a copyright is to protect creative work and to grant authors the exclusive privilege to produce, create or display the work.  It may be possible to copyright a book containing recipes and sometimes even certain recipes themselves or the method or technique of preparation of food products.

Local Regulations

In addition to organizing a business entity and protecting intellectual property, food service operators need to obtain all appropriate permits and licenses.  The permitting and licensing process varies widely from state to state and even city to city and county to county.  Often local government offices can be a great resource for determining what type of licensing and permitting you will need for your business.  In addition, you will likely need additional licensing if you serve or distribute alcohol.  Your business may also be subject to food and safety health inspections.

Conclusion

With the foregoing in mind and, facing the legal side of the foodservice industry does not have to be a daunting task.

If you have any questions in this area, please contact:

Jonathan M. Weis at:

jweis@lgattorneys.com or 312-368-0100.

The Wait is Over: New Standards Adopted on Reporting of Leases on Financial Statements

 

On February 26, 2016, the Financial Accounting Standards Board (“FASB”) adopted a set of long-awaited standards regarding the method of reporting of leases on financial statements.  The new FASB standard addresses a long-standing criticism of the current standard which permits most operating leases to go unreported on a tenant’s balance sheet.  Under the new standard, a tenant will be required to report leases with lease terms in excess of twelve (12) months as both assets and liabilities.  The purpose of FASB’s adoption of this standard is to provide disclosure of financial transactions that have a significant impact on the financial condition of a company.  The accounting treatment for operating leases will more closely approximate the accounting treatment for capital lease transactions, i.e., those leases which are considered a financing device.

Under the new standard, the tenant under an operating lease will report the lease as a liability which will be equal to the present value of all future lease payments.  It will also report the lease as an asset based upon a right of use (“ROU”).  A value of a ROU asset is determined by adding initial direct costs of entering into the lease and any prepaid lease payments to the lease liability amount and then subtracting any lease incentives (e.g., rent abatement) received by the tenant.  The ROU asset is then depreciated over the term of the lease.  The new standard further refines the rules regarding the recognition of fixed payments associated with payment of the landlord’s ownership expenses (i.e., real estate taxes and insurance).  These payments will now be considered a part of the lease expense and will accordingly increase both the reported liability and the value of the ROU asset.

The full impact of the new standard will be determined over time.  While the standard will result in more complete disclosure of future lease obligations, the application of the standard to a company’s balance sheet will reflect both an increase in assets and liabilities and will make year-to-year comparisons more difficult.  Furthermore, the impact on pre-standard loan covenants and other contractual rights and obligations determined on the basis of a company’s balance sheet will need to be carefully evaluated in light of the changes in the accounting standard.

The new standards provide for a lengthy phase in period.  Public entities will need to start reporting leases under the new standards for fiscal years beginning after December 15, 2018 and privately held entities will need to begin applying the new standard for fiscal years beginning after December 15, 2019.

For further information regarding the new accounting standards, real estate leasing matters and related issues, please contact:

Morris R. Saunders at:

msaunders@lgattorneys.com or 312-368-0100

or

Jeffrey M. Galkin at:

jgalkin@lgattorneys.com or 312-368-0100.

Shareholder Loans to Family Business–Are They Really Loans?

June Shaw agreed to advance up to $1 Million to her family’s company, SRG, pursuant to an unsecured revolving line of credit note.  June Shaw advanced $808,475 to SRG pursuant to the Note.  SRG began facing financial difficulties but June kept making advances under the Note.  In 2009, her brother Kenneth Shaw, president of SRG, advised June that the company could not repay her.  June listed the amount as a bad debt on her tax return.  The IRS denied the deduction and was upheld by the Tax Court.

On appeal, the Ninth Circuit upheld the Tax Court’s ruling.  It held that the advance was not a bona fide debt that arose from a debtor-creditor arrangement.  “Notably her behavior was not consistent with that of a traditional lender; she continued to advance money to SRG despite its unstable finances and the company’s failure to repay any interest or principal.”

