Tag Archives | regulation

Hidden Laws, Confusing Regulations

By Coco on June 20, 2011 in Made in America

This is a continuing series called Apple Pie Economics about the deliberate forces and unhappy accidents that are getting in the way of us living up to our entrepreneurial potential. Right now, we’re talking about the problems. Later, we’ll talk about solutions. Earlier posts from this series can be found here.

Hidden Laws and Regulations. There are many hidden regulations, too complex to understand or too illogical to find – except by mistake, great expense or prosecution. These hidden laws and opaque regulations burden, stymie and sometimes crush entrepreneurs.

Laura. Recently, I wrote about the experiences of Laura, a successful entrepreneur, who shuttered her company to get health insurance from an employer. The lack of health insurance was not the only systemic feature that exhausted her patience for being the boss: the second thing that did her in was the confusion and inaccessibility of legal obligations for her business.

Laura had a hard time identifying the laws she needed to follow. When she looked for a lawyer, the fees she was quoted were so high, that she didn’t believe she could afford to hire a corporate lawyer. She told me that she often felt a nagging sense of doom because of what she didn’t know. Eventually, an advisor made a mistake that cost Laura many months and many dollars to sort out and she decided she was done. The unknowable risks associated with staying in business just became too high to bear. Anecdotally, I hear about this problem more than you may suspect. A new client with a seriously thriving business just told me that because of the remoteness of legal rights and remedies, she had her trade secrets ripped off and had to settle a breach of contract suit with a client who reneged.

Impenetrable rules. The law hides in crevices; the information entrepreneurs need about compliance is either locked away in a stilted 10-volume treatise or in a lawyer’s head for $500 per hour. Have you ever tried to figure out how to manufacture a kid’s crib? What about how to write a warranty for a table saw? Or, just get a plain old business license to operate an office in Chicago – with a fire alarm? The regulations for the kid’s crib will be governed by the Consumer Product Safety Commission with regulations that require legal, business, importation and engineering knowledge to understand the delicate mixture of materials, testing, certifications and shipping necessary to make it and sell it in the U.S. The table saw could be a lightly regulated commercial product, unless you intend to sell it in hardware stores – in that case, you have to follow federal warranty law under Magnuson-Moss and the FTC; worse, your ability to limit certain damages will depend on state law. And, state products liability law will probably obligate you to include warnings against using a thumb against the blade while it is moving. There will also probably be industry regulations and standard weight and measure guidelines. As for the city business license, there are several types of licenses you may need; which ones could vary depending on which bureaucrat you are talking to at the moment. One thing is certain (though unclear): you need a separate license for your fire alarm.

None of this information is available all in one place. In fact, there isn’t even a recognized way to organize the information even if it is assembled. That is actually why I wrote Birth to Buyout: to create a way of organizing the information and to compile – if nothing else – (1) the questions that need to be asked by a business and (2) a head start to get the answers.

Regulation Needed. I believe to my core in smart, fair regulation. Businesses unregulated by an impartial observer would be like football played without rules, sidelines and refs – a chaotic death match. You may hate the regulation that keeps you from exagerrating about your products, but it also keeps your competitor from lying about them. The rules that limit your ability to dump waste into the river also allow you and your kids to dive off the side of a boat. Mandatory meat packing inspections that make food more expensive also make it safe to eat steak. We know what industrial America looks like without regulation: brown, thick air hovering over burning rivers.

Clarity is Critical. But, there is a real problem with the regulations we have. Even the smart, fair regulations make little sense. Trouble sleeping? Go here and read the rules that tell you what you have to say to the world when you go public and how you have to say it.

If you don’t want a nap right now, here is a tiny sample from these rules:

I had this fantastic mentor named David Guin who taught me securities law (and just about everything else I know). David told me the only reason lawyers get paid so much is because we’re the only ones who will sit in a chair, wade through this molasses and interpret it for people. But, that means that your ability to grasp and follow these rules depends on your ability to afford a lawyer who will do the slog.

The opacity of laws and regulations poses a serious challenge to the emerging or struggling businessperson. The impentrability of the obligations suffocates commercial expression; worse, they stack the deck in favor of the companies that can afford lawyers. The laws and regs need to be rewritten, colorized, organized and/or visualized. I’ll offer some suggestions and some areas where that is happening in a few weeks. (The suspense is killing me.)

