LegalMatch: Business Law

HP Printer Ink Monopoly Sparks Antitrust Lawsuit.

An antitrust lawsuit has been filed against printer mogul Hewlett-Packard for suspected violation of monopoly laws. The tech giant supposedly paid $100 million to Staples in order to prevent the office supply chain from carrying cheaper, off-brand printer cartridge replacements. This act marks only the latest in a series of anti-competition moves made by HP.

According to Ars Technica, HP and other companies have even begun inserting microchips into their ink cartridges that “work with a corresponding technical mechanism in the printer that blocks the use of unauthorized third-party ink.” But even ignoring these more insidious means of “brand protection,” the $8,000 per gallon figure is pure sticker shock—especially for businesses who go through hundreds of cartridges a year.

Our own printer is currently beeping at us for a new yellow ink cartridge, but after reading about the discrepancies between actual ink availability and printer-reported ink availability, I can’t help but wonder if our office ink slave is one of those filthy, lying thieves as well.

But what’s really going to happen to HP if they’re booked for violating anti-trust laws? Violating the Sherman Act means prohibiting “contracts and conspiracies that create monopolization” (a prohibition which HP’s pay-out to Staples seems eager to exemplify). But when we look at what HP has already handed over to Staples, the actual penalties for violating antitrust laws seem laughable.

The maximum fine for violating the Sherman Act stands at $10 million for companies. But if this lawsuit moves towards the class-action arena, those fees could snowball into something quite a bit more damaging than a $10 million slap on the wrist.

 

 

By Kate Beall 

Bankruptcy Laws Land Banks in Debt.

Bankruptcy laws used to be a lot more permissive. But in 2005, Washington Mutual, Bank of America, JPMorgan Chase & Co, and Citigroup got together with $25 million and lobbied for a change in consumer bankruptcy. 

Prior to those changes, bankruptcy was much easier to claim. You could file for Chapter 7 or Chapter 13, shake off a good amount of debt, and often start fresh with your finances. It was a good deal for people saddled with crippling debt—especially credit debt. But with the 2005 bankruptcy law, credit debt suddenly became much, much more difficult to buck.

Now, the Examiner claims, credit debt is finally being paid off-- but those payments have cost banks like Washington Mutual billions of dollars in write-downs as more and more people have foreclosed on their homes. Even worse, those same banks are looking to increase mortgage bills “by an average of 40 percent in the next 18 months”[1] to balance out the massive increase in foreclosure-related debt. And the reason for these increased foreclosures lies in the details of the new bankruptcy laws and changes to Chapter 7.

Chapter 7, sometimes called “liquidation bankruptcy,” is a type of bankruptcy that allows certain debts to be discharged or negated. Discharged debts do not have to be paid, although the consumer will often have to sell off some of his or her property in order to meet those debts that remain. BUT—properties like homes, vehicles, and insurance policies are often exempt, which means no foreclosure. However, as more consumers are forced to file under Chapter 13, their unprotected, non-exempt property (including their homes!) often becomes meat for the sacrificial fire.

If you’re in danger of losing your home, considering bankruptcy, or otherwise trying to negotiate debt in your life, it is in your best interest to get in touch with a bankruptcy lawyer. An attorney with the appropriate legal expertise can help you with your prebankruptcy planning, prepare you to fight for a Chapter 7 bankruptcy, protect your home from foreclosure, and keep you from paying off debts for the rest of your life.

[1] Howley, Kathleen M.. "Slump exposes bankruptcy law flaws." The Examiner 12 November 2007 : 12.

by Kate Beall

No Shirt, No Shoes, No Service.

“We reserve the right to refuse service to anyone.”

Whether printed on a sign, taped in a window, or tucked next to an asterisk on a restaurant menu, this phrase continues to be one of the most prolific ones in the bar and restaurant industry. Intended to protect owners and staff from rowdy, rude, or inappropriate customers, this phrase isn’t a useless mantra. It’s a legal warning.

But when is it okay to deny service to someone?
And when does it become a civil rights issue?

The signs themselves are completely legal—but their scope is limited. Despite being private property, restaurants still accommodate the public and are thus subject to constitutional laws. So while your local bar is more than justified in bouncing…

• Rowdy or dangerous customers
• Customers that may overfill capacity if served
• Customers that try to elbow in just before closing time
• Customers who are excessively dirty, unkempt, or unhygienic
• Non-paying groups accompanying a customer

…they cannot refuse service on the basis of race, color, religion, or natural origin. Similarly, an establishment cannot refuse service because of an extremely arbitrary condition. For example, the local pub couldn’t bar someone from entering because she or he has a speech impediment.