If you are intending to treat advances to your closely held company as loans, it is important that you act like a “real” creditor and document and treat the advance as a loan.  A real creditor would require a note to document the loan, would stay aware of the company’s finances and ability to repay the debt, would require regular payments and depending on the amount loaned, would require collateral security.  If you fail to follow the formalities of a “real” lender-borrower relationship, you may find that your advance is not afforded the same tax treatment as a bona fide loan.

If you have any questions about family loans to family or other closely-held businesses or any other aspect of family businesses, please contact:

Morris R. Saunders at:

msaunders@lgattorneys.com or 312-368-0100.

Are You Personally Responsible for the Payment of Withholding Taxes?

The Court of Appeals recently upheld the IRS’s determination that two officers of a corporation were responsible for the payment of withholding taxes that were not paid by the corporation. The IRS may find personal liability attaches to responsible persons who act willfully in not paying trust fund taxes to the IRS.

Schiffmann was the company’s president and CEO. He also served as a director and owned stock in the company. As such, he was deeply involved in the day-to-day management of the company; his functions included the power to hire and fire, the development of fundraising strategies, and the formulation of a retention and compensation plan for the company’s workforce. Furthermore, he was a signatory on the company’s bank accounts, and regularly signed checks. In November of 2005 the board adopted a resolution specifically authorizing him to sign financial and contractual obligations up to $100,000 without a second signature. Schiffmann was found to have acted willfully because — after becoming aware that the trust fund taxes were not being paid — he did not pay them. Instead, he allowed the company to use unencumbered funds to pay other creditors. Given Schiffmann’s position and authority, no more was required to support a finding of willfulness.  In August 2005, the company hired Cummings as a financial consultant. Cummings became the CFO on October 25, 2005, and as such had check signing authority and was generally responsible for the company’s financial well-being.  On November 18, 2005, the company board of directors (which then consisted of at least four members) met to discuss, among other things, the outstanding trust fund tax liabilities.   Following the meeting in which the board gave him the power to sign checks and contractual obligations up to $75,000, he exercised that power to pay rent and operational expenses. The company’s tax liabilities went begging. So viewed, Cummings acted willfully because he voluntarily, consciously, and intentionally preferred other creditors to the United States.

They nonetheless signed checks to pay other creditors, but did not pay the government. The funds backing these checks came primarily from cash infusions raised by Schiffmann and the company’s board chairman. Matters went downhill from there: the trust fund tax arrearage was not paid, new trust fund taxes accumulated, the company’s financial decline continued, and the board fired Schiffmann and Cummings in June of 2006.

The court considered each corporate officer’s status, duties, and authority.  The inquiry focused on the “function of an individual in the employer’s business, not the level of the office held.” The criteria that typically inform the determination include whether the person is an officer and/or director; whether the person owns shares or otherwise has an equity interest in the company; whether the person participates actively in day-to-day management of the company; whether the person has authority to hire and fire; whether the person “makes decisions regarding which, when, and in what order outstanding debts or taxes will be paid”; whether the person exercises significant superintendence over bank accounts and disbursement records; and whether the person is endowed with check-signing authority. Though this list is not meant to be exhaustive and no one factor is dispositive, debt prioritization, control over bank accounts, and check-signing authority are at the “heart of the matter” because they “identify most readily the person who could have paid the taxes, but chose not to do so.”

If you have any questions in this area, please contact:

Morris R. Saunders at:

msaunders@lgattorneys.com or 312-368-0100.

Successor Liability-Beware

Often, buyers are advised to buy the assets of a business that is for sale, not the ownership interests.  That is based on the general principle that if you buy the assets of a business, then you are not liable for the business’s obligations unless you expressly agree to satisfy obligations.

