Author: Artaev at Law

Dan Artaev is an expert attorney, specializing in business law issues that affect modern high-tech businesses. Dan’s international background, as well as 10+ years of experience in private business litigation, contract law, and as a government labor lawyer are especially valuable to his clients. Dan is also a proud husband, dad, and cat owner with many hobbies, including triathlon training.

e-mail: dan@artaevatlaw.com

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non-profit corporation

The Essential Guide to Setting Up a Nonprofit Corporation In Michigan

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Nonprofits are big business. According to recent IRS statistics, Michigan has over 50,000 nonprofit entities, holding more than $268 billion in assets, and employing over 470,000 people. Public charities, homeowners’ associations, private foundations, endowments, networking groups, chambers of commerce, are just some examples of nonprofit organizations.

Regardless of whether you have $5,000 local school bake sale to finance a field trip or plan to build a multi-million dollar hospital for needy children, you should formally organize as a corporation. The reason is simple – the corporate form protects members, directors, and volunteers from personal liability. After all, just like with a for-profit business, it is critical to insulate business debts, obligations, and liabilities from personal non-business assets. And this protection is essential regardless of how much money is involved.

A word of warning: Many people wrongly assume that just because they have set up a nonprofit with the State of Michigan, they do not have to pay taxes. But the term “nonprofit” is not the same as “tax-exempt.” Whether a corporation is a nonprofit entity is a matter of Michigan law under the Michigan Nonprofit Corporations Act. Whether a corporation is exempt from taxation is a matter of federal law and is determined under the Internal Revenue Code. While a nonprofit entity may qualify for tax exemption – for example as a charity under IRC 501(c) – the process is not automatic. As detailed below, the nonprofit corporation must be registered with the IRS and the Michigan Department of Treasury and comply with the requisite standards before being granted tax-exempt status. This is why it is especially critical to work with an attorney and a CPA to ensure that you are doing things the right way.

So what are the essential steps to setting up a nonprofit corporation?

1. File the articles of incorporation with the State of Michigan. Form 502 is the basic form that you must file to register your corporation with the State of Michigan.

  • First, you must decide whether the corporation will be stock or nonstock. If it is a stock corporation, that means that you will be issuing shares, you need to designate the number of shares to issue, and describe the classes of shares, along with the respective rights and limitations associated with each class. If you elect the nonstock option, the State of Michigan requires that you describe and value of any real and personal property assets.
  • Second, you must determine whether the corporation will be managed on a membership or a directorship basis. Organizations like sport clubs are often run on a membership basis, while charities and private foundations are most frequently formed on a directorship basis. So, there are several different forms that a corporation can take – stock membership, nonstock membership, stock directorship, and nonstock directorship – so be sure to consult with a professional before selecting the form that is best for your particular needs.
  • Third, a nonprofit corporation must state a specific purpose for which it is organized and disclose a plan for financing. It is not enough to simply state that the corporation is organized for “all lawful purposes.” For example, if your organization intends to solicit donations from the public for the purpose of helping the homeless, you must expressly state that purpose in the articles. And, “donations” must be listed as the financing scheme.
  • Fourth, you should strongly consider adding some optional articles to specifically address IRC 501 requirements for tax-exempt status. For example, you may wish to add an article restricting distributions of any net profit to charitable purposes. Or, the corporation may expressly assume liability for any volunteer director actions right in the articles. Again, consult with a professional to determine which optional articles are necessary and the best language to use.

2. Draft and approve bylaws. The bylaws are the governing document for the nonprofit corporation that set forth things like how decisions are made, who the officers or directors are, how money is accounted for, voting, and the rules for annual and special meetings. The Michigan Nonprofit Corporation Act also contains some special requirements unique to nonprofits – for example, the minimum number of directors is three. Membership eligibility and any dues and requirements may be established. If it is a stock corporation, the bylaws will have provisions restricting the transfer of stock. Officers may be appointed. Bylaws are especially critical for nonprofits as they are important evidence in any dispute regarding whether the corporation qualifies for tax exempt status. Also, the bylaws contain the all-important indemnification provisions that protect from personal liability.

3. Determine whether you need to register as a charitable trust with the Michigan Attorney General’s Office. Under the Charitable Organizations and Solicitations Act, any organization that intends to hold property for charitable purposes or to solicit donations must register with the Attorney General’s office within two months of incorporation or obtain an exemption. Under Section 13(b) of the Act, organizations that have only volunteer employees and do not receive more than $25,000 per year do not have to register are exempt from the reporting requirements. The exemption does require prior approval from the Attorney General’s Office. The articles of incorporation and the bylaws must be filed with the forms. Also, any IRS determination regarding IRC 501 tax-exempt status and any statements detailing financial activities must be filed as well – regardless of whether you are registering or seeking an exemption.

4. File Form 1023 with the IRS to qualify for tax-exempt status. Perhaps the most important step of all, the IRS requires a nonprofit to file Form 1023, together with its articles of incorporation, bylaws, and any solicitation materials. You may wish to involve a CPA at this stage to ensure that all of the IRS regulations are followed properly. Make sure that you have obtained an EIN (employer identification number) before filing form 1023.

Additional steps may be necessary, depending on the particular type of nonprofit organization and your particular goals and circumstances. For example:

  • You may need to execute a power of attorney and representative with the IRS if you wish your CPA or attorney communicate directly with the IRS.
  • There are also special forms and requirements if your organization intends to lobby legislation.
  • If your corporation is not solely for charitable purposes, it may still seek tax exempt status under a different subsection of IRC 501 by filing form 1024 with the IRS.
  • You or your CPA will be filing a special tax return Form 990 for nonprofits.
  • If you are in the business of selling tangible property, you may need to obtain a sales and use tax exemption certificate from the State of Michigan.

Setting up a nonprofit corporation takes more time and effort than a for-profit entity. Given the various possible iterations that a nonprofit can take, as well as the importance of obtaining the tax-exemption approval from the IRS, it is critical to hire a professional to assist.

Have questions? Ready to start your nonprofit corporation? Contact attorney Dan Artaev by email at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This article is for promotional and general informational purposes only. It is not intended to and does not constitute legal, financial, or tax advice. You should not take any action in reliance on this article without first hiring and consulting with a professional about your particular set of facts and circumstances.

© 2020 Artaev at Law PLLC. All rights reserved.

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Resolving Neighborhood Disputes Before They Turn Into Ugly and Costly Litigation: Early Mediation Works.

Disclaimer: This article is for informational and promotional purposes only. Dan Artaev is a trained mediator, as well as an attorney, and this article does not constitute legal advice.

Disputes between a condo board or a homeowners’ association and a resident are some of the most contentious battles that I have ever witnessed as an attorney. A board must balance personal property rights against the rights of the community by enforcing deed restrictions. And understandably, emotions run high when a resident perceives the board as infringing on their property rights and telling them what they can or can’t do. I have represented both individuals and boards, and when elevated to litigation, these disputes are not only toxic for the community – they almost always end in a lose-lose for everyone involved.

