What’s The Deal With Arbitration?

It seems like every contract, service agreement, or website terms of service has a mandatory arbitration clause in it. Why is that? There are compelling reasons to arbitrate disputes, but arbitration also has its drawbacks.

Arbitration

Why arbitrate?

Arbitration is private; whereas, generally documents in court cases are public records.

So, if keeping a dispute out of the public eye is important, arbitration is preferable. In most cases, arbitration is faster. Arbitration can be accomplished in a matter of months. In smaller cases, parties can ask for fast track arbitration which is even faster. Fast track arbitration can be accomplished in a month or two.

Litigation of smaller cases will generally take six months or more. Litigation of complex cases can take years. Arbitration is informal. Because arbitration is done by agreement, it is flexible.

The rules of evidence don’t apply, so parties can either loosen or dispense with the need for testimony necessary in court that makes documents and such admissible. The investigation phase of a lawsuit is called discovery.

Discovery in arbitration is more of an informal exchange of information rather than a structured process involving asking, objecting, and getting court rulings on information requests. Arbitrators can, but do not have to, strictly follow some statutes. For example, an arbitrator can relax some of the “gotcha” procedural laws that litigants find to be unfair such as the time limits for filing suit. Arbitration is final. It is very difficult to appeal an arbitration award.

 

What are the drawbacks to arbitration?

Because the arbitrator does not have to follow laws strictly, statutory claims and defenses that may be a slam dunk in litigation may not be followed by the arbitrator. It is very, very difficult to overturn or appeal an arbitration award. Litigants have a right to have a higher court review lower court rulings.  

Because the rules of discovery and rules of evidence do not apply to arbitration, parties run the risk of not getting all of the information and evidence relevant to the case. The arbitrator may base an arbitration award on evidence that is not admissible in court. Courts and juries cannot consider inadmissible evidence.

There is no jury right in arbitration. The arbitrator is both judge and jury. If the losing party doesn’t pay the award, it will take longer to make the award collectible. If a court judgment is not appealed, it becomes final and collectible in 30 days. After arbitration, the winner must file the arbitration award in court, and the court will confirm the award making it collectible. However, the loser has 90 days to dispute the award in court.

 

Which is more expensive?

That depends. The filing fees for arbitration are higher, but overall costs of arbitration can be lower because arbitration takes less time and because preparing the case for arbitration is less expensive.

 

Mediation is an alternative.

Mediation is a means of dispute resolution that is less expensive than arbitration or litigation. Mediation is attractive because the parties agree on a resolution. If mediation is not successful, then the parties may resort to arbitration or litigation.

Many businesses prefer arbitration because it provides a private forum for resolution of disputes, and arbitration can be faster and less expensive than litigation.

In business disputes among licensed professionals such as doctors or lawyers, the privacy afforded by arbitration is preferable to public court proceedings that may expose the dispute to media coverage.

In reality, inserting arbitration clauses into business contracts has become a knee jerk almost rising to the level of boilerplate. Before inserting an arbitration clause into a contract, consider the pros and cons in light of the contract and the parties’ relationship. Rather than inserting an arbitration clause into every contract, consider requiring mediation prior to arbitration or litigation as an even less expensive means of resolving disputes.

Break Room Art A Quick List of Required Postings for Texas Employers

Ah, the employee break room – the smell of stale coffee, long-forgotten leftovers lingering in the fridge,

and… a panoply of informational posters decorating the walls?

Yesterday, the EEOC raised the penalties for failing to post required notices of employee rights under several federal laws.

At issue are the notices covered in the “Equal Opportunity is the Law” poster.

The maximum fine increased from $210 to a whopping $525 per violation.

This begs the question, “What notices are required?”

EEOC

All employers must post information regarding:

Additionally, federal law requires federal contractors and employers with 15 or more employees to post the “Equal Opportunity is the Law” poster.