If you’re a business owner, make sure to check with a constitutional law attorney before you start kicking people out. You can learn more about your right to refuse service and establish refusal-of-service guidelines that are legally appropriate for your place of business. Don’t get caught up in a discrimination suit because you weren’t playing with a full deck of cards—get familiar with business law.

If you have a specific question about business law, check our Business Law Forum for helpful advice, contacts, and info.

 

By Kate Beall

Turning Lemons into Lemonade…If you’re Lucky!

What Exactly is a Lemon?

A Lemon is a new or used vehicle (depending on the state) that continually has a defect or defects. Most states require that the vehicle be repaired 4 or more times for the same defect during the warranty period before they consider it a Lemon. Also, the defect must be substantial, meaning that it impairs the vehicle’s safety, use or value. Are you wondering if your car is covered? The following states require your Lemon to be new: California, Florida, Idaho, Illinois, Kansas, Michigan, Minnesota, Nebraska, Nevada, North Carolina, Oregon, Texas, and Washington. You can read your state’s exact statute by clicking here. The remaining states allow a Lemon to be any vehicle, new or used.

What is the Purpose of the Lemon Law?

The Lemon Law was established to protect consumers from defective vehicles. Remember that this defect needs to substantially impair the use or value of the vehicle. Your complaint cannot be cosmetic such as you are dissatisfied with a certain aspect of your vehicle’s interior. When you buy a vehicle it should be free of substantial defects that you were not aware of. My Car is a Lemon…Now What? Your first step should be to contact the manufacturer of your vehicle to discuss your situation with them. This of course only applies to cars covered by a manufacturer’s warranty. The Better Business Bureau may be able to help you if your manufacturer participates. Click here to see if the BBB can assist you with your situation. Most of the major manufacturers are listed. You may be required to participate in arbitration. This of course depends on whether or not you state requires this.

Will you be Successful in Turning your Lemon into Lemonade?

If you are lucky everything will go smoothly and your car woes will end. You may be refunded all repair monies that you have paid to fix the defect or you may even get a new vehicle (hopefully one that is free of defects). If things don’t go as planned you will want to consult with an attorney who may be able to convince the manufacturer/dealer to fix the problems that you are experiencing. Remember that before you embark down the Lemon Law road be sure that you have thoroughly read your state’s Lemon Law to make sure that your car is covered, your claim in reasonable, and what remedies you may be entitled to.

By Lisa Zanassi

Do I Really Have to Go Through Credit Counseling?

The new Bankruptcy Law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, now requires all consumers to pay for private credit counseling prior to filing for bankruptcy. This credit counseling session is designed to inform consumers of their options in dealing with their debts. Your bankruptcy attorney will ask you if you have completed the credit counseling session and obtained the required certificate so let’s prepare you. 

The requirements of this class are as follows:

• Credit Agency must be “approved”. A list of agencies that satisfy this requirement can be found here.  The course must be at least 90 minutes in length.
• The course cannot cost more than $50 and accredited agencies cannot turn anyone away who cannot afford the fee.
• The course must be taken and completed no more than 6 months prior to filing for bankruptcy.
• The course can be taken in person, in a group setting, over the phone, or on the internet.
• On completion of the course you must obtain a certificate of completion as proof for the bankruptcy court. Make sure the certificate is the correct one for the bankruptcy court in which you plan to file.

Opponents of this new requirement think this class is simply another hoop to jump through and will not provide the much needed help that consumers are seeking. REMEMBER: The consumer credit counseling industry was founded by companies and banks issuing credit cards and they still receive most of their funding from that industry. AND THEY REALLY WANT THEIR MONEY!

Not all credit counseling agencies are created equal. Although the U.S. Trustee is in charge of screening approved agencies, some are clearly better than others. To assist you in making the best choice you may want to follow some of these tips:

• Don’t sign up with the first agency you find. Do some shopping and contact two or three before making your final decision.
• Look for an agency that offers a wide variety of services such as fact-to-face budget counseling in addition to the debt management classes.
• Find out the fees before making you decision.
• Don’t be afraid to ask about the counselors credentials. You will want someone who has more experience than just a one week training class.