Regardless of who “wins,” both sides have spent thousands of dollars on attorney fees. Litigation and appeals can take years to work through the judicial system. The property owner still has to live in the same neighborhood and endure the “bad blood” that comes out of litigation. The association will have spent its budget on litigation instead of improvements to the community, and may even have to make a special assessment to pay for legal fees. And even if the owner wins, the owner is still part of the community, and may even end up paying the losing association’s legal fees as part of that special assessment.

This is why I strongly recommend mediation to resolve neighborhood disputes before anyone files a lawsuit. The potential benefits are enormous, and the costs are relatively low – certainly a lot lower than fighting it out in court. One of the biggest benefits is that attorneys need not be involved – the resident can represent themselves and the board can be represented by its president or another member with authority to resolve the issue. The mediator is the only cost and it is shared. Another advantage is that mediation is confidential. If you would like to keep your dispute private and not a matter of public record (like lawsuits), then mediation is the way to go. Even if a lawsuit is later filed, mediation or anything said in mediation cannot be used as evidence. Also, not all disputes can be taken to court – but all disputes can be mediated. Issues like loose dogs, lighting, noise, and other “nuisance-type” disagreements can all be resolved in mediation on their own or as part of a bigger issue. The bigger issues like non-conforming structures, fences, and lot lines that could easily be the subject of a court injunction can likewise be mediated. Unlike litigation, mediation is an extremely flexible process that is designed to end in a win-win for both parties – and perhaps most importantly, to help the parties continue living in the same neighborhood.

So what does a mediator do? A trained mediator’s job is to get the parties together, and then to facilitate communication and collaborative problem solving to help them towards a solution. A mediator must always remain neutral and is not going to tell each side whether they are right or wrong – rather, a mediator will help the parties find solutions that work for all by focusing on common interests and goals. When the parties are in control of their own process, it is amazing how a creative and effective solution will emerge. This so-called facilitative approach works very well for neighborhood cases, but also has tremendous application in the business context and other areas.

If you still have doubts, the reality is that if you do go to court, the judge will see a homeowners’ association lawsuit and immediately order the parties to go to mediation. Except that now everyone has to bear the additional costs of an attorney as well as a mediator, tempers are running higher, and yet you are still in the same place as you would have been had you tried to resolve your issues with pre-suit mediation.

But you may be thinking, how do I get the other party’s attention without serving them with a lawsuit? If you are a homeowner, you may want to attend a meeting of your association and express your desire to mediate on the record, to be reflected in the official minutes. Or, send a letter to the association formally expressing desire to mediate your dispute. If you are homeowners’ association, a formal letter inviting the homeowner to participate may get their attention – or if there is a member of the community that the homeowner has a good relationship with, that member may reach out and suggest mediation. Emphasis on a confidential and low-cost process may be particularly effective.

Finally, where do you find a mediator? I am a trained mediator, and you can either contact me with questions or click here to find out more about my mediation services. I even offer special rates to mediate pre-suit disputes where no attorneys are involved and I mediate exclusively via Zoom, so no travel necessary for anyone. Also, many communities have dispute resolution centers – for example, the Dispute Resolution Center of West Michigan is one that serves the west side of the state, and the Oakland County Mediation Center offers resources on the east side.

“Good fences make good neighbors, but neighbors who mediate are best.” – Dan Artaev, Artaev at Law PLLC

© 2020 Artaev at Law PLLC. All rights reserved.

Is Your Lawsuit Stuck Due to COVID? Stipulated Mediation May Be the Answer.

You may wish to give mediation a second look. If you are business owner involved in pending business litigation, you are likely frustrated with the progress – or rather the lack of progress – in your case. Whether as a plaintiff looking for a resolution of your grievance or a defendant eager for vindication, it is frustrating when the courts keep pushing back deadlines and hearings, with no end in sight. When Michigan shut down back in March 2020, the Michigan Supreme Court directed (and rightfully so) that criminal cases be prioritized. Civil matters – and especially business disputes – got pushed to the back of the docket. Now, as many of the courts have resumed normal (albeit remote) operations, they are playing catch-up. This is especially so in busy circuits like Wayne and Oakland.

Business owners do not make money in litigation. Lawsuits are expensive in terms of both time and money – there is little doubt that you are not making the best use of your time if you are stuck in an 8-hour deposition, rather than out there selling your product. This is why mediation is always a good idea, even in the best of times, but during COVID, it is the best possible solution to a number of complicated problems facing business owners attempting to resolve their disputes in the courts.

Even if you have already mediated (unsuccessfully), you may consider another attempt. There is no limit to how many times you can try to facilitate a case. Some judges even order the parties to mediate multiple times during the process at different stages of the case. The court rule that governs mediation, MCR 2.411, is very flexible and allows the parties to stipulate to a mediator of their choosing, whether an attorney, a former judge, or even a respected neighbor in the community. COVID has brought about a sea change for businesses across the United States and there is little doubt that the primary facts, interests, and goals, are different now than they may have been pre-COVID. Accordingly, you may want to try again and possibly with a different mediator.

Effective mediation can work wonders, even with the most stubborn parties. I once represented a former employee, whose employer owed her at least $60,000 in back wages. The employer was a start-up entrepreneur in the fitness business, who was big on making promises, but not so big on delivering them. In other words, he promised to pay many times, but at the end of the day, was either unable or unwilling to write a check for services rendered. The employer was also very aggressive and responded to a rather simple breach of contract complaint with counter-allegations of embezzlement and fraud that were unsupported by any evidence whatsoever. The court strongly suggested mediation, but I had no hopes that this case was going to end up anywhere other than trial. Much to my surprise, our mediator was able to craft a solution that settled the case. Not only that, but the mediator’s resolution made both sides feel like they won. That to me is the hallmark of a good mediation – where both sides feel like they are better off than they were prior to mediation. Better yet, the employer could now devote his time and money to his business instead of the lawsuit, and the former employee could spend her time working elsewhere and making money, instead of paying attorneys and going to hearings.

Now is a time like no other to engage a mediator to resolve that business case. The advantages are numerous:

  • Many judges will encourage parties to settle anyway, and even before COVID less than 1% of all business cases were resolved through trial.
  • The monetary cost of taking a case to trial has increased exponentially, as disputes have been more complex and the costs of discovery has skyrocketed in large part due to technology.
  • The time opportunity cost of taking a case to trial has also increased exponentially, as discovery has grown more complex and requires more time input from business owners.
  • The opportunity cost of taking a case to trial is also unpredictable and may largely depend on the forum and the particular judge’s preferences. I once was involved in a relatively straight-forward contract dispute that was pending for over a year, the judge refused to rule on any motions or set the case for trial, and ordered mediation at least 3 times. The parties eventually gave up and settled after the third mediation.
  • In the same vein, the parties can mutually decide on a mediator that fits their needs, whereas in litigation, the parties do not chose their judge.
  • If you filed pre-COVID litigation, consider whether mediation (even if you have previously tried mediation) can be a way out of the slowed-down docket across the state. After all, the facts, interests, and goals of the parties may look quite different than they looked back in February 2020.

