Boulder Business Law Advisor

We spend a good deal of time with both prospective and current clients encouraging “preventative law.” And, I’ve got to tell you, that simple phrase often causes a number of blank stares. In our society we are conditioned to think that lawyers address existing problems rather than counsel before an issue becomes a problem. As we like to say: “help us help you" prevent issues from becoming problems.

We take for granted regular dental visits —we understand that the check-up dollars spent now can save us countless cavities, root canals … and … many more dollars (and pain) down the road. We take our automobiles in for regular oil changes, check-ups and tire rotations —why?  Because we understand that these routine maintenance tasks can and will save us time and money in the long run.

So, why is it that as we are considering a new business venture or off and running with our dream business idea, we do not involve legal counsel to guide us through the legal nuances of forming, starting and operating our business? Most likely because we are conditioned to believe that lawyers are expensive.  Certainly some lawyers are very expensive - but you would be surprised at how affordable quality legal advice actually is.

In his concise and timely post, Forbes' Mark Britton identifies Seven Legal Hiccups That Can Crush Your Startup - and explains why failing to get “your legal house in order” is a chronic failure of start-ups.

Mark Britton's 7 Legal Hiccups That Can Crush a Startup:

     1.) Choosing the Wrong Corporate Entity

     2.) Putting Off a Founders’ Agreement

     3.) Using Someone Else’s Trade Name

     4.) Failing to Protect Intellectual Property

     5.) Not Understanding Key Contracts

     6.) Failing to Comply with Federal or State Securities Laws

     7.) Not Hiring a Startup Lawyer

However, more often than not these failures persist in long-established businesses as well.  I’ve counseled multinational corporations that simply failed to do the simplest of maintenance over a period of years which led to millions of dollars in catch up, fines and lawsuit settlements.  It all could have been avoided.  I recently counseled a five person start up that chose the wrong business entity for their capitalization plan and didn’t look back until it was too late.  What would have been a nominal cost turned into tens of thousands of dollars in cleanup work to avoid litigation.

Again, it seems that we are conditioned to avoid legal counsel rather than seek it out until we are faced with the legal equivalent of a root canal or major engine overhaul. So, foregoing a few legal hours “check-up” turns into a huge problem—that may or may not be easily resolved – but will cost you time and money.

For example, if you have failed to take the necessary steps to protect your intellectual property or failed to adequately investigate whether you are infringing on someone else’s intellectual property, months or years of hard work building and marketing your brand may be lost. If you have selected a form of doing business aimed at insulating your personal assets from liability but then fail to observe the necessary entity formalities, you may, in the end, face unlimited personal liability.

"Your legal strategy will never catapult your company to $1 billion in sales, but it will help you avoid tripping over some costly, easily preventable mistakes."

- Mark Britton

Successful businesses not only start with a great idea but also adopt a strategy and philosophy for success—don’t leave legal counsel out of your start-up checklist or your businesses strategic plan.

Laszlo & Associates' Boulder StartUp Lawyers provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

I am a cyclist and avid Strava.com user (Strava.com allows cyclists to map and clock their times and speeds using GPS and upload them to its website.)  Just this past Sunday, I was on the road in 100 degree heat trying to beat a few of my segment “personal records” – one segment in particular I wanted big time.  I pushed myself, got to the top and thought “I can’t wait to get home, throw this ride on Strava and see how I did.”  Alas, I was off my best time by two seconds … next time.  Strava has motivated me to ride at times when my will power was susceptible to the thought of a cold beer.  However, I have often thought how Strava could (and almost undeniably does) “motivate” cyclists to ride aggressively in order to break records and rank on particular segments created by its members.   

Yesterday, the family of Kim Flint, a cyclist who died when he drifted into the other lane and hit a car while riding his bicycle around a curve brought a lawsuit against Strava, Inc. claiming the popular site was negligent in promoting and encouraging cyclists, like Mr. Flint, to compete on dangerous roads in order to gain standing on the website.