So what are you in store for? Topics covered in your credit counseling session will most likely include examining the underlying causes of your financial problems, assistance in understanding the debt-to-income ratio and the examination of your budget in terms of income and expenses.

And if you are looking forward to this session you will be exited to know that you are also required to take a two-hour personal financial management education class before your bankruptcy can be completed and debts discharged. A fee will also be required for this class although a maximum fee has yet to be determined. Does this madness ever end?

By Lisa Zanassi

Choosing an Entity for Your Business or Investments

The primary purpose of forming a corporation, limited liability company (LLC) or limited partnership is to protect your personal assets from liability.  With one of these entities, only what you have invested in the entity is at risk, not the rest of your assets, such as your house, stocks, etc.  (There is an exception to this if the owners do things such as commingle personal and entity money, engage in fraud, fail to hold board meetings, etc.)

This is in contrast to a sole proprietorship or a general partnership, where you are fully liable for the obligations of the business or investment.  (A revocable or “living” trust generally does not offer protection of personal assets either.)

Tax Differences Among the Entities

In terms of taxation, there are two types of corporations:  a “C” corporation (think of IBM or General Motors) or a Subchapter “S” corporation, which is used for smaller businesses.  The primary tax problem with a “C” corporation is one of double taxation:   IF there are profits then the corporation pays income taxes on any profits it has, and the owners pay income taxes on their compensation and dividends.  (Although compensation and bonuses must be reasonable, sometimes they can be set so there are no corporate profits.) 

One advantage of a “C” corporation – although it is virtually always offset by the double taxation problem – is that corporation payments for health insurance premiums, life insurance, child care, business-related meals, travel and lodging, etc. are deducted as a business expense, but aren’t included in employees' gross income.   Employer payments for the following employee benefits are treated the same way:  life insurance; accident and disability insurance; supplementary unemployment payments; parking expenses and transit passes (up to certain limits); child care;. 

With Subchapter “S” corporations and LLC’s (and limited partnerships), profits and losses pass through to the owners according to their percentages of ownership.  (The loss pass-through can be valuable with a start-up, since this allows the owners to subtract paper losses from other income that they may have.) 

There is no federal income tax on these entities.  While they pay a California tax of $800/year and/or a tax on revenues, it is at a much lower percentage than that of “C” corporations.  California taxes a “C” corporation at up to 8.84% of profits -- and there are federal taxes as well on a “C” Corporation.  With an “S” corporation, California charges a tax of only 1.5% of any profits. 

With an LLC, the State charges a tax of very roughly 1/4 of one percent of revenues (not profits) on revenues between $250,000 and $5 million a year. 
If revenues will exceed $500,000 a year, the tax on revenues can be minimized by forming a limited partnership.  Since the general partner of a limited partnership has unlimited liability, people generally form an LLC (or corporation) as the general partner holding a 1% interest.  Because two entities are involved, the set-up charges, annual fees and accounting charges are higher, but often the tax savings on revenues exceeding $500,000 year make it worthwhile. 

One downside is that, unlike with a “C” corporation, if an “S” corporation or LLC or limited partnership carries profits into the next fiscal year (for research or development for example), the owners are taxed as if they had received that money.  One way to mitigate this – assuming the owners want the entity to carry over money to the next year – is for the entity to give the owners enough money to cover their taxes on the retained profits.

Pros and Cons of “S” Corporations

“S” corporations do have some disadvantages.  Only individuals may be shareholders in an “S” corporation, and there must be fewer than 35 shareholders total.  If an entity (as opposed to an individual)  is added as a shareholder, the “S” status is immediately lost and the corporation becomes a “C” corporation.  As a result, “S” corporations cannot be used if an entity will be an owner.  (An LLC does not have this restriction.)

Also, an “S” corporation is not a good choice for real estate investments where more than 25% of the corporation’s revenue will come from rents (or other “passive” income), since if that occurs for three years the IRS can covert the corporation to a “C” corporation. 

In addition, with an S corporation, you can only deduct losses up to the amount of your investment; with LLC's you can deduct all losses. 

Finally, an “S” corporation cannot be used if one or more of the owners is a non-resident alien.  This has nothing to do with a green card, but instead very roughly requires residing six months in the U.S. during the past year.  (The actual formula is a bit complicated.)

