Tag: legal help

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.

4 Must Have Legal Documents for New Business Owners

Whether you are a one-man computer whiz coding the next blockbuster iPhone app, or a five-employee manufacturer making parts for a Tier 1 auto supplier, you need basic corporate forms to protect your assets and investments. A limited liability company (or LLC) is the preferred way to organize and obtain this protection. Plus, if you ever apply for a business loan or decide to sell your business, having an organized and up-to-date corporate record book will do wonders to enhance your value. After all, when Google offers to buy your start-up for a couple million dollars, the transaction will go much smoother with an up-to-date Operating Agreement, corporate consents, assignment documents, and annual statements for the buyer to review.

I recommend the following 4 must-have corporate documents for every business owner:

  1. Articles of Organization –  If you registered your LLC with the State of Michigan, you already filed the basic Articles as part of your initial paperwork. These Articles effectively form your LLC, set forth its name, purpose, duration, and designate a registered agent (or contact person) for your company. Even if you are a sole proprietor, it is worth spending the initial $50 filing fee (and the $25 renewal each subsequent year) to create an LLC. That way, your personal assets are separate from your business assets and are protected from both creditors and litigants.
  2. Operating Agreement — While all LLCs have Articles of Organization, not all bother to have their attorney draft an Operating Agreement. An Operating Agreement sets the rules for how the company is run, including how many votes it takes to make a decision, who owns how many shares, and how shares are valued and transferred. This is a critical document that can prevent many disputes down the line, especially when there are multiple owners involved.
  3. Written Consents/Resolutions – Written consents, or resolution, are records of the business’s decisions. The Operating Agreement will set forth the process for making decisions through written consents (as opposed to meetings). Even if you are the sole owner, it is critical that you draft and maintain written consents whenever the LLC acquires property, makes a distribution, sets a salary, has its annual meeting, or takes another material action. Written decision records help prevent future disputes and also ensure ongoing protection of the corporate form for the owners.
  4. Assignments – If you decide to transfer shares to another LLC member or give an investor an equity stake, the share sale must be documented in an Assignment. The typical assignment document will set out the purpose of the transaction, the value exchanged, the final distribution of shares, and will address the assumption of company liabilities (if any) by the transferee. It may be tempting to simply exchange cash for a promise of membership, but a formal assignment will clearly define the parties’ rights and responsibilities, which will prevent future disputes.

Establishing the proper corporate forms and drafting the paperwork need not be expensive. An attorney will generally be able to register your LLC and draft an operating agreement for a couple thousand dollars. Written consents and assignments can then be created on an as-needed basis. This up-front investment is well-worth the protection that it provides for your assets, as well as protection from disputes and even intra-company litigation down the road.

BONUS TIP – just as critical as a good attorney, a business owner should consult with a reputable insurance provider and a CPA. A solid insurance policy and a tax expert to review your financials will protect you from the unexpected and likely save you money in the process.

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.

5 Often-Overlooked Essentials When Selling Your Business

You finally got that phone call from the California venture capital firm that wants to buy your  start-up for a couple of million dollars. You are eager to sell and use that money to pursue other projects and passions. The attorneys and accountants have been retained, and the Asset Purchase Agreement has been drafted. 

But while the attorney drafted the proper asset descriptions and indemnification clauses, and the accountant has allocated the purchase price for the taxes, has your team addressed these five often-overlooked essentials? After all, the sale of a business is much more than just signing the papers and turning over the keys.

  1. Is the buyer hiring the existing employees? When transferring the assets of a business, one can easily overlook the employees who operate those assets and make the business run. Assuming that the buyer is buying the employees together with the business is a grave (and potentially costly) error. Most employees are at will and may walk out from their job if you spring a “surprise” acquisition on them one morning. This may especially be devastating in an industry like manufacturing, where qualified employees are difficult to find. To mitigate that risk, the buyer should provide offer packages to all current employees at least a few days before the sale. As a seller, it may benefit you to make a small monetary or personal gift to some of the long-time or more senior employees to thank them for their years of service and to throw a transition pizza party for the crew. Remember that the sale will be a personal and emotional event for those who work for you. While you are selling the machines and office furniture, the employees make the business run.  
  2. Are any key services performed by a family member or by the seller him or herself? In small businesses, owners often rely on their family members (or themselves) to perform certain key services (like quoting prices or estimating inventory) without a formal employment relationship. The seller should disclose any key services done by family members so that the buyer can make adequate provisions to hire someone to perform those key services. After all, the goal is to keep the business going after the sale and to provide for as few delays as possible. 
  3. What happens to the invoices and receivables received after closing? Continuing in the ordinary course of business, there will be both invoices and checks that the buyer receives post-closing. Who is responsible for the invoices for inventory received pre-closing? Who gets the checks for pre-closing product? And what about any open purchase orders – are those being assigned? To prevent future conflict, all of these topics should be addressed before the money is wired.
  4. What about the building? If the seller owns the building and is selling that building with the business, the transaction is relatively straight-forward. But if there is a lease, the seller must obtain landlord’s consent before assigning the lease. Alternatively, the buyer must enter into a new lease that starts on the day of the closing to ensure a smooth transition and continued operations.
  5. Have the customers been informed? It is a mistake to assume that the business’s customers will simply continue doing business with the new owner. Business is as much about relationships as it is about the numbers. The buyer and seller should discuss a transition plan with respect to existing customers and ensure that these valuable relationships are preserved going forward.

Of course, these are just some examples, and there will be other key topics specific to the nature of your business and to the transaction. 

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

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