Unexpected Liability for Service Providers

With “hacking” and identify thefts becoming all too common place, each service provider must place more and more emphasis on protecting itself from legal liability caused by not only its own actions, but the actions of the company(ies) to whom it outsources. This article provides an introduction to contracting for service providers with an eye toward gaining legal platform upon which to adequately defend itself, if necessary.

In addition to government compliance, which will vary depending upon the industry, any company that collects personal information during the course of providing its services must take steps to safeguard itself from legal liability arising due to unwanted disclosures.  One way to provide a legal safety net is to consider the applicable issues in the service provider’s agreement.  The following is an abbreviated checklist.

  1. Whether personally identifiable information will be provided to service provider’s employees, and if so, what measures are taken to narrowly tailor the need to expose such information to only those employees or third parties who need to know in order to provide the service.  In considering this, a service provider may want to consider identifying types of employees or third parties that may be exposed to such information, or even listing such persons and having them sign a confidentiality agreement with respect to such information.
  2. When does a service provider have to notify a customer of a security breach?   Is there an obligation to notify customers of a potential privacy-related compliance issue?  Or, only when a security breach has occurred?  If a security breach is defined, service providers will be required to undertake all tasks from notification to remediation and payment for such remediation upon receipt of a complaint.
  3. While necessary, service providers will want to limit their contractual obligations to comply with compliance with IT management standards such as the International Organization for Standardization certification.
  4. If the service provider receives credit card information of customers, then at the very least, the following issues must be considered:
    1. Limitation of access of personal information to authorized employees or parties
    2. Securing business facilities, data centers, paper files, servicers, backup systems and computing equipment (mobile and other equip with info storage capability;
    3. Implementing network/ device application, database and platform security
    4. Securing info transmission storage and disposal
    5. Implementing authorization and access controls with media, apps, operating systems and equipment
    6. Encrypting highly sensitive personal information stored on any mobile media
    7. Encrypting highly sensitive transmitted over public or wireless networks
    8. Strictly segregating personal information from and info of service provider or its other customers so that personal information is not commingled;
    9. Implementing appropriate personnel security and integrity procedures and practices (conducting background checks, and providing appropriate privacy and info security training to service providers’ employees.

If you have any questions regarding your liability for disclosure of personal information, please contact:

Natalie Remien at:

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

Selling Your Business?

John Smith owned a small manufacturing business.  One day he received a call from one of his competitors who said he was interested in buying John’s business.  John was now 75 and this seemed like the perfect opportunity for him to retire and have that “nest egg” for him live comfortably in retirement.

John met with the buyer and they discussed, in general, John’s business.  After the meeting, the buyer presented a letter of intent to John, which proposed a purchase price of $10,000,000, subject to the buyer’s due diligence investigation of John’s business.  John felt pleased with the letter of intent and signed and returned it to the buyer.

During a long and protracted (and quite thorough) due diligence, the buyer and his accountants and lawyers examined the business and its books and records.  Based upon their examination, they advised the buyer of various legal and financial risks that John’s business was exposed to and which could become issues that the buyer would have to face.

John could not produce all of his current contracts with his customers.  The contracts which he had contained provisions which could cause the contracts to be terminated upon a sale of the business or a transfer of the ownership of the business.  Their key employees had no employment agreements and could compete with the business once they terminated employment.  The leases for the business’s facilities could not be assigned.

Despite the issues with the business, the buyer was still interested in purchasing the business.  The bad news was that the revised purchase price was to be $8,500,000 with a significant portion to be held in escrow pending resolution of various legal issues.

The above scenario is very common with small business owners.  Bigger companies who regularly acquire smaller companies are “professionals” in the acquisition business.  They know exactly what to look for and they know how to “string the seller along” until they present a reduced offer which most sellers feel they have to accept.

If you are thinking of selling your business, make sure that your business is ready to be sold and that you have copies of all contracts and leases and that you understand what they provide and how they will be affected upon a sale.  Have written employment agreements with all your “key employees.”  Pay attention to your inventory, your accounts receivable and other assets which “drive the sales price.”  Protect your intellectual property by obtaining patents, to the extent applicable, and trademarks.

If you are considering selling your business and would like a “legal check-up,” please do not hesitate to contact:

Morris Saunders at:

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

Is Your Business Litigation Proof?

The heading of this blog is a misnomer. There is no such thing as being litigation proof. Anyone can sue your business for any reason and meritorious or not, you will still have to defend the claim.