There are plenty of vendors who sell the required posters; however, all required posters can be downloaded free of charge through the Texas Workforce Commission and EEOC websites.

Happy decorating!

Taking A Cue From Business: Using Technology to Help More People With Less Resources

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It’s become ubiquitous on customer service web pages: the chat box.

Searching through a site’s FAQs, a box pops up with an avatar of a person who looks eager to help encouraging you to type your question in the box.

Years ago, legal aid lawyers began wondering if we could use a chat box to help people who lived far away from the nearest legal aid office or who didn’t have transportation to their local legal aid office.

Nationally, several groups started working on the idea.

What if we could leverage internet chat to allow lawyers to help low income people from their desk?

Enter Texas Legal Services Center (TLSC) and the Texas Access to Justice Foundation. TLSC proposed and received a grant from the Foundation to start a chat service. We call it Live Help, and it’s still up and running on the Texas Law Help website, www.texaslawhelp.org.

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The site and Live Help are geared to legal issues faced by low income Texans; however, the site contains a plethora of useful information about Texas law. It’s well worth a visit.

The first chat lawyer, Elliott Fontenette, is now the project manager leading a team of paid and volunteer attorneys. I consider him to be a visionary. When we started Live Help in 2010, Elliott and I were swimming in uncharted water. Now, legal aid groups around the world are using chat to help people access legal information, and the service has proved popular here in Texas with nearly 28,000 Texans having used the service.

I was reminded of my time at TLSC and working on Texas Law Help when Elliott and I were interviewed for a recent ABA Journal article about legal aid agencies that use web chat: http://www.abajournal.com/magazine/article/legal_aid_agencies_are_using_webchat_to_answer_queries/?utm_source=maestro&utm_medium=email&utm_campaign=tech_monthly

Thanks, Elliott, TLSC and Texas Access to Justice Foundation for continuing to bring quality legal services to those who cannot afford it. Well done!

 

Holiday Gift For Salaried Workers: OVERTIME

Department of Labor

The Department of Labor has finally issued a long anticipated rule raising the “white collar exemptions”, that is, the salary exemption level for executive, administrative, and professional workers. Traditionally, salaried administrative workers were not eligible for overtime pay unless their salary was very, very low. Beginning December 1, 2016, the overtime eligibility threshold for salaried employees will raise to $47,476 per year or $913 per week. What this means is that salaried employees making less than $47,476 yearly will be entitled to overtime pay for working more than 40 hours in a work week.

The exemption threshold had not been updated since 2004. The new rule provides for automatic updates every three years to maintain the exemption threshold at the 40th percentile of full time salaried workers’ earnings in the lowest wage region according to the U.S. Census.

Plan now to be in compliance on December 1. Salary alone is not the only factor for determining whether a salaried employee is entitled to overtime or is exempt. There is actually a three part test:

  • The employee is paid a salary as opposed to an hourly wage;
  • The salary must be at least $47,476 annually for a full time worker to be exempt; and
  • The employee’s primary job must be executive, administrative, or professional, e.g., management, exercise of discretion and independent judgment, or work that requires advanced knowledge.

Otherwise, the employee is entitled to overtime pay at time and a half the employee’s hourly equivalent rate for each hour worked beyond a 40 hour work week.

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The Department of Labor enumerated four options for employers to comply with the new rule:

  • Raise salaries to maintain the exemption;
  • Keep current salaries, and plan to pay overtime;
  • Adjust workloads and schedules so that employees are not working overtime; or
  • Adjust wages by converting salaried employees to hourly.

Raising salaries and paying overtime is simply not financially feasible for many businesses. Employees may negatively view adjustments in workloads and schedules or conversion from salaries to hourly pay. There is another way to comply with the new rule without undertaking additional financial burdens: adopt a workplace policy mandating that non-exempt employees cannot work overtime without prior written approval from a supervisor. Enforce the policy consistently. This will help the business be able to predict and control labor costs while encouraging healthy work-life balance for employees.