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Introducing Apple Pie Economics

By Coco on May 25, 2011 in Made in America

I am launching a series of articles called Apple Pie Economics to identify the obstacles that get in the way of the American entrepreneur. Apple Pie Economics was inspired by the stories I hear frequently about the games of high stakes Frogger that business starters have to play with the American economic system. Just to give you a flavor, I’d like to tell you about Laura.

I met Laura on New Year’s Day at a party. Laura told me she was glad to meet a business lawyer because she had some questions. I was deeply inspired by her story – here it is:

Five years before, Laura was a consultant at a big accounting firm married to an actor. Laura and her husband had two big professional problems: he couldn’t find steady, paid acting work; she, stuck in endless corporate meetings, was bored. Together, Laura and her husband decided to launch a business in Chicago to produce corporate meetings using actors as the facilitators. Although she was entering a crowded field, they planned to compete on quality and originality.

First, Laura created an environment of respect for the actors by treating them well and paying them better. Second, Laura hired an expert in industrial communications to contribute strategies and insights based on academic research into communications and learning patterns. Then, Laura applied her experiences in the corporate world to create novel, engaging programs. By honoring both the actors and the corporations who hired them, she coaxed better performances out of her actors and deeper participation from the corporate employees who attended the sessions.

From the beginning, her company was a smash. Her first client was a Fortune 50 company located in New York, who loved the work; good word of mouth brought more jobs.

“I expected my little business to go slowly and to take years to build, but it took off from the very beginning. I was overwhelmed, but I handled it and kept thinking ‘what a great problem to have’.”

The US needs more entrepreneurs like Laura to create jobs and create wealth. Most net new jobs get created by new ventures – so says the Kauffman Foundation, which looked at 40 years of census data to count the jobs created in America. (If you are interested, you can also take a look at the US Census Bureau’s analysis here, here and here. I plan to talk more about these numbers and what they mean in a later post.) Even though older companies create more jobs, they also cancel more jobs, which means that the new jobs created by startups are where we actually make employment gains. For instance, from 2007 to 2009, startups created 8,206,452 jobs. Existing companies did create 26,125,966 jobs during those three years, but they also canceled 35,347,539 existing jobs. That means that existing businesses terminated 9,221,573 more jobs than they made. But, startups almost made up for that deficit – almost. Here is a chart demonstrating the jobs created and jobs taken away.

In spite of the importance of startups to American employment, not only are there still doubters (e.g. this nuance-free, misleading post), our current commercial systems seem almost booby trapped to stop entrepreneurs in their tracks. Laura’s story highlights some of the mines.

After only six months, Laura had booked jobs across the country. Using her husband’s theater networks, she was able to produce meetings in different cities, using hometown actors, providing local flavor to her productions and jobs for communities of actors in and outside Chicago. After a mild dip in 2009, her business started to make real money and she felt creatively and intellectually fulfilled.

I expected Laura to ask me the standard business law questions about commercial insurance or negotiating. I didn’t expect her to ask me,

“What do I need to do to shut my company down?”

Laura had taken a new job with a big accounting firm; her first day was Monday. She is an employee again, and her employees are looking for jobs.

Apple Pie Economics will look at the obstacles in the path of the American entrepreneur. Some of those obstacles include:

Health insurance
Life without a net
A game “rigged for big”
Scarce funding
Hidden laws and regulations
Overpriced lawyers
Can’t do attitude

Our American core is entrepreneurial but our American economy is rigged against entrepreneurs. I believe this because I’ve spent over a decade working with entrepreneurs and I’ve seen the struggles they have endured or lost trying to make their dream go. Businesses must adapt or die; but, there are forces and accidents that are getting in the way of us living up to our entrepreneurial potential. I want to examine this, to gather the tools and advantages in the American entrepreneurial arsenal. And, I want to expose and propose fixes for the obstacles.

Over the next few months, I’m going to write about real challenges faced by entrepreneurs, how government can propel startup activity (and how they fail trying) and how you and I can do our part to help entrepreneurs start businesses and create jobs. And, we’ll also get back to Laura and the forces that ultimately propelled a successful, creative entrepreneur back to regular employment.