Still, there are many important steps a business can and should take to reduce its exposure and put itself in an advantageous position in the event a lawsuit is filed. Here are two simple actions that every business, large and small, should take in order to be a little bit more secure in today’s volatile world.

1. An Updated Employee Handbook

Employee handbooks set forth company policy for all employees to follow. Handbooks are useful reference materials that employees can rely upon to guide their day to day activities. They are also evidence of a company’s practices that can be introduced in the event of a lawsuit.

As a business grows, it should be mindful that different laws will apply to it. For example, once a business employs 15 employees, that business is now subject to the provisions of the Americans with Disabilities Act (“ADA”). Once that happens, an employee handbook should be modified to include language related to the reasonable accommodations that the business will make to comply with the ADA. If an employee with a disability were to file a claim under the ADA, a company with a handbook containing reasonable accommodation language would have a stronger argument that its practice is to comply with the ADA, than a company without such a policy in its handbook.

Also, business owners must be mindful that the law is constantly changing. For example, Illinois just enacted a law that requires an employee’s existing sick leave be granted to employees not only while they are sick, but also to care for sick family members (read more about that law here – http://lgattorneys.com/illinois-employee-sick-leave-act). Illinois businesses should amend their handbooks to reflect the change or discuss the pros and cons of moving away from sick leave/vacation time to paid time off that does not differentiate between sick leave and vacation time.

2. Record Retention Policy

If a company becomes involved in litigation, regardless of the issue, there is going to be a records request for all relevant documents in anyway related to the underlying lawsuit. This often involves emails and other electronic communications.

Having a records retention policy is important for several reasons. First, it ensures that all documents are kept for the optimal amount of time to conduct business without clogging servers or storage spaces. Second, it ensures that a company isn’t holding any documents for longer than legally required. Should a business be subject to a records request, a business is required to produce the documents in its possession. A plaintiff in a suit cannot use a document against you if you do not have it (and are not legally required to have kept it). Third, there are many record retention laws specific to different areas of business. A record retention policy can make sure a business does not violate the law by getting rid of documents too soon.

It is important that the business in question follow its policy universally and not on an ad hoc basis. As long as there is not a litigation hold in place requiring a company to keep all related records, then the company is free to follow its record retention policy without inadvertently destroying evidence and leading to a claim of evidence spoliation.

By consulting with an attorney and preparing an employee handbook and records retention policy, a business can take important first steps toward avoiding litigation, or at least being better placed to withstand a lawsuit if one comes its way.

For more information about developing an employee handbook or record retention policy appropriate for your business, please contact:

Robert Cooper at:

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

Administrative Dissolution May Breach a Company’s Third-Party Contracts

Under Illinois law, corporations and limited liability companies (“LLCs”) are required to file annual registrations with the Illinois Secretary of State in order to maintain their entities in good standing.  Pursuant to the Limited Liability Company Act (the “LLC Act”), the Secretary of State may administratively dissolve an LLC if it fails to timely file its annual registration, mirroring the requirement imposed upon corporations in the Business Corporation Act (the “Corporation Act”).

If a company is administratively dissolved, the company will be reinstated upon the filing of the outstanding annual report(s) and an application for reinstatement, along with payment of all outstanding taxes and fees.  Upon reinstatement, the actions made by the company during the period of administrative dissolution are “ratified and confirmed” pursuant to the “relation-back” provisions of the LLC Act or the Corporation Act.

Recently, a provision of the LLC Act was examined by the Illinois Appellate Court in CF SBC Pledgor 1 2012-1 Trust v. Clark/School LLC, 2016 IL App (4th) 150568 (Sep. 8, 2016).  In this case, the Plaintiff, a Delaware mortgage trust, assumed a mortgage and security interest in an eight-building apartment complex which was owned by the defendant, Clark/School LLC.  Under the security agreement, the loan was made on the lender’s reliance of the Defendant mortgagor’s “continued existence” as an LLC, including “all things necessary to preserve and maintain [its] existence and to ensure its continuous right to carry on its business.”  The Defendant unfortunately failed to timely file its annual registration with the Illinois Secretary of State, ultimately leading to its administrative dissolution in December 2013.