On the positive side, only a corporation can set up an Incentive Stock Option Plan (“ISOP”) where the employee does NOT pay taxes at the time the option is exercised but only when the employee sells the stock.  Still, an LLC (as well as a corporation) can offer options/warrants, although the employee is taxed at the time he/she exercises the option on the difference (“spread”) between the amount the employee paid for the stock (the exercise price) and the value of the stock at that time. 

The Self-Employment Tax

The item that is often decisive in choosing between an “S” corporation and an LLC, though, is the self-employment tax.  The self-employment tax is equivalent to withholding for employees for Social Security and MediCare, but includes both the employer and employee portions; currently this is currently 15.3%.  This is in addition to income tax. 

One advantage of a an “S” corporation is that, although you must set a “reasonable” salary for any owner who is doing any work on behalf of the corporation, no self-employment tax has to be paid on any profit pass-throughs.  For example, if you can reasonably set the salaries so that half of each owner’s compensation is profit pass-throughs, the owners will not have to pay the self-employment tax on those pass-throughs. 

With an LLC, each owner who either a) is empowered to sign contracts on behalf of the LLC (which includes  managing members and members of LLC’s that are member-managed) or b) spends more than 500 hours in a year on the LLC’s business probably has to pay the self-employment tax on ALL money that he/she receives that is in addition to his/her compensation as an employee (where withholding is already being done).

While it is possible to try to avoid this by designating someone as the manager who is not a member (e.g., an affiliated corporation), that still does not help members who work more than 500 hours in a year on the LLC’s business. 

There is an exception if the income arises from real estate rentals.  For example, if your business is solely involved in real estate leasing, the rental income generated estate would not be subject to the self-employment tax in an LLC.

Although the choice of a business entity has to be made on a case-by-case basis, if all the owners will be individuals who are U.S. residents and less than 25% of the entity’s revenues will be from passive sources like rents, often it will be best to form an “S” corporation in order to legally avoid the self-employment tax on profit pass-throughs (versus salaries).

Bruce E. Methven
Methven & Associates
www.methvenlaw.com
bmethven@methvenlaw.com

CAN-SPAM (Not to be confused with canned SPAM)

SPAM is defined as any email message the primary purpose of which is the commercial advertisement/promotion of a commercial product or service.  This is certainly not to be confused with SPAM, the Hormel spiced ham in a can.

The CAN-SPAM Act of 2003 (AKA Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003) established the first standards for the sending of commercial email and named the Federal Trade Commission as the agency that would enforce this act.  The act requires unsolicited emails to contain all of the following:

• An opt-out mechanism that allows the recipient to ask you not to send future emails.
• A valid subject line and routing information
• A physical postal address of the mailer: and
• If the email contains adult content then a label must indicate such.

The Federal Government recently cracked down on seven companies who have been accused of hiring outside sources to send illegal emails containing pornographic messages, some of which were sent to unsuspecting children.  The government reports that four of the seven companies under investigation have agreed to pay nearly $1.2 million to settle charges against them.  These companies include BangBros.com Inc., MD Media, APC Entertainment Inc. and Pure Marketing Solutions LLC.  The Federal Trade Commission has stated that the emails involved did not comply with the CAN-SPAM Act () because they were not marked “sexually explicit”, they did not contain an opt-out mechanism and did not include a physical postal address of the mailer.

It seems like I am always receiving these types of unwanted emails but have never really inspected them to make sure they are complying with the CAN-SPAM Act.  If you do find an unsolicited email that does not contain all requirements listed above you will want to forward it spam@uce.gov, an email address set up by the FTC.  The reason that the seven companies are now in hot water is because people forwarded the illegal emails to the FTC. 

If you are a company or individual accused of violating the CAN-SPAM Act then you will want to speak with legal counsel immediately to preserve your legal rights and assist with your defense.

REMEMBER:  Don’t be afraid to send suspicious and non-conforming SPAM (only email, not the ham) to the Federal Government (although they might appreciate the spicy canned version).  The appropriate email address is listed above.

By Lisa Zanassi

Is Bankruptcy Bad?

This nation is built on credit, and consequently, it is built on a lot of money that people do not possess at the time they spend it. People rarely pay for their house, car, or education outright, and because of this, many Americans from varying socio-economic backgrounds find themselves in debt. While there are various options in the form of loans and mortgages that provide the ability to pay for these various necessitates and luxuries, many times people’s eyes are bigger than their stomach, and months or years later they find themselves in a situation where the payment of these outstanding debts is no longer feasible.