So, what, if any, responsibility does Strava have to its cycling members?  Well, there is the product itself: an online athletic data collection and social networking site.  But the data is based on a member’s activity, in this case cycling – bottom line is you have to cycle to capture data in order to upload data to the site.  So, a necessary component of Strava is cycling.  Strava is so popular because of its "segments" - portions of rides/routes Strava members create and then compete on.  Strava itself does not create these segments.  What Strava does is collect member data and organize and present it on leaderboards for each segment.

In May, 2010, Strava.com's Terms made no mention of associated risks of cycling.  Currently, Strava’s Terms reads as follows:

YOU EXPRESSLY AGREE THAT YOUR ATHLETIC ACTIVITIES, WHICH GENERATE THE CONTENT YOU POST OR SEEK TO POST ON THE SITE (INCLUDING BUT NOT LIMITED TO CYCLING) CARRY CERTAIN INHERENT AND SIGNIFICANT RISKS OF PROPERTY DAMAGE, BODILY INJURY OR DEATH AND THAT YOU VOLUNTARILY ASSUME ALL KNOWN AND UNKNOWN RISKS ASSOCIATED WITH THESE ACTIVITIES EVEN IF CAUSED IN WHOLE OR PART BY THE ACTION, INACTION OR NEGLIGENCE OF STRAVA OR BY THE ACTION, INACTION OR NEGLIGENCE OF OTHERS. YOU ALSO EXPRESSLY AGREE THAT STRAVA DOES NOT ASSUME RESPONSIBILITY FOR THE INSPECTION, SUPERVISION, PREPARATION, OR CONDUCT OF ANY RACE, CONTEST, GROUP RIDE OR EVENT THAT UTILIZES STRAVA’S SITE. www.strava.com June/2012

UPDATED: 6/19/2012 7:16pm Strava emailed its members with the following message:

Posted by Strava Admin on June 19th, 2012

We’ve updated our terms and conditions, and we’re doing everything we can to get the word out. You’ll also see a notice on your dashboard when you log in to strava.com.

What’s changed? We’ve grown a lot and have expanded our products and services since our terms were last updated. The updated terms clarify things related to our mobile apps, as well as real-world races and events that you might participate in that use Strava’s site.

That short description isn’t meant to be a substitute for the real deal, so please take the time to read the revised terms and conditions found at strava.com/terms. If you use one of our mobile apps, please download the latest version to access the updated terms from inside the app. Then, get back out there and go for a ride or a run.

Thanks,
The team at Strava

But does it matter that Mr. Flint did not expressly agree to assume the risks of cycling when he joined Strava.com?  Probably not.  Mr. Flint was an avid cyclist.  He would have known the associated and inherently dangerous risks of cycling - and more specifically, the risks of cycling at a high rate of speed down a steep grade that is traveled by cars.  Mr. Flint had ridden the particular “segment” before (indeed was riding for the sole purpose of regaining his position as the fastest rider on that segment) and would have known the risks inherent on the ride.

According to Frances Dinkelspiel of Berkeleyside News,  Mr. Flint had raced down South Park Road (the rode on which the collision occurred a few weeks later) on June 6, 2010 in 2 minutes and 7 seconds, reaching a top speed of 49.3 mph.  The speed limit on South Park Drive, which is a steep grade, is 30 miles per hour.  “49.3 mph, on a bike. How I find religion on Sunday morning,” “Set new personal records – Centennial, 3 Bears, some others, even a KOM (King of the Mountain) on south gate descent!” Mr. Flint wrote on June 6.

Under California law, primary assumption of risk arises where an individual voluntarily participates in an activity or sport involving certain inherent risks – in this case, cycling.  Cycling is an inherently dangerous sport.  For example, in order to obtain a cycling license from USA Cycling, a rider is required to sign an “Acknowledgment of risk, release of liability, indemnification agreement and covenant not to sue” which states: “I ACKNOWLEDGE THAT CYCLING IS AN INHERENTLY DANGEROUS SPORT…”

There is no doubt that Mr. Flint’s death is a sad event.  However, Mr. Flint’s death was precisely the type of injury he assumed the risk of encountering while cycling.  There is no question that Mr. Flint voluntarily chose to ride his bicycle - nor that he chose to ride in the manner he did.  It also seems quite clear that he knew of and accepted the risks associated with cycling – Mr. Flint was an avid cyclist, joined a website dedicated to cycling and rode to achieve cycling “records.”  He undoubtedly was aware of the fact that the streets on which he rode, whether “segments” or not, were full of hazards including moving cars.  This, along with what will come out in discovery; Strava should not have to prove much more to establish that Mr. Flint knew of and/or appreciated that a “serious injury” or death could result from his activity.

