This paper addresses the gaps in legal insight and decision-making
for small business and entrepreneurs and describes the implications of
correlative judicial remedies for these issues. Summary findings of
empirical studies of preventable problems faced by business are
juxtaposed against a discrete analysis of relevant United States Supreme
Court decisions involving these same business interests. Finally, a more
judicious solution to improve legal insight and decision-making is
proposed; this alternative model, called a Legal Audit, is advanced to
first elevate legal insight and decision making, and then to diagnose
and address flawed legal practices which create significant legal
problems. The paper ends with a call for further inquiry of sustainable
legal decision making and minimal acceptable standards for the concept
LIDM or Legal Insight Decision Making.
Each year the United States Supreme Court (USSC) issues a limited
number of Writs of Certiorari. This action constitutes initiation of the
legal process that requests a lower court to deliver the record in the
case the USSC has accepted for review. The USSC accepts and decides only
a finite number of cases and remarkably few of these involve business
interests. For example, in each year from 2005-2009, the USSC docket
heard or will hear as few as 63 cases and as many as 74 cases; but of
these cases, only a baker's dozen directly affect business
interests. Knowledge of this finite universe of USSC cases that affect
business interests is power; in fact, these select cases provide rich
lessons to the wise and wary.
BACKGROUND AND LITERATURE REVIEW
Amid growing concern that even the wise and wary are not savvy to
the lessons of the USSC decisions affecting business (Cutler, 2003;
Hemingway& Maclagan, 2004) nor even to the need to comply with
underlying laws and regulations (Rondinelli, 2007) some have concluded
that the failure to seek and access information (Roth, 2005) does
inhibit firm performance and can indeed impede success. Researchers have
observed that companies of all sizes are adept at developing and
implementing mission statements (Gumbus& Lussier 2006), but this
does not translate to ability to develop awareness of legal issues and
consequent legal insight decision making.
Minority and non-minority entrepreneurs, whose likelihood for
failure exceeds the average failure rate for new businesses (Kaplan,
2003; Kuratko, 2005; Mendoza, 2007) are in accord with this perspective.
Indeed, the term "entrepreneurial cognition" aptly describes
the process of overcoming ignorance and doubt to find opportunity to act
and make decisions (Shepherd, et al 2007) such as should be made in the
arena of legal issues and practices, without regard to firm differences.
In fact, decision making which involves the owners and managers of the
firm, especially in the legal arena, can lead to conflict, as aptly
noted by family business scholars, (Eddleson, Otondo & Kellermanns,
2008; Brigham, DeCastro & Shepherd, 2007; Steier & Ward, 2006)
and the field for future research is rich (Heck, Hoy, Poutziouris &
Steier, 2008); although the available data and published research on
judicially affected legal issues is less so.
The opportunity to act and make beneficial decisions affecting
legal issues does not rest solely in the hands of the firm's legal
counsel; indeed, the majority of small businesses seek legal counsel in
a reactionary rather than proactive manner. Even small business academic
gurus, Hornsby, Kuratko, Naffzinger, LaFollette and Hodgetts in a
co-authored seminal study, "The Ethical perceptions of small
business owners: A factor analytic study" published in 1994 and
using a 16 item questionnaire developed by Longenecker, McKinney and
Moore (1989) equated legal decision-making with ethics rather than with
legal knowledge (Hornsby, Kuratko, Naffzinger, LaFollette &
Hodgetts, 1994; Longenecker, Moore, Petty, Palich & McKinney, 2006).
The literature thus describes and characterizes the legal decision as an
ethical decision; though whether the decision is made by the small
business owner or the hired hand legal counsel, legal decisions are not,
in fact, related to ethical perceptions. Further, most small firms do
not retain in-house legal counsel, but resort to out-sourcing formal
legal advice as needed or when a perceived legal issue arises.