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How To Sell Groupon Coupons Without Losing Lawsuits

By Coco on May 4, 2011 in Business Law, Posts We Admire, The LAWdown

Did you know that some of the companies that have done these Groupon sales have gotten sued? The problem is the expiration date. For instance, I bought $200 worth of personal training sessions for $80 – 2 years ago, so my coupon has expired. Technically, I could sue, but I would be too embarassed to admit that I never called to make the appointment. Others, however, are not. To avoid those customers, read below.

Judie Rinearson, one of my old law partners at Bryan Cave, has written this business law article about how you and your company could make a Groupon-like promotion and comply with the law, all at the same time. It’s a terrific article and good legal advice. And so…

Avoiding Legal Traps When Offering “Groupon” or “Living Social”-like Discounted Certificates | BankBryanCave.

By Judie Rinearson – May 3, 2011

We have heard from many retailers and service providers who are interested in building up new business by offering a deeply-discounted “Groupon” or “Living Social”-like” promotional certificate program. This is how these work: emails go out to local residents letting them know, for example, that for $30 they can get a certificate worth $60 towards food at the French Bistro, a local restaurant. However, the discounted certificate almost always has a short expiration date: like a manufacturer’s coupon, the consumer must take advantage of the offer within a few weeks or months.

And that’s the problem. Of course, a short expiration date makes perfect sense from a marketing perspective. But these are different from the manufacturer’s coupons you get in your Sunday paper, because the consumer has had to pay for them. Even though the consumer pays less than full value, they are still paying. That is why, although these programs are highly popular, there has also been a spate of class action lawsuits because certain expiration dates may violate certain federal or state laws.

The good news is that there is a way to offer a discounted Groupon-like promotional certificate program, without getting on the wrong side of the law. Here’s how.

I. The Issues Under Federal Law.

In 2009, Congress passed the CARD Act, which among other things, regulates gift cards and gift certificates. Under the CARD Act, both open and closed loop gift certificates and gift cards are prohibited from expiring prior to five years from date of issuance.

However, there is an important exclusion for loyalty, award and promotional cards (referred to collectively as “promotional cards”). Expiration dates are permitted on promotional cards provided that the fact that it is a “promotional card” and the expiration date are both clearly disclosed on the front of the card or certificate.

The tricky part is making sure that your discounted gift certificate program falls within the definition of “promotional programs”. To meet the definition, the card must be issued to a consumer “in connection with a loyalty, award, or promotional program.” To make sure you can demonstrate that you have issued your discounted certificate in connection with an award, loyalty or promotional program, make sure you put appropriate language in your contract with your discounted coupon provider stating that the discounted certificates are issued “in connection” with a promotional program. Also, make sure you include on your website, advertising and other marketing materials language that confirms that the discounted certificate is offered in connection with a promotional, loyalty or award program.

So, when it comes to federal law, you can still have an expiration date on your discounted certificate as long as you clearly and conspicuously indicate on the front of your discounted certificate that it is a “promotional” or “award” or “loyalty” certificate, and the expiration date. In addition, since these discounted certificate programs are offered and purchased online, the “promotional” nature of the certificate and its expiration date must be clearly and conspicuously indicated in the actual offer (i.e., on the website page that displays the offer for purchase or in the email that advertises the offer). If you do all of this, and are as clear and transparent as possible (no hidden expiration dates; no mouse type disclosures), you should be reasonably compliant with federal law.

II. The Issues Under State Laws.

Just because you are compliant with federal law, don’t think you are off the hook. Unfortunately, a lot of state laws also restrict or even prohibit expiration dates altogether. Moreover, most of the state laws do not simply exclude loyalty, award and promotional cards in the same manner that the federal laws do. Instead, many state laws add an additional requirement; in order to be eligible for the promotional or reward card exemption, the consumer must not have paid value or “consideration” for the certificate. For example, although the laws from the state of Ohio do not permit an expiration until two years after issuance, there is an exception for promotional cards, but only if the card is “distributed by the issuer to a consumer pursuant to an awards, loyalty, or promotional program without any money or anything of value being given in exchange for the gift card by the consumer.” (Ohio Consumer Protection law – ORC §1349.61(C)(1) (emphasis added)).

The problem is this: While a promotional program is exempt under federal law, it may not be exempt under state law, because generally, in the Groupon-like discounted certificate program, the consumer has to pay a fee for the discounted certificate. There are a lot of states that have this kind of law on the books; you’ll need to check the local laws applicable in your state to know for sure.