Businesses have only a few months to plan for the new rule. Start analyzing your options now. A business lawyer can help your business make the transition to the new rule.

The Department of Labor has published this fact sheet for employers: https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf

New Federal Law Protects Business Trade Secrets

Pres Obama Signs

On May 11, President Obama signed the Defend Trade Secrets Act of 2016 into law. The Act protects businesses from misappropriation of trade secrets and gives businesses the ability to litigate trade secret cases in the federal courts. The text of the new law can be found here:

https://www.congress.gov/bill/114th-congress/senate-bill/1890/text.

Texas adopted the Uniform Trade Secrets Act in 2013. The Texas law is codified in Chapter 134A of the Texas Civil Practice and Remedies Code. The text of the Texas statute may be found here:

http://www.statutes.legis.state.tx.us/Docs/CP/htm/CP.134A.htm.

There are a few differences between the Texas law and the new federal law. The definition of a trade secret is essentially the same under both the federal and state statutes. A trade secret is information that is valuable because it is specific to the business and that the business reasonably tries to protect. Trade secrets typically include a company’s financial data, policies and procedures, customer lists, supplier lists, intellectual property, and other proprietary information such as formulas, techniques, processes, drawings, and the like

The new law allows a business to file a federal lawsuit to protect trade secrets “related to a  product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). Courts traditionally interpret interstate commerce broadly, so many businesses will be able to litigate in federal court. One of the most interesting provisions of the new law is a pre-emptive strike: the law allows a party to obtain a court order for seizure of property to prevent the dissemination of trade secrets in “extraordinary circumstances.” The seizure order can be obtained without notice to the opposing party. A prevailing party may get an injunction to prevent dissemination of trade secrets, an order requiring the opposing party to pay a royalty, damages for actual business losses, damages for unjust enrichment, and attorneys fees. The law also allows an award of up to two times the amount of damages if the misappropriation was willful and malicious.

Protecting trade secrets is of paramount concern when a competitor hires a former employee. The Defend Trade Secrets Act allows a court to place conditions on the former employee’s employment when there is a threat of misappropriation.

There are some circumstances when employees or former employees have immunity from disclosing trade secrets. For example, an individual is immune from liability for disclosing a trade secret in confidence to a government official or attorney solely for the purpose of reporting or investigating a violation of law. If trade secrets are disclosed in documents filed in a court, the statute requires the filing to be sealed to prevent public disclosure.

Important: The Defend Trade Secrets Act requires employers to notify employees of the immunity provisions in the law. If your business has incorporated non-disclosure language in your employee handbook, or if you require employees to sign non-disclosure agreements, you will need to revise your handbook or agreements to properly notify employees that they are protected from liability when disclosures of trade secrets are made to government agencies or attorneys solely for the purpose of reporting or investigation violations of the law. An employer that fails to provide the required notice loses the right to recover attorneys fees and exemplary damages.

The availability of both state and federal court actions to protect businesses from misappropriation of trade secrets is a welcome development; however, most businesses need to revise their non-disclosure agreements, handbooks, or policies and procedure manuals as soon as possible to avoid losing valuable rights under the new law.

8 Reasons Why Your LLC Needs a Company Agreement

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Jane, Mary, and Alice have a thriving business. They decided to operate as an LLC and handled the formation themselves by filing a certificate of formation with the Texas Secretary of State.

Everything was fine until Alice got divorced, and her ex was assigned half her membership shares.

Who’d have known their company shares were community property!

Now, the ex is making life miserable by demanding to see the books, demanding distributions, and threatening to sue. What a mess: a mess that was avoidable. Had they adopted a company agreement, the owners could have managed what happened to the company shares in divorce.

A company agreement, also called an operating agreement, describes the way a limited liability company will do business. The company agreement governs the relations among members, managers, officers, and the company. Even a sole member LLC can, and should, adopt a company agreement. Here are a few reasons why.