It is important that companies which promote or involve potentially or inherently dangerous activity be sure their terms of service or user agreements contain adequate warning and release language.  Like many other companies in the heath and fitness arena, Strava is a growing company with increased exposure - and with increased exposure come, well, increased exposure. While I am not sure what kind of legal budget or threshold for litigation the company has, especially in light of the fact it is currently involved in a patent lawsuit, I would look for Strava to vigorously defend this case to set an example for similar claims going forward.

The Boulder business lawyers at Laszlo & Associates, LLC provide legal counsel to businesses on a variety of business needs including products liability, risk management, corporate protection and legal compliance.

In April of 2012, FDA issued a draft guidance for the use of nanotechnology in both food and cosmetics.  While a draft guidance does not technically establish “legally enforceable responsibilities,” its purpose is to provde an agency's thinking on a particular issue in the form of tentative guidelines—here being the use of nanotechnology in food.  The draft guidance opens a period for comment from industry participants as to their opinion of the effect if the draft guidance were to be implemented as a regulatory standard.

In this particular draft guidance, FDA has opined that the use of nanotechnology in food may require additional "scrutiny" and, thus, it is best practice for industry participants using nanotechnology in food substances to consult FDA prior to marketing such products:

As with all food substances, this guidance also is intended to recommend that you consult with us regarding a significant change in manufacturing process for a food substance already in the market, irrespective of your conclusion about whether that change affects the safety or regulatory status of the food substance. It is prudent practice for you to do so, particularly when the change in manufacturing process involves emerging technology. Food substances may be used in a wide array of products manufactured, distributed and sold at retail by a large number of firms. The consequences (to consumers and to the food industry) of broadly distributing a food substance that is later recognized to present a safety concern have the potential to be significant.

If implemented, the draft guidance may have significant impact on both the manufacturers using nanotechnology in their food substances and the nanotechnology firms developing and marketing nanotech applications for food substances as the use of nanotechnology in food will almost certainly increase in cost for all.  Requiring FDA consultation prior to taking a nanotech food application to market, including the necessary research and/or studies substantiating the safety of the intended nanotech food use to FDA, will create regulatory hurdles, lengthening the time and increasing the expense of developing and marketing nanotech food products and applications. 

Moreover, food substance manufacturers will likely require a more thoroughly reviewed safety profile of the intended use from nanotech firms both to convince the FDA as to the safety of its application and as "insurance" against future product liability claims.  In light of the FDA draft guidance, failure to properly investigate the safety risks of a nanotech application in food prior to marketing by either the nanotech firm marketing the nanotech application or the food manufacturer using the nanotech application in its food substances could expose both entities to liability from future product liability claims as the draft guidance will certainly be used as a standard for reasonable industry conduct.  Notably, even if the draft guidance is not implemented by FDA for some years to come, its issuance in itself can arguably be an informal standard of the "reasonableness” of a company’s actions and practices in the context of a product liability lawsuit.  Thus, any deviation from the draft guidance can be fodder for product liability lawsuits.

The Boulder business lawyers at Laszlo & Associates, LLC provide legal counsel to businesses on a variety of business needs including products liability, risk management, corporate protection and legal compliance.

Starting a business with friends can be an exciting thing.  However, the excitement and anticipation of jumping in and getting the business off of the ground often overshadows the little details that are necessary when forming your company and, when starting a new business, it is the “little things” that become very big things later!

In Colorado, there are two popular forms of doing business: the stock corporation (“Inc.”) and the limited liability company (“LLC”).  Both forms, if properly formed and administered, limit the liability of the shareholders or members—often the most critical reason to choose one of these forms of doing business. The LLC does offer a degree of flexibility that makes it an extremely popular choice for new businesses.