While scholars note strategic planning is the optimum weapon to
enhance organizational performance (Ensley, Carland & Carland,
2003), legal issues strategic planning is sometimes omitted from the mix
of planning elements. In studies of nascent business development, the
formation of the legal entity or selection of legal form of business may
figure as merely a step in development (Fiore, Lussier, 2007). Studies
of small businesses that engage in formal and informal planning and the
importance of planning is presumed and validated by many scholars
(Allred, Addams & Chakraborty 2007). However, there is disagreement
upon the dimensions of the planning and the inclusion of all the
fundamental business functions (especially the legal function) in
planning. In the Allred study, the ranking of legal planning was near
the bottom for both formal and informal planning. Other scholars
measuring internal and external considerations of planning, in
particular strategic planning identify only a very low Pareto analysis
result for each of the legal factors measured: legal environment and
legislation regulation (Hodges & Kent, 2007). Whether the study
involves home-based businesses (Bardwell, Spiller & Anderson, 2003)
or studies of business success factors, including financing and planning
even with boot-strap methods (Van Auken, 2003), these studies often
tangentially shed light on the related legal issues; but do not focus on
the risk of consequential legal remedies. The lack of legal insight and
failure of effective legal decision making can be deduced from the
increase in small business lawsuits, arbitrations and bankruptcies--all
of which are on the rise according to the statistics available via BLS
and according to many insightful researchers (Gaskill, Van Auken &
Manning, 1993; Lussier, 1995; Palmer, Andaleeb & Joyner, 2005/2006;
Carter & Van Auken, 2006).
Even seasoned, knowledgeable researchers and academic proponents of
business models may omit the legal component in research and conceptual
theoretic; in fact, no legal functions were included in a proposed
comprehensive review of core components of a business model and no
reference to legal matters were identified in the definitions of
business models in a seminal article about the creation of an empirical
model to test theories of guidance to achieve sustainable advantage
(Morris, Schindehutte, Richardson, & Allen, 2006). Thus, a review of
the literature that addresses these various issues reveals that
relatively few legal issues matters or studies have been reported in the
literature of small business journals unless one considers topic
specific articles, or studies reporting client satisfaction with
bankruptcy legal representation (Palmer, Andaleeb & Joyner,
2005/2006) or other topic specific reviews concerning regulatory or
general category legal issues.
Identifiable legal issues affecting new ventures are likely to
include matters like business format, intellectual property, liability,
regulation, contracts, tax, employment, finance and real property
(Malach, Robinson & Radcliffe, 2006). In a comprehensive survey of
292 legal clinic clients who were generally in planning or pre-start up
phase, analysis of the type of business rather than the legal issue was
the focus of the study (Malach, Robinson & Radcliffe, 2006). This
study targeted the stage of the business development as a distinctive
factor in legal issue identification; it reveals significant useful
information regarding the type of issues identified, but opts to use a
proxy of frequency to rank importance of those legal issues. The attempt
to quantitatively rank the relative importance of the legal issues is
confined to new ventures and based upon frequency, rather than
seriousness of consequence or risk of the legal decision (Malach,
Robinson & Radcliffe, 2006).
Though identification of important legal issues has been the
subject of several studies (Heriot and Huneycutt, 2001) as noted by
Malach, et al, the literature might lead some to conclude that while
distinct legal issues are the subject of scholarly study, those studies
omit any cognitive recognition of a connection with the judicial
remedies imposed by the USSC in its fine series of legal decisions
affecting business. Indeed, the relevancy of legal issues to new
ventures and the rank by frequency that the legal issue arises (Malach,
Robinson and Radcliffe, 2006) does not draw any conclusions about the
judicial remedies imposed upon legal decisions made by firms, small
businesses and/or entrepreneurs. Over a period of several years, the
author has used simple questionnaires to elicit responses from business
owners and managers, MBA students, SBI students, academics, lawyers and
entrepreneurs to gauge legal knowledge on business related legal issues
within key USSC and other high or key court decisions (for years 2004,
2005, 2006, 2007, 2008, 2009). As will be seen, it appears that
knowledge of recent USSC decisions affecting legal decision making and
which can provide legal insight to entrepreneurs, business owners and
managers is hiding in plain sight.