Also, online mediation through videoconferencing (like Zoom) is viable and surprisingly effective option. Consider the following advantages:

  • No need for parties or attorneys to travel, allowing for convenience of all.
  • Greater flexibility means potentially lower costs and quicker resolution.
  • Potentially lower mediator fees.
  • Option to have multiple days or extended sessions, as may be needed.
  • Increased scheduling flexibility for all parties.
  • Technological advances such as separate virtual conference rooms, screensharing, text chat, and online whiteboards make it easy for the parties to share information with each other and the mediator.

Artaev at Law offers mediation services as well as representation in alternative dispute resolution proceedings. Contact Dan at dan@artaevatlaw.com or by call or text at 269-930-0254 to schedule your mediation or to secure representation.

© 2020 Artaev at Law PLLC. All rights reserved.

Is Your License at Risk? The Administrative Complaint Guide for Healthcare Professionals and Other Licensees in Michigan.

Dan Artaev is a former Assistant Attorney General for the State of Michigan who represented various State agencies in judicial and administrative proceedings. In private practice, Dan has defended doctors, nurses, physician’s assistants, real estate agents, and others against State of Michigan complaints seeking to sanction or revoke their professional license. If your professional license is at risk, contact Dan today at dan@artaevatlaw.com or 269-930-0254.

The Michigan Bureau of Licensing and Regulatory Affairs (“LARA”) oversees the occupational licensing process in Michigan that is required for about 150 different careers. A license from the State of Michigan is mandatory for doctors, nurses, physician assistants, psychologists, and counselors. But licenses are also required for persons outside the health professions – like real estate agents, accountants, architects, professional engineers, and even cosmetologists and barbers.

Regardless of the license that you hold, it is an essential part of your business and livelihood. So it is distressing when you receive a phone call or a letter announcing an investigation from the State of Michigan. And it is especially traumatic if you receive an official administrative complaint alleging professional misconduct that may result in a suspension or even revocation of your hard-earned license.

If you find yourself being investigated or receive a complaint, you should contact an experienced attorney immediately to represent your interests. In general, until you retain counsel, you will find yourself dealing with representatives from the bureau or board that issued your license. In dealing with these agents, you may feel pressured to admit to misconduct in hopes to reach a quick resolution or settlement of the matter. However, as a licensee, you have certain rights, including rights to defend yourself at an administrative hearing and judicial review of any final agency decision. You should not waive those rights lightly. An attorney can help you put on the best defense possible at any hearing – but also, hiring an attorney allows the attorney to negotiate with the State on your behalf and potentially reach a cost-effective settlement or resolution before you have to go through the time and monetary commitment of a full hearing.

What kind of conduct triggers an investigation and complaint?

An investigation can be triggered when an individual files a complaint with the particular state agency responsible for your license. For example, a patient or a customer or their family member may file a complaint alleging conduct that they deem improper. It does not have to rise to the level of malpractice – it may be something deemed unethical, negligent, or otherwise unprofessional. Or, the federal government or another state agency may be required to notify LARA if a licensee is convicted of certain crimes (such as illegal possession or delivery of a controlled substance). Depending on the nature of the purported misconduct, a mere investigation by another agency or government entity may be sufficient. Needless to say, if you are charged with or convicted of a felony or misdemeanor, expect follow up from LARA regarding your license.

The Investigation.

The next step in the process is the actual investigation. LARA’s investigators work as fact-finders for the government and their job is to interview any witnesses, collect evidence, and compile a report that will then be the basis of any subsequent administrative complaint action. It is likely that an investigator will reach out to you and ask for an interview. However, there is no law that requires you to talk to an investigator – you are free to decline to speak with them, even if they make you feel like you “have to” meet. They are not your friends and they also do not have the authority to dismiss the complaint against you. If you retain an attorney at the investigation stage, the attorney can speak to the investigator on your behalf – to gather information on the nature of the complaint, to sit with you at any interview that you choose to attend, or to deliver a written statement to the investigator in an attempt for early resolution of the matter.

Of course, if you receive an official order or subpoena that requires you to produce documents or appear for testimony, you do have to comply. But while such official orders do happen at the investigation stage, they are relatively rare.

Responding to the Administrative Complaint.

Unless you have reached an early settlement, an investigation will likely result in an administrative complaint. This is a formal pleading – like a court action – filed by LARA against the licensee that alleges certain misconduct, violations of the applicable laws, and seeks sanctions. If you receive an administrative complaint, it is critical that you contact your attorney right away because the law only gives 30 days for a response. Failure to respond in time will result in a “default,” which means that you will be deemed to have admitted the allegations of misconduct, and the complaint will be forwarded to the relevant disciplinary board or committee for a determination of the sanction. A sanction could be a fine, a license suspension, or even revocation of the your license. However, note that your license remains active until a sanction is actually handed down, except in certain extreme circumstances where you receive an order of summary suspension.

If You Receive an Order of Summary Suspension…

You are immediately precluded from engaging in licensed conduct and are treated as if you do not have a license. An order of summary suspension must be justified by some imminent threat or harm to the public. Such a summary suspension is rare, but does happen in some of the more serious cases, such as where a physician is accused of illegal prescriptions or where there is some other ongoing threat to the health and well-being of others.

Because a summary suspension is an extreme measure, the law allows a licensee to request an expedited hearing on the whether the summary suspension is justified. This is a separate process from the full administrative hearing and focuses solely on whether the license should continue to be suspended pending the full administrative hearing.

The Compliance Conference.

After you or your attorney file an answer to the administrative complaint, you have the right to a compliance conference. A compliance conference offers a chance at early resolution of the matter before you spend too much time and money defending against LARA’s allegations. Before COVID, the compliance conferences were in-person meetings, usually at the Office of the Attorney General in Lansing. However, right now these meetings are conducted remotely via telephone or via Zoom.

The licensee usually attends with his or her attorney. LARA is represented by an Assistant Attorney General assigned to the case and a “conferee,” which is a person who represents the particular licensing board at issue. Usually, the conferee is a member of the licensed profession themselves, so they are familiar with the particular standards of conduct and the professional nuances of the job. The conference is informal and none of the conversation that takes place is admissible at any subsequent proceeding – in other words, it is a chance to talk freely, and try to reach a viable settlement.