Once organized, an LLC’s affairs are governed by an operating agreement, which, while similar in many respects to a stock corporation’s by-laws, contains the agreement of the members as to how the LLC will conduct its day-to-day business.  Think of an LLC’s operating agreement as its constitution—the operating agreement governs the rights, duties, limitations, qualifications, and relations among the members, the members' assignees and transferees, and the limited liability company.  The operating agreement may also contain provisions concerning its enforcement, interpretation, construction, and application.  Importantly, however, the operating agreement is a “contract” between the members – an “agreement” as to how the LLC will operate.

Colorado courts have consistently held that the provisions of an LLC’s operating agreement control over any provision of the Colorado state statutes governing limited liability companies to the contrary, subject to some exceptions.  The intent of the Colorado Limited Liability Company Act is to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.

While some companies may seldom find it necessary to have to refer to the LLC’s operating agreement, the reality is that most businesses with multiple members will need to consult the operating agreement to answer a question or solve disputes – questions such as: what becomes of the LLC if a member (or, the sole member) dies? What do you do when a member decides to exit the LLC or retire?  What if the LLC decides to bring in a new member?  How to go about winding up the operations of the LLC and closing the business – how are the assets to be distributed?  A well drafted operating agreement should answer all of these questions and serve as the roadmap by which your LLC conducts business.

Laszlo & Associates, a Boulder, Colorado based lawfirm provides legal counsel to for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance.

A recent Louisiana court of appeal opinion involved a question of whether there existed a “Mary Carter” agreement. 

In Hutto v. McNeil-PPC, Inc., McNeil was one of three defendants in a tragic case involving the death of an infant who was given multiple doses of Infant Tylenol at the direction of a nurse and who assumed the parents had Children’s Tylenol, and parents who asumed the nurse's instructions called for infant Tylenol, a weaker version of the drug.  The infant died from liver failure secondary to acetaminophen toxicity.

Prior to trial, the hospital admitted liability and paid the Plaintiffs $100,000.  Due to the hospital's admission of liability, the Patients Compensation Fund entered the case to defend on the issue of causation and damages.  Plaintiffs and PCF entered into an agreement whereby the Plaintiffs and Defendant PCF would jointly cooperate during trial with the goal being to minimize the percentage of fault allocated to the PCF to less than 10%, if any at all and PCF would support the Plaintiff’s damages arguments.  The agreement was secret from McNeil and McNeil argued that the secret agreement was a “Mary Carter” agreement which was prejudicial to McNeil.

Briefly, a Mary Carter agreement is an agreement between a plaintiff and one or more, but not all, co-tortfeasor defendants which places a limit on the maximum liability of the settling defendant, and further provides that such sum will be reduced or extinguished (based on the amount recovered) in the event of a recovery against the non-agreeing co-tortfeasor.  The plaintiff also agrees to not execute on any judgment against the settling defendant, seeking recourse against only the non-agreeing defendants, and the defendant agrees to continue as a party defendant in the trial of the action.

In finding that the agreement was not a Mary Carter agreement, the Court relied primarily on two things: 1) The fact that the agreement was “not a true compromise because the Plaintiff did not receive any money -  they did not settle their claims against the PCF; and the PCF remained potentially liable to them, albeit for a significantly reduced amount,” and, 2) the fact that the defendant PCF was a “nominal defendant” who’s position was not the same a McNeil’s on account of the fact that PCF entered the litigation with its liability already established.  Therefore, the court stated, PCF had no defense to liability and was not, in reality, McNeil’s co-defendant. 

Mary Carter agreements are viewed differently in different jurisdictions.  In Louisiana, Mary Carter agreements that are not made known to the trier of fact are said to violate public policy as they distort the litigation process.  Other jurisdictions will apply off-sets where such a settlement is reached. In Colorado, Mary Carter agreements are not very practical as such an agreement would be discoverable – and because finder of fact is to determine the degree of negligence of the agreeing defendant, any secret agreement’s purpose is eliminated, and there is no reason to use one.  So, it is very important to know what effect a settlement with one party may have on the outcome of your case against another defendant - especially if the agreement is kept secret from a non-settling party.