This paper fills a gap in the literature of analysis of key legal
issues by identifying the legal issues that create significant problems
to business success and describes correlative judicial remedies to those
legal issues. This paper proposes a logical next step in the development
and examination of a new conceptual body of business related legal,
ethical and regulatory matters; the concept called LIDM, Legal Insight
The author, utilizing information from previous case studies which
included in-depth interviews with business owners and managers, created
a set of revised questionnaires to determine generic respondents'
pre-knowledge of key legal issues. These questionnaires include: Top 25
Legal Issues Legal Audit[C] tool, Top 3 Survey Tool, Small Biz and
Entrepreneurs Survey; these are included in the appendices. Respondents
were not randomly selected; instead, they were voluntary participants in
legal seminars, academic meetings, MBA students, undergraduate business
students, business consulting clients, economists, entrepreneurs, or
others seeking information about key business related USSC decisions and
related legal issues. Except for the business consulting clients, no
demographic or firm related data was gathered. Key legal issues were
drawn from the following topics: Agent and Principal law, Arbitration,
Bankruptcy, Contracts and Collections, Damage(s) Control, Embezzlement,
Eminent Domain, Employment Law, Fraud, Independent Contractors,
Intellectual Property protection, Privacy, Sarbanes-Oxley Rules, SPAM
law, Tax Law, Tax Matters and Liability, Trademarks and Trade Secrets,
Truth in Lending (TILA), Regulation "Z". Questionnaires,
surveys, focus groups and consulting inquiries using the Top 25 Legal
Issues Legal Audit[C] tool, Top 3 Survey Tool, Small Biz and
Entrepreneurs Survey were utilized to collect information and to
determine general legal topic knowledge.
For example, in the Top 25 Legal Issues Audit[C], business owners,
managers, consultants, economists, entrepreneurs and others review the
integrated components which are necessary for healthy legal status of
any business entity. The Top 25 Legal Issues Audit[C] tool is a
checklist of items ranging from compliance matters, to collection and
contract suggestions which should be in place for every business. The
twenty five issues pertain to all business forms, and most items also
pertain to non-profits. This tool is useful to raise awareness of
specific legal practices which should be in use to maintain legal health
and acts as a diagnostic for legal errors and omissions. It is useful
both as a teaching device to raise awareness, and a list of best
practices for model legal health.
Perceived problems facing business owners are likely to range from
macro (the economy) to micro (the collection of past due accounts), and
there may be cyclically popular problems of supply, sales, cash-flow and
innumerable other problems faced by businesses no matter what size or
A short questionnaire called Top 3 Survey Tool was developed to aid
identification of top problems facing business owners; the resulting
topics solicited from the use of the Top 3 Survey
Tool were culled to reveal the top legal content problems. The
resulting topics then were analyzed in conjunction with relevant USSC
decisions on those topics.
CORRELATIVE JUDICIAL REMEDIES
As a result of these initial questionnaires, common flawed legally
related business practices capable of harming businesses were identified
and the legal insight decision making opportunities requiring knowledge
could be organized. The key knowledge factors for each topic generated
an alpha legal topics chart and those in turn could then be related
directly to legal decisions (primarily USSC decisions) on those topics.
As is evident in Exhibit C, the very issues identified as
problematic are the same issues presented to the high court under the
writs of certiorari. For example, cases involving arbitration,
bankruptcy, contracts have been selected and distinguished by USSC
recent decisions and provide opportunity for legal insight decision
making. In the following section, a select few topics will be reviewed
(Arbitration, bankruptcy, contracts and independent contractors,
embezzlement and fraud) and the judicial case in point is described to
illustrate the Legal Insight Decision Making model.
LEGAL INSIGHT DECISION MAKING
Arbitration in lieu of civil litigation is favored in federal law
and this deference to arbitration has been the most pervasive change in
business practice in the last decade. The status of the
"Arbitration" clause in contracts, as well as strategic use of
the arbitration clause by big business, was noted by academic scholars
at the turn of the century (Bardwell, 2001) to mark a new strategic
defensive posture by lending and credit institutions. The revelation of
this posture was evident due to the requirement of the federal Privacy
Act which requires such institutions to annually disclose terms and
conditions of the lending/borrowing relationship via mailing of an
annual Privacy Notice to its customers.