If a settlement is achieved at the conference, it is formalized through a proposed consent order. In this order, the parties stipulate to certain facts that they can agree on, agree that those facts form a basis for imposing discipline, and the conferee then recommends the consent order be adopted by the relevant licensing board. If the board does approve, the order is signed and resolves the matter. The licensee then must comply with any stipulated sanctions, such as payment of a fine, taking continuing education classes, a suspension from practice, drug testing, or anything else that may be imposed. More often than not, the settlement is compromise that results in less severe sanctions than would otherwise be imposed and also achieves finality for the licensee, allowing them to keep their license and continue working in their profession.

The Administrative Hearing.

If settlement discussions are unsuccessful, the parties proceed to an administrative hearing. An administrative hearing is a lot like a court trial, except that there is no jury, and there are slightly different procedural rules. Before the administrative hearing, the parties do have the opportunity to take discovery (meaning subpoena witnesses and documents) and file motions.

The hearing itself takes place in one of the local government buildings – usually in Grand Rapids, Lansing, or Detroit. An administrative law judge (“ALJ”) presides over the hearing and the hearing is recorded for future transcription. Witnesses provide testimony, documents are admitted into evidence, and the parties make arguments for the record.

After the conclusion of the hearing, the administrative judge usually allows the parties some time to write and file closing briefs summarizing the evidence and their positions. After that, the administrative judge usually takes about 90 days (depending on the length of the hearing) to issue a “proposal for decision.” This is a lengthy document summarizing the evidence, applying the legal standard, and recommending a decision.

The parties then have the opportunity to file exceptions to the proposal (meaning objections), after which the recommendation is considered by the director of the licensing bureau at issue. It is a little bit strange that the director of the same licensing bureau that is a party to the case reviews the decision, but that is how the administrative law process works. The director can accept, reject, or modify the proposal for decision, after which it becomes a final order.

And a final order may be appealed to the court system.

Appealing the Administrative Order.

A party dissatisfied with the order has the right to appeal. Depending on the nature of the case, there may be different deadlines applicable to the appeal. Also, while in most circumstances the appeal goes to the circuit court, in rare instances the law requires a direct appeal to the Court of Appeals. All the more reason to hire an attorney to guide you through this complex process.

Whatever the appropriate court, the parties have the opportunity to submit appellate briefs, summarizing the case and pointing out the errors. But the court will not second guess the ALJ’s discretionary rulings or make new findings of fact (except in rare special circumstances) – instead, the court will conduct a deferential review of the record to determine whether the ALJ made a legal mistake or whether the decision is unsupported by evidence. In other words, it is difficult to prevail on appeal if you have already lost at the lower level. And while you may continue to appeal to the higher courts, the chances of a favorable decision grow slimmer, the higher up that you go.

Hire an Attorney!

Although this guide may seem lengthy, it is a still only a cursory examination of the administrative licensing sanction process here in the State of Michigan. It is a complicated landscape and an experienced attorney is worthwhile, especially when your professional license is at stake. Do not forget that you do have rights to a hearing and due process, and you should take care to protect those rights.

Contact attorney Dan Artaev today for a consultation regarding a State investigation or administrative complaint against your processional license.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal advice. Every licensing case is unique and any action you take with respect to your license should only be done after consultation with a qualified professional about your specific circumstances.

© 2020 Artaev at Law PLLC. All rights reserved.

Are you expecting payments under a lease, land contract, or promissory note? It may be time to dust off those documents and call a lawyer.

The economy is still uncertain, especially for business owners who rely on lease payments, land contract payments, promissory notes, or other installment-type payments for their income are in for tough month. Payees may very well be unable to make payments on time or at all. What are your options to protect your rights? It is a good time to find those documents and contact a business attorney to review your options. While every document is different, here is a general overview of some key provisions and concepts:

  1. When is the payment actually due? More often than not, a payment clause in a note or lease has a built in “grace period” – usually between 3 and 10 days after the due date for the payee to “make up” any missed payment without penalty. Importantly, many agreements also require written notification that a payment is late or has been missed – it is critical to review the documents in question, determine exactly when a payment is considered late, and to send out notice to preserve your rights.
  2. Document any modifications in writing. If you do agree to a reduced payment, different payment deadline, or some other modification with your tenant or debtor, make sure to document the agreement in writing. Most contracts (including leases) have provisions that require that any amendment be in writing. And, you don’t want to be accused of agreeing to something that you did not actually agree to later on. Further, a written record goes a long way from protecting you against any future argument of “waiver” or that you simply abandoned your rights by failing to insist on strict adherence to the contract.
  3. Find out what happens if there IS a default. Despite your best efforts to work with a tenant or a note payee, there may come a situation where they simply cannot make the payment or refuse to agree to a reasonable modification of their obligation. In that case, you need to review the default provisions with your attorney and give prompt, written notice of default. Here are some special considerations:
    • Promissory note: (a) determine whether there is a default interest rate that entitles you to higher interest in the event of default; and (b) if the note is secured by collateral, determine the status and location of such collateral. Talk to an attorney immediately if you think the collateral may be destroyed or otherwise impaired.
    • Land contract: A land contract is unique because the seller retains ownership of the property and the deed until the land contract is paid in full. However, land contract forfeiture is not automatic – there is still a requirement that proper notice be given and the landlord go through the other steps required by Michigan law before actually retaking possession of the premises.
    • Lease: Michigan law provides for summary proceedings to recover premises and evict non-paying tenants – a useful process where a landlord wants a paying tenant to take the place of a delinquent. Summary eviction is still available as a remedy – but a new tenant is not a given, judicial proceedings are delayed, and there may be other considerations to discuss with your attorney before filing those court papers.
  4. However, you can still file a lawsuit to preserve your rights. You can still file a lawsuit to enforce a default on a note or lease. Remember, in addition to (or instead of) an order of eviction, you can get a money judgment for unpaid rent. Now it is more important than ever to retain qualified counsel to protect your rights in these uncertain times.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

© 2020 Artaev at Law PLLC. All rights reserved.