 

  1. Retaining control. A company agreement allows the members to determine how the company is governed and what happens to membership shares if a member dies, divorces, files for bankruptcy, or just wants out. These kinds of events can erode members’ control over the business. It is best to deal with these contingencies before they happen. A company agreement does that.
  2. If you don’t have a company agreement, the State of Texas will set the operating rules for your company through Chapter 101 of the Texas Business Organizations Code. Many of the Code provisions can be waived or modified to better suit your company.
  3. With a company agreement, you can establish different classes of ownership. For example, a you may want to retain control of the company but give others a share in ownership. This can be accomplished by having two classes of membership: voting members and non-voting members. Without a company agreement, an LLC is limited to one class of membership.
  4. A member of an LLC cannot withdraw or be expelled from the company unless you have a company agreement that describes a process for a member to withdraw or be expelled. In other words, if one member wants to leave, or if members want to kick out a non-performing member, you can’t do it unless you have a company agreement.
  5. A company agreement can limit assignment of interests. What if a member gets into financial trouble and wants to pledge membership shares as collateral for a loan? If the member defaults on loan payments, you may up with a business partner you never intended to have.
  6. A company agreement can describe the relationship between members and managers. While the certificate of formation states whether an LLC is managed by its members or managers, there is no guidance or restrictions on managers without a company agreement.
  7. A company agreement can expand or limit the duties, responsibilities, and liability of members, managers, and officers. Many members are shocked that Texas law does not impose a fiduciary duty between them. A fiduciary duty is a duty of loyalty to act in the best interest of another. If you want members to owe a heightened duty to one another or to the company, you must have a company agreement.
  8. Having a well-drafted company agreement saves money in the long run. By fully describing expectations in a company agreement, members have a means of resolving disputes without resorting to litigation. The initial investment in legal fees for drafting a solid company agreement is tiny compared to the cost of arbitration or litigation.

 

A company agreement is a valuable tool that allows LLC owners to control the destiny of their company and to manage relationships between themselves, their managers, and their officers.

They can expand or limit responsibilities and liability as they see fit.

Adopting a company agreement early can be a cost saving strategy that staves off expensive problems later, and the agreement can be modified as the company grows. It is critical to use an attorney to draft a company agreement, but it is money well spent.

Hijacking on the Information Highway: Ransomware and How to Avoid it

Ransomeware scams have been around for several years.

However, they are on the rise.

Every business needs to train staff who have access to computers how to avoid this kind of scam. Ransomware is one of the many kinds of malware — that is, malicious code that can infect a computer.

Ransomware enters a network, computer, or other device in the same way as other malware. Usually, a user clicks something they shouldn’t —  like an icon, a link, or a file attachment in an email or text message. Increasingly, criminals are inserting malware links in social media posts as traps for the unwary.

Click and thieves are in the door.

Once ransomware finds its way into a device or network, the device will freeze or appear to crash. Initially, ransomware scams were perpetrated by cybergangs who encrypted the infected device. The only way for the victim to regain control was to pay the required ransom. Now, less skilled copycats generate a pop-up message on the infected device that says the device is frozen or encrypted, but the warning may be a ruse.

Some scammers generate a pop-up warning that purports to be from law enforcement. The warning states the victim has broken a law and that the agency has locked the victim’s device pending payment of a fine.

Other versions of the scam simply notify the victim that the device has been encrypted, and a ransom must be paid to regain control of the device. Either way, the criminal’s endgame is the same: to force the victim to pay to remove the malware. The size of the ransom plus the damage to a business if the situation lingers prompts most victims to pay up.

The FBI has just released a public warning that includes a helpful list of steps to take to avoid ransomeware scams. You can find the full press release here: https://www.fbi.gov/sanjuan/press-releases/2016/fbi-warns-the-public-about-ransomware-internet-scam.