Close reading of Privacy Notice Disclosures reveal that beginning
in the early 2000's, arbitration clauses were regular conditions
imposed as conditions of borrowing and lending by most US financial
institutions. This effectively minimized costs and risks to lending and
credit institutions by automatically affording the manifest protections
of arbitration. The obvious benefits of arbitration include: choice of
forum and choice of arbitrator to resolve the dispute by the lending
institution; no jury; no appeal; no judicial precedent; and, until the
Supreme Court ruled in Green Tree v. Bazzle, no class actions in
arbitration. Furthermore, the Federal Arbitration Act (F.A.A. 9USC
[section] 1 et seq.) pronounces, and federal court and USSC have agreed,
that arbitration clauses are valid and preferred under law; that
arbitration is favored over litigation and that arbitration can be
compelled where there is a valid arbitration clause. Thus, by employing
the legal tactic to force arbitration as a condition precedent to
obtaining financing, the entire system of civil litigation was
effectively flat out removed as an option to resolve all disputes
related to financing by the lending and banking industry.
As recently as March 9, 2009, the USSC ruled to support arbitration
clauses in contracts between lending institutions and its customers in
the case, Vaden v. Discover Bank. Vaden v. Discover Bank, 07-773, 08
C.D.O.S. 2829, was decided 03-09-2009 in the Supreme Court of the United
States on Writ of Certiorari to the United States Court of Appeals for
the Fourth Circuit opinion filed March 9, 2009. Justice Ginsburg
delivered the opinion of the Court; she opined that "Section 4 of
the Federal Arbitration Act, 9 U. S. C. [section]4, authorizes a United
States district court to entertain a petition to compel arbitration if
the court would have jurisdiction, "save for [the arbitration]
agreement," over "a suit arising out of the controversy
between the parties." Justice Ginsburg describes the typical facts
giving rise to the case stating that... "The litigation giving rise
to these questions began when Discover Bank's servicing affiliate
filed a complaint in Maryland state court. Presenting a claim arising
solely under state law, Discover sought to recover past-due charges from
one of its credit cardholders, Betty Vaden. Vaden answered and
counterclaimed, alleging that Discover's finance charges, interest,
and late fees violated state law. Invoking an arbitration clause in its
cardholder agreement with Vaden, Discover then filed a [section]4
[Federal Arbitration Act] petition in the United States District Court
for the District of Maryland to compel arbitration of Vaden's
counterclaims. The District Court had subject-matter jurisdiction over
its petition, Discover maintained, because Vaden's state-law
counterclaims were completely pre empted by federal banking law. The
District Court agreed and ordered arbitration. Reasoning that a federal
court has jurisdiction over a [section]4 [Federal Arbitration Act]
petition if the parties' underlying dispute presents a federal
question, the Fourth Circuit eventually affirmed."
Summarizing the Vaden decision, the majority of the USSC reversed
the 4th Circuit lower court decision and reiterated the power of the
arbitration clause by concluding that state courts as well as federal
courts are obligated to honor and enforce agreements to arbitrate.
Finally, FAA[section]2 is binding on state courts and this requires an
interpretation of arbitration clauses which favors arbitration; the
exact language of the relevant federal statute section states that
FAA[section]2 renders agreements to arbitrate "valid, irrevocable,
The insight gleaned from this latest decision on arbitration
clauses should enhance knowledge based decision making and suggests that
businesses of any size, in any industry can likewise employ arbitration
clauses to avoid litigation and reap the benefits, noted above, of
Bankruptcy data available for every jurisdiction from the American
Bankruptcy Institute (www.abi.org) demonstrates that the bankruptcy rule
changes of 2005, in concert with the downturn in the economy, have
meshed to create a statistical upsurge in the filings of chapters 7, 11
and 13 bankruptcies. Some fail to see bankruptcy as a strategic business
maneuver and it is a sad fact that business owners often fail to
recognize the key warning signs of vendor, supplier, client or customer
impending bankruptcy. Since bankruptcy is an exclusively federal subject
matter, though individual state rules can apply where permitted, it
remains dangerous and short sighted to ignore the warning signs of
Bankruptcy warning signs include the creation of Receivership
status; approximately 80% of businesses in receivership eventually will
enter Bankruptcy and the constraints upon creditors who join a
bankruptcy proceeding are far more onerous than in the pre-bankruptcy
stages. Receivership is a red flag that bankruptcy is imminent.
