Tuesday, January 17, 2012

Legal Environment In Businesses

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What is the legal environment in which business operates today? My immediate thought when I first read this question was, without regard to the “environment”, they operate very carefully. Businesses today are taking great precautions to protect themselves from other businesses, customers, consumers, and State & Federal regulatory agencies. We find ourselves working and living in a litigious society gone a wry. This may seem a bit cynical, but my experience in the MBA program thus far, the information I have learned in this class and my own experience has led me to this conclusion. We as MBA students and prospective business owners must prepare ourselves for this legally challenging environment.

Business-to-business transactions require extensive legal expertise. Businesses incorporated today, and companies that incorporated years ago, are finding themselves hiring lawyers for the simplest of business transactions. In my work experience, we have had many agreements that needed the assistance of attorneys. The first experience, is our most recent, a joint venture with two other well established companies. LaBarge Products, Inc., Goodyear Tire and Rubber Company, and Henry A. Petter Supply joined to distribute conveyor-belting products in the St. Louis region. The details of the venture are that Henry A. Petter wanted to move into the St. Louis region with out having a brick and mortar presence, LaBarge agreed to be that for them. Goodyear is involved because it is their product and they have to be careful in regards to distributor territories. Each company felt concern about the venture not having a contract stating each company’s involvement, responsibilities, and possible restitution if required. As a result, a legal contract was drawn and due to the involvement of attorneys, this venture took well over six months before being finalized. On the other hand, thirty years ago, this type of agreement would have ended in a handshake and no one thought twice about breach of contract or the possibilities of suing the other partners.

Another business-to-business transactions requiring the help of the legal system is distributor-manufacturer agreements. Again, LaBarge Products, Inc. is a distributor for a multitude of manufacturers. We are required only to have a contract with one, Eaton Aeroquip. This contract outlines the details of our distributorship, listing restrictions to other manufacturer’s products we are allowed to carry, whether or not we are a “Premier Distributor” or an “Associate Distributor, and our responsibilities in growing the business here in St. Louis. If Eaton finds us at fault in any of the details to the distributor agreement, they can pull the line at any time. If Eaton feels that we breach a contract-pricing schedule with a customer, they can file suit against us for compensation.

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Business-to-business customer transactions are finding themselves in the world of litigation as well. For example, supply-chain agreements and integrated-supply agreements are now requiring written contracts developing regulations and provisions for breach. A supply-chain agreement is when a company, like Monsanto, will do away with the bulk of their purchasing department and storeroom locations, and hire a company like Texas Mill Supply to handle their inventory. Monsanto contracts this out in order to reduce the number of employees needed and decrease their overhead. Texas Mill engages in an agreement like this because not only are they compensated for the materials, but also a negotiated percentage above that for handling the ordering, stocking, and management of the inventory. Companies need legal protection because now when you are providing a supply or a service in this situation you have employees working in another company’s facilities and taking over duties that the customers once did themselves. This protection is health insurance, liability insurance, and workman’s compensation to cover these employees. Monsanto would not be responsible for a Texas Mill employee while this employee was at Monsanto doing a stock order.

The next area of business heavily hit by litigation is the business-to-consumer division. Companies now carry large dollar liability insurance to protect themselves from consumer claim. Our company used to carry only a $1 million dollar product liability umbrella, but with the increase in litigation forced us to increase it to $10 million dollars. All paper work and products have warranty disclaimers, to protect retailers, manufacturers, and consumers. Invoices and receipts of purchase have disclaimers � claiming we are not liable for anything. This is a result of consumers favoring frivolous and nuisance litigation. Consumers jump at the chance to sue a manufacturer � as proven in examples in class. The prime example offered in class, was the consumer who sued a ladder manufacturer after he fell off the ladder because it was place in a pile of cow dung. Now as we discussed � did the consumer need protection � or to the companies need it from consumers like this one.

Businesses also need to protect themselves even from their own employees. This is another radically cynical statement � but it is true that businesses today face litigation from their own workers. Businesses are now including arbitration clauses in contracts to prevent lawsuits. The types of litigation employers are protecting themselves from are sexual harassment, discrimination, and competitive information leaking from their business. Businesses are either holding seminars or sending employees to seminars to learn about sexual harassment � to protect themselves from future lawsuits. This is a large cost incurred by the employer � not to mention the cost of liability insurance to handle situations. Many employers are having prospective employees sign “Non-Competition Clauses” or “Non-Disclosure Agreements”, these agreements protect the company if the employee should not stay with the firm. Each company’s clause/agreement details different restrictions put upon the employee upon leaving the company. LaBarge Products’ clauses/agreements prohibit a former salesperson from contacting current customers within a certain mile radius of the city. They are prohibited from taking customer lists with them; they are even prohibited from joining a competitors firm until three years upon leaving LaBarge. LaBarge has put these details in the clauses/agreements for protection.

The fifth partnership that businesses need to protect themselves from is the Federal & State regulatory agencies and acts. These Federal agencies and acts include the Occupational Safety and Health Act (OSHA), the Environmental Protection Agency (EPA), the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Equal Employment Opportunity Commission (EEOC), the Food and Drug Administration (FDA), and the Federal Trade Commission (FTC), just to name a few. The two important agencies/acts in my opinion are OSHA and the EPA. These two agencies ultimately affect the way a business operates and influences how a company goes to market and effects the cost of goods sold. The cost and liability involved with these two agencies is unbelievable. For example, a few years ago, our company purchased castings made in St. Louis, we then machined the parts, sent them to be anodized, and then we would assemble, package, and ship them. The casting manufacturer here in town paid so much for disposal of the by-products, casting run-off, slag and molder sand, which was over 60% of his cost of making the parts. We can now purchase the same castings from China � completely machined, anodized, and assembled cheaper than the original casting alone. This is because the Chinese casting manufacturers’ regulatory cost is cheaper than those in the United States are. Their utilities are free, and they have no EPA to monitor the disposal of the run-off � the companies just dump the run-off onto the ground. There are no lawyers to sue these companies in China for pollution or environmental neglect. On the other hand, lawyers specialize in EPA cases, suing companies for violating the rules and regulations. There for, companies carry a high insurance policy to solve issues like these. The State agencies are typically mirror bureaucracies of the Federal agencies. These agencies are another level taking another piece of your pie.

I believe that this environment is a product of the influx of new attorneys graduating each year. Every year there are more lawyers then engineers graduating. The increase of attorneys as made the legal system go a wry. There are law offices on just about every corner in some cities that are more than willing to take on a lawsuit against anyone.

When this country was starting out, many of the legislators were citizen legislators. A citizen legislator was a legislator that owned land, was a farmer, business owner, and a legislator part of the time. Now, the majority of legislators are lawyers. This is a conservative opinion, and by no means is do pass negative judgment on lawyers.

The opportunity to sue businesses and other people presents itself to be an easy task. All it takes is a plaintiff to file suit against a defendant, and whether the plaintiff wins or loses, there is no cost to them. On the other hand, the defended is out cost of lawyers, possible loss time at their job, and the embarrassment of the lawsuit.

The change in the legal environment I would like to see is a reform in the litigation system. The legal system is strongly political in the United States. Trial lawyer lobbyists will oppose reform. Trial lawyers thrive on lawsuits and litigation � any type of torte reform would be frowned upon.

The torte reform I propose is to mirror the British court system. In Britain, any plaintiff that files a lawsuit is responsible for the costs of the defendant if the suit is found in favor of the defendant. This kind of reform in our legislation will curb the appetite of prospective plaintiffs raising suit against another.

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