However, an exception to this general rule is founded upon “successor” liability.  That is, if the buyer’s newly formed business can be found to be a successor of the seller’s business, then the buyer’s business may be found to be liable for the obligations of the seller’s business.  Such liability can be for the seller’s taxes, employment obligations and even union liabilities.

A recent case in California found that the buyer who set up a new business was a successor employer and therefore liable for the withdrawal liability of a prior business under the Multiemployer Pension Plan Amendments Act.  In this situation, the “buyer” only purchased certain assets of the “seller” at a public liquidation sale but was found to be liable for some of the “seller’s” liabilities.

The prior business, Studer’s Floor Covering, Inc. (“Studer’s”) was in the construction industry.  It ceased doing business on December 31, 2009.  At that time, it was party to a collective bargaining agreement, pursuant to which it made contributions to a multiemployer defined benefit pension plan (the “Fund”).

The owner of Studer’s announced to its sale staff that Studer’s would go out of business in a couple of months.  A member of Studer’s sales staff formed a new company (“Michaels”) two months prior to Studer’s going out of business. Michaels obtained a lease for the same storefront Studer’s operated its business, effective January 1, 2010.  Michael put up a sign “Michaels/Studer’s” on the storefront, obtained the same telephone numbers and purchased 30% of Studer’s tools, equipment and inventory at a public liquidation sale.  He did not obtain the customer list since the owner had personal knowledge of most customers.  Michaels employed eight installers (of whom five had been Studer’s employees) and used mainly independent contractors.

The Appellate Court held that the court should consider “continuity of the workforce” as a major factor.  Continuity could be found to exist if a majority of the new employer’s employees were employees of the old employer.  The court held that the changes in ownership here did not affect successor liability.  An important factor was substantial continuity as measured by customer retention.  The Court also was swayed by the new business using the same telephone numbers, the same location and the sign that incorporated the name of the prior business.

Where putative successors do rely on insider knowledge, similar public presentation (signs, location) to corner their predecessor’s market store, and have a continuity of the work force, courts may find the successor doctrine to apply.  New businesses that are concerned about the liabilities of the prior businesses should carefully consider these factors.

Levin Ginsburg has represented and provided counsel for many buyers and sellers of businesses.  If you have any questions regarding successor liability or any other aspect of your business, please contact:

Morris R. Saunders at:

msaunders@lgattorneys.com or 312-368-0100.

That Looks Just Like Our Product!

The phone rings and it is one of our clients telling us that someone has taken the design of their product and is selling a competing product.  The competitor is not solidly a typical trademark infringer, as they named the infringing product something completely different.

Trade dress to the rescue?  Not so fast.  Patent design or trade dress infringement theories can sometimes be a successful remedy, but not always.   Patent design requires a prior patent registration, which oftentimes, the victim of the infringement either did not realize it, should have filed a design patent, or did not take the time or money and put it toward that task.  Therefore, patent design is only as good as the forethought and planning that may have (or may not have) gone into the product design.

So, we are left with trade dress protection.  Trade dress is typically defined as the “look and feel” of a product and is a bit elusive considering it is not usually filed in an application before the USPTO.  Therefore, this client would be left to try to factually establish infringement in court, an often time consuming and expensive venture.

Converse was certainly up for the challenge several years ago.  The shoe company sued multiple companies concerning the alleged “copying” of its iconic Chuck Taylor shoe designs.  An argument typically argued by defendants in these cases is functionality – that is – if the design is functional, a necessary component for the product to work or function, then that element is not eligible for trademark protection.   However, a most interesting other argument is that Converse waited so long to file these lawsuits, that the design was already copied by so many companies that it became “generic.”   While trademark infringement defendants often argue laches, or delay in filing suit, that has somehow prejudiced defendant, we do not often see an argument that delay caused the design to become generic.  That is, that there already were so many infringers and Converse did not act quickly enough so as to determine that the design is actually not protected.