Other key warning signs that bankruptcy will occur include late
pays, reduced pays, or excuses for pays by accounts payable customers.
The legal insight objective to keep in focus is to recognize that any
disturbed pattern of payment signifies financial stress and financial
stress is a precursor to bankruptcy.
Finally, requests to re-negotiate classic terms of longstanding
contracts and any reduction in business related communications, known as
the ostrich syndrome, also signify financial stress that typically
Two interesting cases tangentially touching on bankruptcy reached
the USSC and the lessons in each case provide significant legal insight
decision making opportunity. In the United States v.
Galletti case, a partnership declared bankruptcy, and as we know,
back taxes owed to the IRS cannot be discharged in bankruptcy. In the
Galletti case, a former partner of the now dissolved partnership argues
that he (Galletti) was not responsible for the back taxes assessed by
the IRS upon a former partner for a now defunct partnership. In this
case, the USSC confirmed that the Statute of Limitations for the IRS to
assess a tax is 3 years from the time the tax return is filed, or should
have been filed. However, provided the IRS makes the tax assessment
within the 3 year limit, then the time permitted to collect the tax debt
is 10 years from the date of assessment. Galletti answered a very
important legal question about tax liability for defunct partnership: If
a "Partnership" is the assessed taxpayer, are the individual
partners liable up to 10 years later?
The resounding answer to this question is yes. If the IRS timely
assesses the partnership "taxpayer" within 3 years, then the
law of Partnership which makes each and all individual partners jointly
and severally liable, extends the debt collection period for up to 10
years after the IRS assessment of taxes due; and each individual former
partner, even though not personally assessed nor personally notified of
the IRS tax assessment, is subject to collections actions for up to ten
years until the debt and interest and fines is fully satisfied. Note
that the collection power of the IRS ranges from garnishment and
attachment to confiscation and the IRS is a supreme debt collector.
Obvious lessons from this case include the need to reconcile financial
obligations and terminate business entities completely, including all
prospective tax obligations. Certainly, the form of business of
partnership is less desirable than is any other form of business entity
due to the feature of joint and several liability unique to a
Contractors and Status as Independent Contractors or Employees
There has always been a tense relationship between the IRS view on
employee status versus independent contractor status and the benefits of
the Independent contractor status to the employer. For example,
employers are not liable for torts committed by independent contractors,
nor are employers responsible for payment of withholding taxes for
independent contractors. These two benefits alone created an inducement
for the world's largest private ground carrier, Roadway [now FedEx
Ground] to declare in California that its drivers were to be classified
as independent contractors rather than employees. However, this
brilliant bit of business strategy has backfired on FedEx in a rather
terrific legal manner.
In a landmark California case, Estrada v. FedEx Ground, the
employer FedEx has found that drivers' status as an independent
contractors cannot be guaranteed even if so declared under written
contract. Current IRS tax laws recognize there are numerous factors
which guide but may not absolutely determine the proper classification
as either employee or as independent contractor. The FedEx case
demonstrates that employers must use 10 classic factors to determine
true independent contractor status or they might well rue the
consequences. These are 10 classic factors to consider: close
supervision, uniforms, training, tools, full time, hours of work,
peripheral work, payment, expenses, statutory class. In California, a
state statute clearly requires proper classification of workers as
either employees or independent contractors and the intentional
misclassification of workers constitutes fraud and is criminal under the
statute California Labor code [section]2802.