5 Legal Tips for Business Owners Weathering the Coronavirus Disruption

There is no doubt you are distracted by this coronavirus outbreak. Constant news alerts, supply shortages, government-mandated closures and cancellations make it all but impossible to also run your business. However, remember that your lawyers are available to assist you. For example, if you have questions about obligations to your employees, insurance coverage questions, contract responsibilities, or anything else related to your business, feel free to reach out. In the meantime, here are 5 legal tips to help your business through the crisis with minimal disruption:

  1. Review your existing contracts for a “force majeure” clause. Do you have a contract with a supplier, distributor, or vendor? Has the coronavirus outbreak affected performance under the contract – for example, are payments being delayed? Are shipments delayed? Has demand dropped to the level where you are having trouble paying normal operating expenses? The reality is that a lot contracts were negotiated in “good times” without the threat of external forces disrupting business operations. This means not all contracts provide for what happens in times of crisis, and if they do, they are often generic provisions that may not even be applicable to the current situation. Nevertheless, some contracts have standard terms — known as “force majeure” or “Act of God” clauses — that allow for contract termination, modification, or delay in performance under certain extraneous circumstances. Importantly, even if your contract does have such a clause, it often includes notice obligations to the other party – so if you suspect that contract performance may be disrupted (either on your end or on the part of the other party), contact a business attorney for guidance on your rights and obligations.
  2. Review your existing lease and make sure you know your rights and responsibilities. Leases are another type of contract that may be affected by the pandemic. In general, commercial leases are drafted in such a way that a tenant’s obligation to pay rent is absolute and non-excusable. If you are a business owner having trouble making rent payments due to decreased demand, you need to carefully review your lease for any possible options, including early termination. Alternatively, you should be prepared to discuss lease modifications with your landlord. If you are on the landlord side, reach out to your tenants and discuss any potential issues directly. While eviction is still available as a remedy, consider that finding a replacement tenant may be more difficult at this time, and you may want to conserve resources instead of spending money to evict someone. And as always, reach out to an attorney if you have any questions about your rights and obligations under any lease.
  3. Purchasing or selling a business? Adjust your expectations or consider termination. Uncertainty is high, which means that many business deals that seemed profitable a few months ago may no longer be attractive to potential buyers. Whether you signed a letter of intent and are conducting due diligence, or you are at the purchase agreement drafting or even closing stage of the transaction, make sure you know your rights and responsibilities. Is there a specific time for performance and what happens if there is a delay? Is “time of the essence” to this transaction? Particularly, be aware of any penalties or liabilities that may be attached to termination of the pending transaction before closing. There may be a liquidated damages provision involved, or perhaps something more onerous, like an “actual damages” clause, including attorney fees. You should have an attorney representing you in any buy-sell transaction, and in the current situation, it is especially important to retain advice about your options.
  4. Know that courts are still functioning, although in a diminished or delayed capacity. One of the reasons that it is critical to know your rights and responsibilities under your various contracts, is that you want to avoid business litigation. But you may think, aren’t courts closed? So how can I protect my rights? Most courts are actually operating in a “diminished” capacity, with civil litigation taking a back seat to criminal matters. However, a lawsuit can still be filed. And, if there is a need for emergency relief like an injunction against a former employee actively stealing customers, it is still available. Understand that even if the justice system is operating in a limited capacity, it is still operating. Litigation is a possibility – and expect that even when this pandemic is over, there will still be litigation fallout over breaches of contract and other business matters that arose due to business disruptions in this difficult time.
  5. This is a perfect opportunity for “corporate catch-up.” Even if your business is currently slow or completely shut down, this time may be a great opportunity to talk to your lawyer about some business matters that you have been putting off. For example, have you trademarked your logo, slogan, or business name? Do you have a new business idea and need to incorporate a new business? Or, do you need to update your LLC’s papers to reflect the fact that you hired your niece as your new CFO? Are there old corporate entities out there (after an acquisition or merger) that continue to exposre you to personal liability? And ask yourself, is your business prepared for the 4 Ds — divorce, death, disability, and debt? Now may be the perfect time for “corporate catch-up.”

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

What Every Business Owner Must Know About PFAS Contamination

Remember when everyone was worried about PFAS contamination? Believe it or not, it was a serious concern that dominated headlines in late 2019 and early 2020 before COVID-19. It remains a serious environmental issue. But what is PFAS, and more importantly, how does it impact your business? PFAS stands for per- and polyfluoroalkyl substances, which are a group of man-made chemicals that have been manufactured and used in a number of industries across the globe since the 1940s. Also known as PFOA and PFOS, these chemicals are found in commercial household products like stains, paints, waxes, chemically coated fabrics, and production facilities for chrome plating, electronics, and general manufacturing. Firefighting foams used on military bases or at airfields are another big contributor to PFAS contamination.

One of the main reasons that PFAS is such big news today is that it has made its way into Michigan’s waterways. PFAS does not break down naturally and tends to accumulate, forming a foamy film on surface water. PFAS has also been linked to certain adverse health effects, making its accumulation in Michigan’s water especially concerning. For example, PFAS accumulation in the Huron River resulted in “do not fish” advisories throughout the watershed in 2019. While swimming was still safe, pictures of accumulated foam on the river banks made for dramatic news stories.  

Business owners need to be aware of whether their business is contributing to PFAS contamination. If your business is releasing PFAS into the environment—whether intentionally or not—it could lead to significant fines and clean-up costs. The State of Michigan recently filed lawsuits against 17 chemical companies that allegedly are responsible for 74 contaminated sites throughout the State. The State is seeking to recoup the approximately $25 million per year that it spends to remediate PFAS contamination—an amount that is likely to increase. Local wastewater authorities—entities that operate wastewater treatment plants—are also filing lawsuits against businesses that are releasing PFAS into the environment to recoup their own expenses and the need for new infrastructure.

Even if you are not the owner of a chemical company or a “toxic” business like a chrome plating facility, you still need to be aware of potential exposure and environmental liability associated with PFAS. An example of a “non-traditional” PFAS contamination source is Chinese-made surgical gowns. Unaware that the gowns are treated with PFAS-containing chemicals, some commercial laundry facilities were inadvertently releasing PFAS into their local wastewater systems. As a business owner, you need to be aware of whether your business is contributing to PFAS contamination. At a minimum, you will want to know the answers to the following:

  • First, does your business have an IPP permit (Industrial Pretreatment Program) from your local wastewater treatment facility? These permits govern the chemical levels that a business is allowed to discharge into the local wastewater treatment system and are issued pursuant to local sewer ordinance. Many—if not all—wastewater treatment authorities are in the process of adopting special regulations related to PFAS. Violations of the local sewer ordinance can result in significant fines and injunctive orders from the Courts.
  • Second, does your insurance protect you from any pollution liability or exposure? Most standard commercial liability insurance policies have pollution liability exclusions. So unless you purchased a special rider (which can be expensive), you are likely not covered against PFAS-related claims.
  • Third, did you do a Phase I, Phase II, and Baseline Environmental Assessment (BEA) when you purchased your business or the property on which your business is located? The Michigan Natural Resources and Environmental Protection Act allows property owners to conduct certain environmental testing as part of purchasing a property. The resulting BEA can limit environmental liability going forward.

If you are concerned with how PFAS is affecting your business, contact attorney Dan Artaev at 248-380-0000 or dartaev@fb-firm.com. Dan can advise you with respect compliance and answer any questions you may have about best business practices going forward.