Some people believe “bankruptcy” is a bad word that carries many negative connotations.  However, bankruptcy is a useful tool for both individuals and companies that find themselves in a hopelessly insolvable financial situation. While it would probably take an educated bankruptcy lawyer or accountant to tell you the various advantages and disadvantages of declaring bankruptcy in ones specific situation, it is helpful for everyone to know a little more about the process, and how maybe in the end, bankruptcy is not necessarily as bad as many people like to think.

For individuals that find themselves in a financial situation in which they are no longer adequately able to pay off their debt, there are two types of bankruptcy on in this situation could file.  Chapter 7 bankruptcy is most commonly utilized by individuals that choose to declare bankruptcy. It involves the liquidation of all assets in order to pay off as much debt as possible, then a general forgiveness on the remainder of the debt owed, although there are exceptions for both what you have to liquidate and what is exempt from forgiveness.

Another option for an individual declaring bankruptcy is to file a Chapter 13 Bankruptcy. Chapter 13 bankruptcy allows an individual to pay off his debt over time. The process starts when the individual files a petition with the bankruptcy court. This petition includes a complete list of all the individual's debts and assets. Additionally, the petition must include a payment plan that describes how the debt will be paid off over the next three to five years. This option tends to be most helpful to individuals who have a steady income, since they will (eventually) be able to pay off the debt.

While some continue to fear the word “bankruptcy,” more people should remove their inhibitions and realize the inherent attributes of getting a fresh start. Some researchers have even gone so far as to say, our economy would benefit if more and more people did declare bankruptcy. But, like every process in law, it is important to consider both sides, be aware of disadvantages, and realize that bankruptcy is not necessarily for everyone either.

By Evan Anderson

Welcome to the LegalMatch Business Law Blog!

Are you seeking legal advice or representation on a business law-related issue? Perhaps you're an attorney who specializes in business law? The LegalMatch Business Law Blog is the online source for relevant and informative articles and information. LegalMatch offers an authoritative and trustworthy voice on the issues of the day as they concern the legal industry and you as a consumer. Please note, the articles and information in this blog are for informative purposes only. Always consult the professional advice of a lawyer for your particular legal issue. Enjoy!

It’s A Race to the Bankruptcy Court

Considering Bankruptcy?  The time to act is now.  Come October 17, 2005 all provisions of the Bankruptcy Reform Bill will go into law making it more difficult for individuals to erase their debts.  Many critics are disgusted by the ramifications of this bill stating that it punishes the middle class debtor while awarding millions of dollars to the creditors (banks and credit card companies). 

You may be thinking… These people should not get a free ride and should be obligated to pay their debts back.  I don’t think it is that simple.  Many people seek the solace of filing for bankruptcy because they cannot pay their bills.  The ramifications of filing for bankruptcy include, but are not limited to, difficulties obtaining credit and high interest rates if you are given a line of credit.  Regardless of the ramifications, bankruptcy attorneys are working overtime assisting people with the filing process.

The most typically types of bankruptcy are Chapter 7 and Chapter 13.  In a Chapter 7 bankruptcy your assets are liquidated and given to creditors and the rest of your debt, minus a few exceptions, is wiped clean.  In 2004, approximately 72% (1.1 million people) of the bankruptcies filed were under Chapter 7.  In a Chapter 13 bankruptcy you are placed on a payment plan to repay debt.  Over 445,000 people last year filed under Chapter 13. 

Under the new law fewer people will be allowed to file under Chapter 7.  Currently, the court determines if your case qualifies under Chapter 7.  Under the new law, your income will be put to a two-part test.  First, a formula that determines if you can afford to pay 25% of your non priority unsecured debt (a.k.a. credit card bills).  Second, your income is compared to your state’s median income.  If you make more than your states median income and you can afford to pay 25% of your debt then you will not be able to file for Chapter 7. 

Other new provisions include the requirement that you must now live in a state two years before receiving the benefits of that state’s exemptions.  Also, filers will be required to meet with a credit counselor and attend money management classes at their own expense.

The goal of this new reform bill was to clean up the bankruptcy system.  Opponents of the bill argue that although the numbers of people filing will go down, that there will be more people who go through “informal bankruptcies.”  These people will move from state to state or place to place, avoiding payments and creditors and hiding their assets.  So the question remains will this “reform” bill really reform us as a society or have a damaging and negative effect?

By Lisa Zanassi