In the landmark case, Estrada v. FedEx Ground filed in Los Angeles
Co. Superior Ct. decided on December 19, 2005. Two later appeals
modified the ground breaking class action decision against FedEx for
misclassifying all single route drivers as independent contractors
rather than employees; but left the liability issue intact. FedEx's
action was determined by the court to be in violation of California law.
This class action lawsuit of about 200 class members in California
included an injunction against FedEx to halt the practice and awarded
$5.3 million to plaintiffs. Note: $12.3 million awarded for attorney
The consequences of this lawsuit, a dispute resolved via
litigation, not arbitration will be tremendous. The details of the
dispute have spawned more litigation in other jurisdictions; there are
more than 32 suits from 25 states which may or may not be consolidated
asking for wage and hour compensation and reimbursement for fuel, oil,
tires, repairs and liability insurance; these lawsuits also challenge
the practice of firing employees and then re-hiring these workers as
independent contractors to avoid paying taxes, benefits, insurance and
other employee related expenses and entitlements.
The ripple effects of this lawsuit are enormous. The consequences
of using a strategy to circumvent financial costs associated with
hiring, training and retaining employees will include an industry wide
examination of all carriers who classify drivers as independent
contractors; then there will likely be an expansion to other industries
who have utilized this independent contractor strategy. For the record,
other jurisdictions, including Massachusetts and Indiana have followed
the California Estrada v. FedEx court decision and challenged the
classification of drivers as independent contractors.
However if the reason for the strategy in the first place was to
save costs, then the outcome is essentially one of ironic proportions.
The reason this cost-saving strategy has monumentally backfired is that
the IRS has already reached back three years from the Estrada decision
of 2005 in California and levied over $319 million in fines and
penalties against FedEx for failure to pay withholding taxes to the
drivers it intentionally misclassified, starting with the tax year 2002;
of course, the IRS will utilize its power to assess back taxes for each
subsequent year and employ its power to collect those taxes for the full
ten year collection period for each assessment period.
Contracts and Designer Contracts
All business contracts one writes are potential allies, but all
contracts written by the other party are potential enemies. The legal
insight decision making model would emphasize that use of
"Boilerplate" contracts, those in which standard terms are
inserted without regard to custom requirements of the parties typically
benefit the author not the other party to the contract. Therefore,
businesses which employ contracts to define relationships and terms and
conditions should customize those contracts and use written contracts to
clearly state policies that will protect the interest of the contract
writers and notify others of specific practices, including arbitration,
collection practices, liquidated damages and related custom issues.
Contracts should be used to define deadlines and to state
consequences and expectations on the face of the contract; thus
requirements for parol evidence will be moot.
Embezzlement and Fraud
Query: What percentage of small businesses may be likely to
experience an incidence of embezzlement during the lifetime of the
business? Response: 100%
All embezzlers share the same characteristics: they are intelligent
and trusted employees placed in a position of control with little or no
oversight due to their very loyal personality.
Fraud is a complex and multifaceted illegal behavior; creative
accounting, escrow fund abuses, tax evasion, billing "errors",
valuation and insurance frauds are examples; but the list is endless and
both civil and criminal sanctions are available to remedy fraud.
Criminal fraud is more likely to be prosecuted than ever before due in
part to private attorney general statutes including those created by
Sarbanes-Oxley, according to official court statistics (usdoj.gov;
The increase in fraud prosecutions is related to multiple factors
including perceived public demand and support to prosecute, convict and
punish. Some reasons fraud investigations and enforcement are favored by
prosecutors include mandates of Federal sentencing to uniformly impose
stiffer penalties; higher standards of personal liability and
responsibility by owners, directors and firm fiduciaries; the fact that
fraud defeats the corporate shield laws; and unfortunately, the fact
that media darlings are created [prosecutors] and destroyed
Stoneridge Investment Partners v. Scientific-Atlanta Inc. decided
January 2008 by a 5-3 majority provides a current example of extension
of fraud liability. In this case, Chief Justice John Roberts first
recused himself, but then sold his stock in an involved firm and
rejoined the justices to fully participate in the deliberations. The
USSC ruled that 3rd parties were not liable under the SEC for investor
losses due to 2nd party fraud even if those 3rd parties actually knew of
the fraud. The reasoning for this outcome is entirely based upon a
strict reading of the SEC provision rule under question. In the question
at hand, a class action suit, in which the class was seeking redress and
damages under SEC rule 10(b) from 3rd party deep pockets, the class must
prove that a legal cause of action exists under SEC rule 10(b)
justifying vicarious liability for actions not recognized under the SEC
10(b) rule. To date, the 10(b) rule has not been so extended.