What is interesting is the lesson to business owners and designers.  This example is yet another reason to periodically review the product lines and advertising to determine whether the brands are adequately protected.  Additionally, companies should also be vigilant when it comes to protecting its product designs, and even website designs, before it is too late.

If you have any questions in this area, please contact:

Natalie A. Remien at:

nremien@lgattorneys.com or 312-368-0100

Protecting Your Business From Trolls: Internet Anonymity is a Thing of the Past

The internet has long been a safe harbor for trolls and ne’er-do-wells of all sorts to unleash their scorn on whatever unsuspecting business lands in their crosshairs that day.  Yelp, Glassdoor and many similar web-based services provide a valuable mechanism for consumers to rate companies based on their experiences; but they also provide a virtual soapbox from which the less scrupulous can publish false information and materially damage a company’s reputation.

An actionable defamatory statement arises where there is an unprivileged publication of a false statement, made to a third party, that causes damages. See Solaia Tech., LLC v. Specialty Pub. Co., 221 Ill. 2d 558, 579, 852 N.E.2d 825, 839 (Ill. 2006).  By providing a voice to the masses, the internet has made it easier than ever before to publish false statements to third parties and it is now well established that statements made online can be the basis of a defamation action. See Hadley v. Doe, 2015 IL 118000, 34 N.E.3d 549 (Ill. 2014).

But how do you discover the secret identity of AngryEmployee546 who is presently scouring the internet for additional websites to tell the world that you steal your customer’s money?  In Illinois, one can use a pre-suit discovery tool known as a Rule 224 Petition. A Rule 224 Petition allows the petitioner to request information from the entity that owns the website that is publishing the offending remarks.  Such information can include all the data that the website operator collects from the poster. At a minimum, this usually includes an IP address and an email address and depending on the website, may include much more.  From there, it is generally possible to connect the dots to the offending poster.

In order to sustain a Rule 224 Petition and discover the identity of a poster, the petitioner must present sufficient allegations of a defamation claim to overcome a motion to dismiss that is automatically imposed by the court.  Id.  This means that a petitioner must effectively plead all of the elements for a claim for defamation on the face of the petition in order to obtain the information it seeks.

The one of the biggest hurdles for sustaining a defamation claim for internet published statements is that the statement is an opinion, and thus constitutionally protected speech.  Opinion statements, even if untrue, are not defamatory because they are constitutionally protected under the First Amendment.

Opinion statements also make up a large portion of negative online posts.  For example, if you were to write a review of restaurant and state that the service was slow, the food was terrible and the experience was unpleasant, such statements, even if totally false, are arguably just your opinion and not defamatory.  Whereas if you said that you saw the cook return to work without washing his hands and then saw the server spit in your food, these objectively untrue facts could well be defamatory.

Despite the hurdles, Illinois law provides a mechanism to find out who published defamatory remarks about you or your business so that you can protect your image, should the need arise.  If you or your business has been targeted by false online statements and you wish to investigate your options, please contact:

Robert G. Cooper at:

rcooper@lgattorneys.com or 312-368-0100.

Available Real Estate Tax Incentives for Cook County Property Owners and Developers

Real estate taxes are one of the largest operating expenses for income producing properties; especially for commercial and industrial properties located in Cook County. In an effort to reduce the property tax burden and to inspire development, the Cook County Board of Commissioners created tax incentive programs available to prospective buyers of vacant property and available to current owners who plan to construct new improvements on their property. These incentive programs can offer significant real estate tax reductions, with some property tax bills being reduced by up to 60%. Current owners or developers of property located in Cook County should become familiar with these incentive opportunities.

The tax incentives created by the Board of Commissioners are the Class 6b and Class 8 Tax Incentives, which are available for industrial properties, and the Class 7a, Class 7b and the new Class 7c Tax Incentives, which are available for commercial properties. These tax incentives last for ten years, escept for the Class 7c Tax Incentive which lasts only for 5 years. The Tax Incentives can be obtainable by fulfilling the eligibility requirements and filing a Tax Incentive application and corresponding tax appeal with the Cook County Assessor’s Office. You can visit the Cook County Assessor’s Office website to find the mandatory eligibility requirements for each incentive and the necessary forms that need to be submitted with the Assessor’s Office: http://www.cookcountyassessor.com/PdfForms/Incentive-Forms.aspx.