3 Common Mistakes that Compromise a Business’s Corporate Protection and Expose Your Personal Assets.

Businesses that commingle assets, forgo record keeping, official minutes, and fail to keep their registration with the State of Michigan up to date risk losing their corporate protections. In most cases, the corporate form limits your personal liability and insulates your personal assets from business debt – unless a creditor successfully argues that the corporate form is a sham and used to perpetuate fraud. However, this protection is not an absolute and there are many situations where that protection may be set aside and personal assets (the owner’s house, boat, car, bank account, etc.) are at risk.

Even if you run a perfectly organized business with current paperwork and a separate bank account, there are still situations where you are at risk of personal liability for your business debts. The following three scenarios are most common:

  1. Did you sign a personal guaranty for a business lease or a business loan? Personal guaranties (or guarantys) are additional collateral that you may be asked to execute as a prerequisite to a business loan or even a business lease. A personal guaranty is effectively an agreement that waives your corporate protection and allows a creditor to go after your personal assets directly. Because a small business does not have many assets to collateralize a loan or assure a landlord that obligations will be paid, you may be asked to sign the personal guaranty. Whether you accept that risk is up to you, but at a minimum you should read the document carefully and discuss it with your attorney so that you understand the implications. You may also be able to negotiate for a lease or loan without a personal guaranty, but in most cases you will need to provide sufficient collateral or other assurances to secure your obligations.
  2. Are you knowingly breaching a contact or a lease? Some business owners erroneously assume that because they have an LLC, they can ignore contracts or leases. For example, if your company signed a 3-year lease in a dying shopping center – what’s to stop the LLC from defaulting on the lease and walking away? A lawsuit can only reach the LLC, right? That’s not only wrong, but it is also a dangerous line of thinking that may put your personal assets at risk. A court will not allow the abuse of the corporate form to evade obligations or escape debts. Understand that corporations are created by statute – i.e. the law – to facilitate business. At the same time, the court system will not apply the law to facilitate a party’s evasion of its contractual obligations. If you are abusing the LLC to default on loans, other contracts, or lease obligations, a court may very well determine that you are abusing the system, pierce the corporate veil, and impose personal liability.
  3. Are you moving assets around to another company? You may also think that you can simply start over by forming a new LLC, transferring the assets of the old LLC to the new one, and leave the loans, contracts, and leases behind with the old shell of a company. But even if you declare bankruptcy for the old LLC, your assets are not immune from creditors. The bankruptcy proceedings allow aggrieved creditors to challenge any transfers made before bankruptcy as “fraudulent” and have them set aside for the creditor’s benefits. And even if your old business had no assets, a court may still impose personal liability and pierce the corporate veil if it is determined that your actions were for a fraudulent purpose – such as escaping a debt, contract, or lease obligation.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

Does Your Business Have a Pre-Nup? The Importance of Planning for Life’s Unexpectancies.

Nobody likes to plan for life’s unpleasantries, including divorce. While divorce remains an unfortunate fact of life, proper planning with your business attorney can help protect your business from the unexpected. This is particularly critical where a business has multiple owners, members, or partners.

In a recent case out of New York, a company’s three partners were shocked to learn that the fourth partner’s impending divorce would result in his ex-wife owning part of the business. Small businesses are particularly vulnerable to members’ interests becoming part of a divorce property dispute. And unlike blue-chip stock, who owns the shares of a small business has a direct impact on the day-to-day operations and decision making. In the New York case, the owners admittedly failed to plan for a divorce and ended up having to borrow $250,000 to buy out the divorcing partner.

However, with proper planning and consultation with a business lawyer, you can hedge against contingencies like divorce ahead of time. One such way is through a carefully-drafted Operating Agreement that expressly sets out what happens if a membership interest becomes subject to a divorce judgment. Common provisions grant the company a right of first refusal to buy out any sort of membership interest subject to transfer, and also set forth the rules for valuing such interest using either the Company’s books, a CPA, or an independent appraiser. Another common (and highly useful) provision prohibits a transferee of any membership interest from voting or otherwise participating in the Company’s affairs, until officially admitted as a “member” by the other members. Thus, even if a divorce decree awards a spouse part of the membership in the company, the spouse is limited to the economic benefit of such ownership until (and only if) the rest of the membership decides to allow the new member to participate in the actual business. Another planning tool is a separate buy-sell agreement, which sets forth the rules and conditions for each owners’ membership interest.

Divorce is not the only “D” word that a prudent business owner must plan for. Death of a member is another contingency that should be expressly addressed in a company’s documents. Disability or incapacity is another. Finally, a business should have specific provisions in place to address the potential of bankruptcy or insolvency.

The four “D”s–divorce, death, disability, and debt–are realities that no one likes to think about. However, planning for the bad as well as the good is a part of running a business. With a plan in place, a company will suffer much less disruption and uncertainty when the unthinkable happens. And that is good corporate governance.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

A Lesson in Licenses and Why You Own Nothing.

In 2019, Fortnite went offline. No one could play, stream, compete, or access their account. This was part of an in-game “event” known as the Fortnite Blackout or The End. Can Epic Games do that? What rights do you even have as a player, team owner, or competitor? It all comes down to the End User License Agreement (EULA) – so leave it to a gaming lawyer to use Fortnite to teach you about the critical role of licensing in the digital age!

By way of background, Fortnite is certainly one of the most –if not the most popular video game in the world. The game, which is available as free download on modern consoles, PCs, and even iPhones, is a hit with kids, teens, adults, professional athletes, celebrities, and even Prince Harry (the Duke of Sussex) who got so addicted that he called for the game to be banned in Britain. True story. It has also evolved into an international eSport phenomenon, with this year’s World Cup Finals winner taking home a cool $3 million check. There are hundreds, if not thousands, of professional gamers and streamers across the world that make this game their career. Epic Games, the game’s owner and creator, is estimated to have earned between $2.4 and $3 billion from the game in 2018 alone. This is particularly impressive given that the game is free to download and play, with all of the revenue coming from in-game cosmetic content, such as different character outfits.

Now imagine if one day all of that was suddenly gone. Epic shuts down the servers and Fortnite no longer exists. Well, this actually happened (at least for about 24 hours)–during the Fortnite Blackout or The End event. The hundreds of hours you spent playing, earning points, and ranking? Gone. Did you spend all of your birthday money on new outfits so you could look like a James Bond villain in the game? Gone. Even worse if you are a professional gamer who made Fortnite a career. Or a team owner who invested hundreds of thousands of dollars into building the next world champion. What can you do? Who can you sue?

The simple answer is NOTHING and NO ONE. Because you have to understand licensing. And the fact that the traditional concepts of ownership–i.e. I pay money for something therefore I own it–do not transfer to the digital world. Did you read the EULA that you have to accept before logging into Fortnite? I didn’t think so. Yet it contains important rights and obligations–especially if you play professionally. The reality is, by playing Fortnite and even paying real money to “buy” in-game characters, weapons, etc., you own nothing. In simple terms, Epic Games grants you a license to play the game at its sole discretion, but Epic Games owns and controls everything and anything within the game, even the content that you paid real money for.