CONCLUSIONS AND IMPLICATIONS
No business enterprise can exist successfully without a legal plan
to direct, design and even deter the principals from dangerous
practices. This is true whether in start up, growth or maturity phase. A
comprehensive Legal Audit[C] is a useful tool and can significantly
performance fault lines and how to predict where the quakes will
occur using the Legal Audit [C] tool. Knowledge of the key USSC
decisions extracting lessons from these decisions and applying this
knowledge to gauge the effect upon business issues is essential in the
legal insight decision making model.
Track notable decisions regularly. Usually August is prime season
to identify hot topic cases and many Certiorari grants are determined
over summer and finalized for October; the writs are based upon discord,
dissent and politics and thus these elements will affect business
practices. Key cases arise from forum differentials in high octane
forums such as the 4th and 9th circuits and a modicum of uniformity is
desired by USSC. Therefore discord among the circuits on the same or
similar issues is a good predictor of certiorari.
Knowledge of the matters at issue relating to business should be an
on-going obligation of good strategy and good planning. Managers and
owners should react by adjusting business practices to comply with
judicial outcomes and adjust current practices by using simple
contractual language to define desired outcomes.
Whether the business is in start-up phase, growth phase or is fully
developed, all businesses and owners should use a standardized approach
to check the legal soundness of their company. A simple, but
comprehensive Legal Issues Audit[C]" will be a cost effective and
efficient method to identify problem areas and prepare for corrective
Leading cases are potent red flags to signal that legal insight
decision making strategy should be instituted and implemented to enhance
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Stephanie Huneycutt Bardwell, Christopher Newport University
Exhibit A: Top 25 Legal Issues Audit[c]
1. Business License on File in All Jurisdictions in Which Doing
2. Proper & BEST Legal Form Of Doing Business& Yearly Compliance [Sole
Prop/ Partnership/ LLC/SCorp/C-Corp]
3. Federal/ State/ Local Tax Compliance
4. Multi-jurisdictional Tax Compliance
5. Insurance Policies: Liability & Umbrella
6. Worker's Compensation
7. Health Insurance
8. Contracts with Employees customized
9. Contracts with Partners customized
10. Contracts with Suppliers/Vendors customized
11. Office/Warehouse/Other Property Lease Contracts customized
12. Equipment Lease Contracts customized
13. Current Licenses or Compliance Records For Specialty Workers or
IKs Government Regulations Posted On Site For OSHA/ABC/Etc.
15. Intellectual Property is Recognized and Registered
16. Pensions, Disability, Other Benefits
17. Arbitration Clause & Collections Policy Clearly Stated On All
18. "As-Is", Warranties, Guarantees etc. Clearly Stated On All Sales
19. Facilities Accessible To Handicapped
20. Facilities in Good Repair/No Dangerous Conditions
21. Calendar Of Dates For All Required Tax Filings & other
22. Bank Accounts and Financial Data Up To Date and regularly
23. Partnership/Key Person Insurance
24. Disposition of Business Assets Written Plan Exists In The Event Of
Emergency or Death
25. Up To Date Will on File with Attorney with Accurate Description of
Directions for Disposition of Business
Exhibit B: Top 3 Survey
The top three problems facing business owners:
The top three reasons entrepreneurs/businesses ARE successful:
Three preventable problems for small business:
Exhibit C: Table of Sample Issues and Cases
Arbitration Vaden v. Discover Bank
Bankruptcy United States v. Galletti
Contracts and independent contractors Estrada v. FedEx Ground
Embezzlement & Fraud Stoneridge Investment Partners v.