Each of the available incentives have their own set of eligibility requirements, For example, the Class 7a and 7b Tax Incentives are only available for commercial properties located in areas determined to be “in need of commercial development,” and the Cook County Assessor’s Office requires a tax incentive application to be filed with their office prior to any vacant property being occupied or any new construction commencing. These requirements are mandatory and every property owner or prospective buyer should become familiar with the tax incentive requirements and consult with legal counsel before entering into a purchase or construction contract. Additionally, the Cook County Assessor’s Office requires all incentive applications to include a passed resolution from the local municipality In which the property is located that supports and consents to the Tax Incentive being granted for the property. Owners and buyers seeking the Tax Incentive must make a formal request to the local municipality for the supporting resolution as part of the process for obtaining the tax incentive. The local municipality will most likely have its own requirements for passing a resolution supporting the Tax Incentive, and such requirements could me more or less extensive than what is required by the Assessor’s Office.

As indicated above, property owners and developers who intend to seek the above-referenced Tax Incentives should plan and coordinate with their counsel, along with the representatives from the local municipality, in the initial stages of the real estate project or venture. If you have more questions regarding available property tax incentives or to discuss future real estate projects, please contact:

Anthony M. Ochs at:

aochs@lgattorneys.com or (312) 368-0100

Guidelines for Non-Competition Clauses in Employment Contracts

Employment contracts with non-competition clauses are quite common.  But employers must not go too far in restricting the activities of former employees.  If they do, courts will not enforce the post-employment restrictions.

Recently, an Illinois court struck down covenants in an employment agreement that an employer tried to enforce because the restrictions went beyond what was necessary to protect a legitimate business interest of the employer.

In Assured Partners, Inc. v. Schmitt, 2015 Ill. App. (1st) 141863 decided October 26, 2015, the defendant, Schmitt, had been employed by ProAccess, a subsidiary of Assured Partners, Inc.  After he resigned, his former employer sued him, asking for money damages and an injunction.  The employer lost.

The employment agreement Schmitt signed prohibited him from competing with his former employer “anywhere in the United States or its territories” for a period of 28 months even though he had worked for ProAccess for only 20 months.  It also contained a confidentiality clause prohibiting Schmitt from disclosing any information or observations he made about ProAccess’ business while employed.

The court refused to enforce the non-compete clause because it was too broad saying it prevented Schmitt “from working as a broker, in any capacity, within the entire universe of professional liability insurance business anywhere in this country.”

It also refused to enforce the confidentiality clause because it was far too broad saying, “Illinois views post-employment restrictive covenants that insist on absolute secrecy of any and all information as unreasonable and unenforceable because a person is allowed to make a living, and cannot possibly not utilize any information from his past job.”

Notably, the court did not discuss or consider Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, which holds that a minimum of two years of continued employment is necessary to establish adequate consideration for a restrictive covenant.  Given that Schmitt worked for ProAccess for only 20 months (less than two years), the court arguably could have dismissed Schmitt’s claim on the basis that there was insufficient consideration to support the post-employment restrictive covenant.

The takeaway for employment contracts is:

  1. post-employment restrictions should (a) be limited to protecting the legitimate business interests of the employer, and (b) not impose an undue hardship on the employee; and
  2. the time period and geographic area in which the restrictions apply must be reasonable.

To discuss employment contracts or a non-compete issue you have, please contact:

Michael Weissman at:

mweissman@lgattorneys.com or (312) 368-0100

or

Mitchell S. Chaban at:

mchaban@lgattorneys.com or (312) 368-0100

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