Due to the Defendant’s administrative dissolution, the Plaintiff initiated a mortgage foreclosure action against the Defendant for failing to “preserve and maintain its existence” as an LLC.  The lower court determined, and the Illinois Appellate Court subsequently affirmed, that the Defendant committed an event of default by failing to maintain its status in good standing and held for the Plaintiff.  The Defendant unsuccessfully argued that the relation-back provision of the LLC Act prevented the Defendant from liability under the security agreement because it validated any actions that were taken from the date of the Defendant’s dissolution through the date of its reinstatement by the Secretary of State.

The predicament in CF SBC Pledgor was a novel issue under established Illinois LLC law; thus, the Illinois Appellate Court looked to precedent under the Corporation Act.  The relation-back application of the Corporation Act only pertained to ratification of the corporation’s actions; however, it did not automatically protect the corporation from possible breaches under third-party contracts.  Looking to the Corporation Act, the Court found that the relation-back provision will not “impose a legal fiction that belies actual real world facts.”

In that regard, a company cannot use the relation-back provision of its respective governing law in order to escape liability for committing a breach in a contractual agreement whereby the contracting party is relying upon the company to maintain its “continued existence” as a legal entity in good standing with the Secretary of State.

A company should pay prudent attention to its required filings and its obligations under its third-party contracts so as not to inadvertently breach such contracts.  Otherwise, as was the case in CF SBC Pledgor  the consequences may be harsh.

For more information on this topic or how you can protect your corporation or limited liability company, please contact:

Pamela Szelung at:

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

Industrial Growth Zones Created

The City of Chicago and Cook County recently announced the creation of an “Industrial Growth Zone” initiative in order to encourage industrial development in seven designated Chicagoland neighborhoods.  These neighborhoods are principally located in existing industrial areas on the south and west sides of the City.  The program is intended to incentivize industrial development in these neighborhoods by removing barriers to further development and by providing services to support property owners and industrial developers in their development efforts.  Specifically, the services to be provided are aimed at two primary impediments to development: evaluation and remediation of environmental conditions and maneuvering complex governmental regulations.

Much of the land located within the Industrial Growth Zone program has been previously developed and used for industrial purposes.  Accordingly, to redevelop these properties, a developer will first need to conduct a Phase I environmental site assessment and, depending on the identification of recognized environmental conditions, to perform some level of environmental remediation.  This can constitute a significant barrier to development as the cost to conduct the required testing and the possible costs associated with remediating hazardous environmental conditions may be substantial both in terms of costs and delays in commencing construction.  The Industrial Growth Zone initiative will provide qualified developers up to $130,000 of financial assistance for environmental evaluation and remediation efforts.  Specifically, developers may be eligible for $5,000 to update an existing Phase I environmental report and up to $25,000 to conduct a Phase II report.  Additional funds in the amount of $100,000 may be available to remediate environmental conditions.

Additionally, the initiative will establish a “concierge” program.  The concierge will serve as a single point of contact for providing assistance to developers in conducting site evaluation and working their way through voluminous and complex layers of governmental regulations and requirements.  The concierge will assist in making available a broad range of site data and documentation required in connection with the development of properties.  This data includes, among other things, zoning maps, aerial photos, surveys, ownership and real estate tax history, analysis of utility availability, flood plain classification, and providing information regarding the presence of wetlands and endangered species.  Having access to this information at the early stages of the development process will save a developer time and effort in conducting its due diligence, evaluating the suitability of a property for development, and commencing the process of obtaining required governmental approvals.

For further information regarding Industrial Growth Zones, real estate development and related issues, please contact:

Jeffrey M. Galkin at:

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

Restaurant Nutrition Labeling Provisions of the Patient Protection and Affordable Care Act of 2010

More than two-thirds of adults in the U.S. are overweight or obese.  Approximately one-third of consumers’ total caloric intake comes from foods consumed outside the home in restaurants and other retail food businesses.  In order to provide consumers with easily accessible nutrition information, pursuant to the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010, the Food and Drug Administration (FDA) now requires the disclosure of certain nutrition information for standard menu items in restaurants.

FDA is now requiring disclosure of certain nutrition information for standard menu items in restaurants and similar retail food establishments that are part of a chain with 20 or more locations doing business under the same name and offering for sale substantially the same menu items.  These businesses will be required to provide calorie and other nutrition information for standard menu items, including food on display and self-service food.  This rule was originally to become effective on December 1, 2015, but the compliance date for the rule was extended to May 5, 2017.