Small Business and Entrepreneurs Survey
[T]/[F] Arbitration clauses permit litigation in court.
[T]/[F] Bankruptcy permits full discharge of debts.
[T]/[F] Contracts w. usurious Collections policies are void.
[T]/[F] Damages cannot be limited or capped.
[T]/[F] Embezzlement is the most prosecuted white collar crime.
[T]/[F] Fraud/Forgery/Falsification is on the rise.
[T]/[F] Regulation "Z" prohibits undisclosed fees to be charged
to credit card holders.
Legal Issues Knowledge Survey questions & Response Scale:
[0 = None/Low to 5 = Strong/High]
1. My knowledge of uses of Arbitration clauses in 0-1-2-3-4-5
2. My knowledge of recent USSC decisions affecting 0-1-2-3-4-5
business practices in employment law & bankruptcy
3. My understanding of anti-SPAM law and practice 0-1-2-3-4-5
4. My understanding of the Federal Sentencing 0-1-2-3-4-5
5. My knowledge about Intellectual Property 0-1-2-3-4-5
protection for small business and entrepreneurs
6. The likelihood of embezzlement becoming an 0-1-2-3-4-5
issue in most businesses is:
7. For most businesses, I believe Risks of 0-1-2-3-4-5
Marketing via email and running afoul of Anti-SPAM
8. The benefits of filing for Bankruptcy 0-1-2-3-4-5
protection in 200X, compared with pre-2005, are:
9. The likelihood of a local economic empowerment 0-1-2-3-4-5
agency taking private land to turn over to another
private entity is:
10. The effect of USSC NY & MI wine industry 0-1-2-3-4-5
decision about importing wine in my state is:
1. All 50 States have criminal Anti-SPAM laws- [T]/[F]
2. Over 80% of inbound messages to consumers are [T]/[F]
3. Unsolicited E-mail with false transmission
information is criminal in which states?
4. To date there has been no successful [T]/[F]
Prosecution of "Kingpin" Spammers sending
Fraudulent Bulk messages-
5. "Misdemeanor" SPAM rises to "Felony" SPAM under
your STATE law if:
6. Under the Federal CAN-SPAM Act, any State [T]/[F]
Anti-SPAM laws relating to falsity or deception
7. Anti-SPAM laws provide for both civil and [T]/[F]
8. Private parties may institute legal action [T]/[F]
under Anti-SPAM laws.
9. Under state statutes, Out-of-state SPAMMERS [T]/[F]
cannot be prosecuted.
10. Penalties include: X -- jail time: Y -- $$$
Wage Law & Overtime Survey
11. Under the Federal Overtime rules, only hourly [T]/[F]
workers are entitled to overtime pay.
12. Flex timers, managers or administrators [T]/[F]
working from home are exempt from overtime pay
13. Union employees are covered under the Federal [T]/[F]
Wages & Overtime rules.
14. Independent Contractors are exempt from [T]/[F]
Overtime Pay rules.
15. Penalties MAY include:
X -- jail time: Y -- $$$Fines Z -- Back wages for
up to 2 prior years
Wage & Hour Law Changes Survey
Federal mandates for overtime pay have created the latest "class
action" vehicle of choice in business law. Unintentional failure
to pay overtime wages is corrected by civil suit-BUT intentional
failure to pay overtime may bring punitive damages & jail time.
Q. Who is entitled to Overtime pay?
Eminent Domain Survey
16. Under the 5th Amendment, Eminent Domain may [T]/[F]
only be exercised by the States.
17. Eminent Domain permits taking of Private [T]/[F]
Property for public use upon payment of just
18. Kelo v. City of New Londonpermits only a very [T]/[F]
narrow interpretation of "public Use".
19. States may alter Eminent Domain rules. [T]/[F]
20. Private companies may be sued if they fail to [T]/[F]
put private property obtained by eminent domain to
a promised use.