The Fortnite EULA is a license, which is a right to do something, or access something. Think of it like a ticket to go see a football game or a concert, but in this case it is a ticket that gives you access to a video game. In legal terms, what distinguishes a license is the fact that it is a “revocable” right, meaning the licensor (the owner of the license) can terminate the licensee’s rights of access at any time, subject to any conditions of the license. So what terms do you agree to when playing Fortnite?

Epic grants you a “personal, non-exclusive…limited right and license to install and use the Software…for you personal entertainment use.” Also, ” The Software is licensed, not sold, to you under the License. The License does not grant you any title or ownership in the Software. ” Ok, but can Epic just shut down the game? Yes–read on–” You also acknowledge that any character data, game progress, game customization or other data related to your use of the Software or Services may cease to be available to you at any time without notice from Epic….”

What about all the real money you paid for skins, custom characters, etc.? You get that back, right? Nope. Read on–” Epic, in its sole discretion, has the absolute right to manage, modify, substitute, replace, suspend, cancel or eliminate Game Currency or Content, including your ability to access or use Game Currency or Content, without notice or liability to you.” Meaning, you do not really own any “game currency” or the “content” that you bought–in fact, all you are acquiring when you are “purchasing in-game content” is another license to use the currency or the content that you purchase with the currency for as long as Epic wants.

It’s not really so confusing. When you downloaded and played Fortnite, you agreed that Epic owns everything and you own nothing. If you paid any money to Epic for skin or custom parachute, Epic gave you a license to use that particular skin or parachute. You paid for the “experience”–not a tangible item itself. That’s licensing.

Of course, this reality creates a whole host of follow-up questions. What happens to content I create using Fortnite’s creative mode? Does Epic own that too? Short answer is YES. What about streamers who make a living playing Fortnite? Professional gamers? Team owners? Fortnite World Cup sponsors? There is no easy answer there, as each situation is fact-specific and depends on the various terms of the license agreements, any sponsorship agreements, intellectual property law, etc.

The Fortnite Blackout was a lesson in “ownership” in the digital age. Traditional concepts of ownership do not apply or transfer to to the digital realm. Music, video, games, and even photos that you upload or post on social media–are not “yours” in the traditional sense. Rather, there is an increasingly complex web of rights that becomes even more complex when gaming is a business.

So, like any business owner, if you are investing time, money, and effort into a game–with the idea to play professionally, make streaming revenue, or to otherwise make it in the gaming business–engage and consult with an eSports attorney. Understanding your rights and obligations will help you craft an effective business strategy going forward, and plan for contingencies and er…singularities.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

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Into the Fire: Effective Strategies for Litigation Management Before Going to Court

Are you a litigious business owner? Do you copy your attorney on correspondence to a non-paying client or a vendor? Have you ever threatened another business owner with “I’m going to sue you”? Is this something you do as part of your day-to-day business routine? Does your county’s local business judge know you by name? If so, you probably are not effectively managing the litigation aspect of running a business.

As a Metro Detroit business attorney, I frequently encounter clients who are always “ready to sue.” However, as an attorney, my job is to counsel the client regarding all possible approaches, and to the extent that litigation is the preferred route, I am always honest with the client regarding the judicial process. If your lawyer talks up your case, or uses terms like “sure thing” or “slam dunk” to describe the lawsuit, stop and ask questions. Litigation is not a “hammer” with which to punish someone who wronged you – rather, the justice system is designed to be a neutral process to achieve a the correct result by applying the law to your specific facts.

But you may be thinking–come on Dan, this guy or girl totally screwed me! File the lawsuit tomorrow! I WANT BLOOD!!! I’ll pay you, whatever it takes!

But that approach is only likely to result in added time, expense, and headache for you. No matter how strongly you feel about your case, you absolutely must consider the following and discuss with your attorney:

  1. Litigation is a lengthy process – it may take years to reach a resolution at the trial court level, and then there is always the risk of appeal. Yes, years. Even if you think your case is “easy.” Remember the goal of the justice system is to reach the correct result, given certain facts and the law. Very rarely do the courts dispose of a case quickly, and it is especially so when you are the plaintiff (the side who initiates the lawsuit) because you will have the burden of proof. Most judges are also inclined to let cases drag on, in hopes that the case will settle and the judge won’t have to make a decision. If you file a lawsuit, be prepared for the long haul.
  2. Litigation is a disruptive and unpleasant process – as a business owner, you should never approach litigation as a money-making scheme. Litigation will not only require a substantial financial investment (see below), but it will also be disruptive to your business. You and your staff will need to search for and provide all relevant documents, emails, texts, phone logs, etc. as part of the discovery (or fact-finding process) to your attorney. You and your staff will have to appear for depositions (to provide testimony in this case). Then there are motion hearings and trial. If there are electronic data storage issues, you will need to retain an IT expert. All of this takes time and resources away from your business and you must do a careful cost-benefit analysis before getting involved in litigation.
  3. Litigation is an expensive process – you may easily end up paying tens of thousands of dollars to your lawyers over the course of the case. The fact-finding process that is discovery is the most costly and lengthy. Paying your attorney to attend a 5 hour deposition, review the transcript, respond to discovery requests, and craft your own discovery requests adds up very quickly. And, even if you win, YOU DO NOT GET YOUR ATTORNEY FEES PAID BY THE OTHER SIDE. The only exception to this general rule in the business world is a contract provision that expressly provides that the loser pays the winner’s attorney fees in the event of litigation. Of course, such a provision is a double-edged sword that applies to both parties.
  4. Litigation is an uncertain process – cases are rarely black and white and no attorney can predict what a judge (or jury) will do with your claim. You may have an unpredictable or eccentric judge. You may have attorneys on the other side that will make life not only difficult through discovery, but also expensive by dragging out the process. Also, even if you go to trial or win on a motion, there is always a chance for the losing party to appeal. And, if the Court of Appeals “remands” the case–meaning sends it back to the trial court with instructions–the process could very well restart and drag on for years more.

So what’s a business owner supposed to do? What are some options to enforce your contracts short of going to court? You should consult an attorney about the following options:

  • Consider pre-suit facilitation, but be mindful of the applicable statute of limitations.
  • Consider using arbitration clauses in your contracts to mandate an alternative dispute resolution process between the parties.

The unpredictability and expense of litigation also highlights the need to retain an attorney to advise your business and review any contracts before signing them.

The bottom line is a business does not make money litigating. It is a huge drain on time and resources that could be spent growing market share. If you find yourself considering litigation or on the receiving end of a lawsuit, contact an experienced business law attorney immediately for a consultation.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Don’t Spin Out: 5 Lessons for Every Business Owner From the Peloton Copyright Lawsuit.