To be covered by this rule, a business must satisfy several criteria.  Primarily, it must be a restaurant or similar retail food establishment.  Restaurants and similar retail food establishments include bakeries, cafeterias, coffee shops, food service facilities located within entertainment venues (such as amusement parks, bowling alleys, and movie theaters), food service vendors such as ice cream shops and mall cookie counters, food take-out and/or delivery establishments, such as pizza take-out and delivery businesses, quick service restaurants, and table service restaurants.

These new rules will require food service operators to revamp their menus, but presumably these changes will lead to healthier public.

For further information regarding this topic, please contact:

Jonathan M. Weis at:

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

Following Corporate Formalities are Really that Important?

Recently a dissolved corporation found out the hard way that corporate formalities do indeed matter to the IRS.

Urgent Care Nurses Registry, Inc. (Urgent Care) was incorporated in California on July 21, 2005, and was assigned a taxpayer identification number by the California Franchise Tax Board (board). On Aug. 1, 2008, the board suspended Urgent Care’s corporate charter pursuant to section 23301 of the Suspension and Revivor article of the California Revenue and Taxation Code, and on July 26, 2016, the California secretary of state certified that Urgent Care’s “powers, rights and privileges remain suspended.”

Urgent Care filed some income and employment tax returns for 2009 through 2013 but enclosed no payments. It failed to file other returns, and IRS prepared substitutes for returns and assessed all of the taxes in question plus a penalty for failing to file Forms W-2, Wage and Tax Statement. In January of 2015, IRS sent Urgent Care a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.

On Sept. 28, 2015, Urgent Care timely sought review in the Tax Court. On July 28, 2016, IRS filed a motion to dismiss for lack of jurisdiction, contending that the petition was not filed by a party with capacity to sue. The Court directed Urgent Care to respond to the motion to dismiss on or before Sept. 2, 2016, which it failed to do.

The Tax Court granted IRS’s motion to dismiss for lack of jurisdiction on the ground that Urgent Care lacked legal capacity to prosecute the case.

The Court said that since Urgent Care’s corporate powers were suspended in 2008, and there was no indication that it has since received a certificate or revivor or become current on its California tax obligations, it lacked the capacity to sue.

Is your corporation in good standing and are its books and records up to date? Shouldn’t they be?

If you have any questions or would like to discuss this article or any other legal concern you have, please contact:

Morris Saunders at:

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

The Americans with Disabilities Act: Employers Must Engage in the Interactive Process

A recent 7th Circuit Court of Appeals decision emphasizes the steps an employer must take to accommodate an employee with a disability.  The American’s with Disabilities Act (“ADA”) is a federal statute that applies to any employer of 15 or more employees.

In Eymarde Lawler v. Peoria School District No. 150, a teacher (“Lawler”) with PTSD was hired by School District 150 (the “School District”) and worked without incident for 4 years.  Lawler’s PTSD symptoms began to manifest in 2010.  She was initially given a leave of absence, and then transferred to a school for students with emotional and behavioral problems.  Lawler had no prior experience teaching children with severe behavioral problems but never-the-less earned a satisfactory rating after the first year.  The following year, after several stressors in and out of school (including witnessing the aftermath of a shooting and being concussed by a student), Lawler’s psychiatrist opined that the events had retriggered her PTSD and that Lawler should be transferred away from such a stressful environment.

The School District refused the transfer request, instead performing an accelerated review that labeled her job performance unsatisfactory and terminating her.  Lawler sued for, among other things, failure to accommodate her PTSD under the Rehabilitation Act.  The Rehabilitation Act requires the same analysis as the ADA.

Under the ADA, the employer (and the employee) must engage in the “interactive process” to find a reasonable accommodation for the employee’s disability.  After the request from Lawler (supported by a psychiatrist’s professional opinion) for a transfer to a less stressful environment, the school district was required to make a reasonable effort to explore possible accommodations, such as looking for open positions in other schools or reducing the number of students with behavioral or emotional disorders in Lawler’s classroom.

In this case, the facts in the record suggest that the School District made no attempt to look for another position for Lawler.  “The school district simply sat on its hands instead of following-up with Lawler or asking for more information.”  The court vacated the summary judgment award initially granted to the School District and remanded the matter for trial.

It is vital that employers covered by the ADA take employee requests for disability accommodation seriously and explore available options.  By failing to engage in the interactive process, the School District now faces the prospect of liability for failure to accommodate Lawler’s disability.

If you have any questions regarding an employer’s responsibilities or an employee’s rights under the Americans with Disabilities Act, please contact:

Robert Cooper at:

rcooper@lgattorneys.com or (312) 368 0100.

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