In a nutshell, the FBI suggests:

  • Keep your data backed up, and store the backup file in a remote location.
  • In addition, we suggest using at least a two-step backup system. Use a backup service that stores a copy of your files in a remote location either in the cloud or in a remote server, and perform regular backups on a portable storage device such as an external hard drive. Keep the external hard drive in a safe place.
  • Update your settings to show hidden file extensions. The FBI warns that malware may contain double file extensions, e.g., *.pdf.exe.
  • Don’t open *.exe files attached to emails.
  • Use antivirus and firewall protection, keep it up-to-date, and make sure you install operating system updates and security patches as they become available.
  • Use strong passwords, and avoid using the same password for everything.
  • We suggest changing passwords regularly as well.
  • Use a pop-up blocker.
  • Download software only from trustworthy sources. Be especially careful when downloading freeware.
  • Don’t open attachments in unsolicited emails.
  • We suggest treating all unsolicited communications as if they are scams. In other words, if you did not initiate a conversation, be extra careful even if the communication purports to be from someone you trust. Scammers can hijack or spoof email addresses.

    When in doubt, contact the alleged sender. Don’t use contact information from an email, text, or pop-up message. Go to your contacts list, address book, or an official source such as an agency’s website to get the email address or telephone number. Ask whether they sent the suspicious message before opening anything attached to it.

Train your staff to use internet-connected devices safely. If you become a victim, report the crime at www.ic3.gov. Do not jump to pay a ransom. First, turn off file sharing. Then, check to see whether any of your files have been compromised by running your antivirus program. Remove any infected files, and restore them from your backup. This may resolve the problem. If not, contact an IT expert for assistance. 

The President’s Supreme Court Nominee: Chief Judge Merrick Garland What Would His Confirmation Mean for Small Employers?

Chief Judge Merrick Garland

In the wake of U.S. Supreme Court Justice Scalia’s death, there has been a lot of political hullabaloo about the confirmation process for Chief Justice Merrick Garland of the D.C. Circuit, President Obama’s nominee, to fill the position. However, little of the political maneuverings has anything to do with what is most important to small business owners: whether his judicial opinions have helped or harmed businesses.

Let’s take a look at a few opinions authored by Justice Merrick to see what we can glean.

First, there are several federal agencies that have regulatory power over American businesses including: the Department of Labor, the National Labor Relations Board, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Internal Revenue Service, and the Federal Trade Commission. Justice Garland has a reputation for giving deference to agency determinations. Most of the time, agency contact with a business happens because the business has been accused of violating a rule, regulation, or statute.

When a business is appealing an adverse agency decision, Justice Garland appears to rule in favor of the agency more often than not.

Here is an example that explains why:

In a case involving the escape of a large amount of a corrosive and deadly chemical that sent 150 people to the hospital, the OSHA cited the business for multiple safety violations. The case went to a hearing in front of an administrative law judge who affirmed most of the violations. The company appealed to the D.C. Circuit, and in upholding the violations, Justice Garland wrote that the Court must uphold OSHA’s fact findings and conclusions so long as they are supported by substantial evidence and not arbitrary, capricious, abuse of discretion, or otherwise contrary to law.

This is simply a restatement of what the standard of review already is.

However, Justice Garland went on to quote a prior D.C. Circuit opinion stating, “We defer to [an agency’s] interpretation of the Act and regulations, upholding such interpretations so long as they are consistent with the statutory language and otherwise reasonable.”

The opinion goes on to painstakingly review OSHA’s fact findings. What this opinion tells me is that Justice Garland is not an activist judge. He follows historical precedents. Unfortunately, we are in an era when those precedents frequently favor employees over their employers.

This is not to say that Justice Garland hasn’t authored decisions favorable to businesses. He has.