Those of you who follow me on Instagram know that I am the #Trilawyer (basically, a lawyer whose hobby is doing triathlons). The cycling leg just happens to be my favorite, I love going to spin class at the gym, and I am also a big fan of watching pro cycling on TV. So obviously when I saw the news featuring BOTH the law and indoor cycling training, I had to write about it. A group of music publishers are suing Peloton, the company behind those heavily advertised stationary bikes and on-demand spin classes, for allegedly using popular music in their on-demand videos without the proper licenses.

The Peloton situation actually provides some valuable lessons for every business owner, regardless of industry. But first, some background on what happened with Peloton, at least according to the plaintiffs’ one-sided view in the Complaint. For those who have not seen their advertising barrage, Peloton is a public company that sells high-end stationary bikes and treadmills. How high end? A spin bike will set you back a couple thousand dollars, but luckily you can finance it with low low monthly payments over 36 months (just like your TV, couch, cell phone, pure-bred poodle, and anything else these days). The treadmills are even more expensive at something like $5k, but the lawsuit is about the spin bikes.

Why would someone pay $2000+ for a stationary bike when you can buy a great one for $300-400 on Amazon? I have no idea. But one of Peloton’s central marketing points is a subscription service (for a separate monthly fee) that will give you access to streaming fitness videos, spin instruction, competitions, and other content that simulates an in-studio workout from your mid-town high-rise apartment or summer chalet or weekend home in the Hamptons. At least according to the commercials.

If you have ever been to a spin class at the gym, you know that the instructor’s playlist is a big part of the experience. The instructor plays a list of songs for the workout session that are generally synchronized to the tempo of the current workout intervals. For example, if the instructor wants the class to sprint at 110 RPMs on a flat road (meaning easy resistance), then she may play something fast and upbeat to get the class going. If the session calls for hills at 60-70 RPMs and heavy resistance, then she may play something slower and heavier to match the workout. Peloton offers a library of pre-recorded workout sessions that it streams to subscribers and like the in-gym spin classes, the recordings feature an instructor with a playlist taking the participants through a particular class. The problem – according to the lawsuit – is that Peloton does not have permission to use the musical content in its workout videos. In the world of copyright law, a company must have the proper license for commercial use before it can use music as part of its business. In the case of videos synchronized to music, the law requires what is called a “sync” license that permits that particular song to be used with a specific video. Apparently Peloton failed to secure those “sync” licenses for at least some of the videos that it broadcasts. Copyright law also provides for punitive damages for willful violation of copyright, and Peloton may be facing a steep price tag if the court determines that Peloton’s failure to secure licenses was a deliberate decision. Which it very well may have been, as it is surprising to think that a company that size missed a rather obvious music licensing issue.

Whatever the merits of the litigation, and whatever the outcome, there are some important takeaways for all business owners from this lawsuit. Even if you have never been inside a spin studio, even if you do not use music at your business, there are still valuable lessons to be keep in mind:

  1. Trying to save a few bucks at the beginning may cost you big bucks later on. The most common reaction online to the Peloton lawsuit is that “how could a big public company not have seen this coming?” Peloton grew quickly, and it may be possible that the company deliberately skipped paying licensing fees at the beginning to save money, but this attempt to scrimp at the outset may end up costing millions down the road. This is why no matter your size, it is important to properly budget and anticipate all expenses. For example, talk to an insurance agent you can trust and get the right amount of insurance coverage for your business. Buy workers’ compensation insurance. Comply with MIOSHA regulations. Hire a lawyer to draft a proper business agreement between you and your partner to reflect your respective rights and obligations to the company. Do not co-mingle personal and business bank accounts. You get the picture – a cheap shortcut now can come back and cost you much more money in the future. It could even potentially sink your entire business.
  2. What may seem like common sense to you may be illegal. You may be thinking – but if I buy a CD at the store or a song from iTunes, don’t I own the music? Can’t I play it for whoever and whereever I want? It may be common sense that you own something that you buy, but it is not always true, especially in the modern age of digital media. With respect to music for example, you are often buying a license for personal, in-home use. Say you have a bar or a restaurant, and you decide to play your own iPod playlist over the speakers for atmosphere. Without a separate license, you just violated the music studio’s copyright and can be sued. Or, if you decide to start your own weekend DJ business using your old LPs. Same thing – the CD you buy at the store to listen to in your car does not give you the right to play that same CD at a wedding for money. Sound confusing and counter-intuitive? It may be, but it also protects the rights of the music publisher and keeps the cost of CDs and iTunes singles accessible to the general public. The bottom line is that you need to consult with a professional about all aspects of your business to make sure you are doing it the right way, and to ensure compliance with all applicable laws. And the right professional will identify all the relevant issues, not just the obvious ones.
  3. You are never too big (or too small) to be sued. You might also be thinking, oh who cares, I run a mom-and-pop gas station/grocery store/bar and no one is going to sue me for playing my CD collections over the speakers. Or you might think, my business partner is my friend, he will never sue me. My employees are all like family, right? Wrong. Just one example is a string of lawsuits filed against nightclubs for playing songs without the proper commercial license in 2016. From my own experience as a business litigator, there are far too many cases where business partners break up and decide to sue each other because they never had a written agreement. Actually, one of the major reasons to create a separate legal entity for your business – like an LLC – is to anticipate lawsuits and to protect your personal home, car, and bank account in case of unanticipated trouble. Luckily, creating the right corporate entity and maintaining corporate formalities to ensure protection are not particularly complex or expensive endeavors, and should be done by all business owners.
  4. Anticipate and budget for lawsuits as the cost of doing business. You can take all of the precautions in the world, hire the best attorneys, and run a flawless business. You are still going to get sued. That’s the reality of doing business. There may be a disagreement with a supplier over the quality of the product supplied. One of your workers may get injured on the job. Or, a vengeful ex-partner or employee may decide to use entirely frivolous litigation to harass and extort you. Thus, it is critical to budget for such eventualities just like you budget for utilities, rent, or salaries. I have counseled numerous businesses who think that they can handle a legal proceeding in-house, and end up creating more trouble for themselves that then costs MORE money to untangle down the road. It is a great idea to treat litigation as just a cost of doing business, set aside some funds each month, and have a lawyer on retainer, so that when you do get sued, your attorney can jump on the case right away and minimize any damage.
  5. Hire the right lawyers to review all aspects of your company. Of course, you have to have the right people for the job. Contact a knowledgeable and well-rounded business attorney like me to provide a consultation for your business. That way you can make sure that you have all the right documents, that you have secured the necessary licenses, and that you are fully prepared in case something goes sideways. And remember, there is always someone willing to do it cheaper. Choose your professional wisely!

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

© 2020 Artaev at Law PLLC. All rights reserved.

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