When an employee wrongly tried to invoke protection of the Americans with Disabilities Act, Justice Garland sided with the employer. The employee asked for reduced work hours as a reasonable accommodation for arthritis. Days later, she fell and stopped working. For four months the employer asked for information about her health condition. She gave none, so the employer asked her to return to work. She didn’t. The employer terminated her. After that, she sent a doctor’s note saying she was totally disabled and could not work. She claimed the employer failed to give reasonable accommodation and retaliated against her. The trial court sided with the employer, and the employee appealed. Justice Garland wrote, “there can be no genuine dispute that [the employee] was not a qualified individual  . . .one who can, with or without reasonable accommodation, ‘eperform the essential functions’ of her position.”  Noting that an essential job function is the ability to appear for work, the Court found that the employee’s termination was legitimate, so there was no retaliation.

These are only two of the many legal opinions authored by Justice Garland.

However, they illustrate that he is a jurist that painstakingly reviews the facts of each case and who analyzes and complies with legal precedent. This is consistent with the observations of most commentators who have described Justice Garland as a moderate and as more conservative than President Obama’s previous nominees. What is apparent from the two cases described here is that Justice Garland appears to be neutral – neither pro-business nor anti-business.

Interestingly, Justice Garland’s father ran an advertising business out of the family home. Justice Garland describes it as the smallest of small businesses. He is known for being tough on crime and for having served as lead investigator and prosecutor of the Oklahoma City bombing case. Perhaps most importantly, Justice Garland has garnered praise from both sides of the aisle – Republicans and Democrats.

Regardless of the outcome, the path this nominee takes through the confirmation process will be interesting to watch.

Is an Employee Handbook a Contract?

 

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Texas is an employment-at-will state. That means either party can end the employment relationship at any time without reason. In an employment-at-will state, the employer does not have to have good cause to fire an employee. However, an employee who is terminated without good cause related to the job may be eligible to collect unemployment benefits.

Like any legal concept, there are a few exceptions.

An employment contract that specifies the situations when the relationship can be terminated will form a contract that overrides employment-at-will. That is why it is important that an employee handbook not create a contractual relationship between the employer and the employee.

A well-crafted employee handbook is a valuable asset to your business. A handbook describes operating policies, employee benefits, and sets clear expectations for the employment relationship. A common practice is for employees to sign and agree to abide by the policies outlined in an employee handbook; however, careful wording is necessary to avoid creating an employment contract that would abridge the employer’s ability to terminate the relationship at will.

What turns a handbook into a contract?

An enforceable contract must contain a mutual agreement and consideration (benefit). To avoid turning an employee handbook into an employment contract, set expectations but avoid making promises, state clearly that either party can terminate the relationship without cause, make no promises of continued employment, and avoid creating inflexible discipline systems. Employers whose handbooks contained discipline systems that abrogate the right to terminate the employee at will have inadvertently created employment contracts.

The simplest way to avoid turning an employee handbook into a contract is to provide a disclaimer that acknowledges the handbook contains guidelines only, does not create a contract of employment, and that it is subject to change including revocation by the employer at any time. Including a disclaimer protects the employer from claims that an employee handbook creates an employment contract that modifies the at-will employment relationship.

Contract vs. Agreement

What’s the difference between a contract and agreement?

Non-Compete

Is there a difference?

We seem to use the words interchangeably. The word “agreement” is broader in scope. Like all horses are animals, but not all animals are not horses; all contracts are agreements, but not all agreements are contracts.

An agreement is simply a meeting of minds. The Merriam-Webster dictionary defines an agreement as the act of agreeing or an arrangement by which people agree about what is to be done.

Black’s Law Dictionary defines a contract as a deliberate agreement between two or more persons with lawful consideration.  

So, a contract is an agreement with consideration. Consideration is the thing bargained for in a contract. Consideration is usually in the form of a benefit to be conferred, such as money, or foregoing something, for example, agreeing not to do something. The most common form of contract is a sales contract. The seller gives up legal title to an item. In return, the buyer pays the seller money. Each party gives up something, and each gains something.

Whether you call it an agreement or a contract, make sure everyone involved agrees to every term and that everyone involved understands what they are agreeing to. The best way to achieve clarity is to write it down.