So, how do you offer a Groupon-like discounted certificate without running afoul of your local state laws? The answer is simple, but it must be done right. You need to separate the paid gift card or gift certificate from the free, limited time, promotional offer. It works like this:

In our example, when the consumer pays $30 for the discounted certificate to the French Bistro, the consumer receives a $30 gift card or gift certificate that does not expire.
Together with the gift certificate, the consumer also receives a limited time promotional offer: for three months that $30 gift card is worth $60. However at the end of three months, the promotional offer (i.e, the doubling of the value of the gift certificate) expires. There is no reason why the promotional offer cannot expire.
However, even after three months, the consumer still has a $30 gift certificate that continues to be valid until it is used. The consumer never loses the value of the $30 that has been paid.

To make this work and to be effective against regulatory or class action claims, your online offer must disclose very clearly and carefully all of the terms and conditions, the expiration date that applies to the promotional offer, and, of course, the fact that the paid gift certificate or gift card does not expire, even if the promotional offer does.

With care in structuring the programs, and with good clear disclosures in all offers and marketing materials, these Groupons or Living Social-like promotional certificate programs can be a true win-win for both consumers and retailers.

If you have any questions on discounted promotional certificate programs, please fee free to contact us.

Judith Rinearson
Judith.Rinearson@bryancave.com
(212) 541-1135

Jennifer Crowder
Jennifer.Crowder@bryancave.com
(816) 374-3365

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THE 7 TYPES OF REGULATIONS

By Coco on March 9, 2011 in Business Law

Nearly every service, product and material has laws or rules about it that you should (and often have to) follow. Governments regulate products and services that have the capacity to injure: restaurant refrigerators, mutual fund ads and lawyers all follow rules to keep people physically and financially safe. But what do these regulations make you do? Here are the seven main types of regulations (PS in the trade, these are called “compliance.”).

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From Farm to Fork: The New Food Safety Bill

By Coco on January 17, 2011 in Business Law

FOOD SAFETY MODERNIZATION ACT

48 million people (1 in 6 Americans) get sick from food-borne illnesses every year – out of those people, 128,000 go to the hospital and 3,000 of them die.[i] Food dangers have increased because of the consolidation of food production and sale and increased imports and the law has not kept up to keep people safe. On January 4, 2011, President Obama signed the Food Safety Modernization Act, a giant step in making our food safer. Essentially, the new law asks all players in the food supply chain to protect the food while it is in their custody. Everyone in the supply chain, from harvest to sale, has a role now. Below are highlights of the people and their obligations under the new law.

1. Farms and produce companies

Farms and produce companies have a role in protecting the food, particularly through (a) complying with new harvesting standards; (b) watching the most wanted list of food hazards; and (c) ensuring that produce can be tracked and traced.

Harvesting Standards. Farms and produce companies will need to follow new national standards issued by FDA for producing and harvesting produce, including safety guidelines for specific fruits, veggies and agricultural commodities. As the rules are developed, FDA will be holding public hearings around the country and the public, particularly from the farming communities, should attend. Before that, however, the FDA will release the regulations in draft on its website and, once again, people who understand the burdens and benefits should comment.

Watch the Most Wanted List of Food Hazards. Every two years, FDA will also issue a most wanted list of the biggest dangers around foods and new regulations to avoid them.

Track and Trace Produce. FDA, working with produce companies, will create a way to track and trace fruits and veggies to pull contaminated food out of the market.

2. Trucking and transport

FDA will issue new rules on the sanitary transportation of food. Those rules are currently being developed.

3. Food production facility

Food production facilities bear the greatest burdens under the new food law.[ii] To begin with, food production facilities now have to register every two years (as opposed to the near continuous registration under prior law).

Find Hazards and Plan to Avoid Them. Food production facilities will have to evaluate their processes to find hazards, note the hazards and create controls to avoid those hazards. There will also be new recordkeeping requirements. Food production facilities will then have to make reports to the FDA on all identified hazardous practices and plans to fix them. The plans are due for implementation in 18 months.Food producers need to update the plan every 2 years or sooner whenever you change suppliers, ingredients or processes. Companies that fail to do a hazard analysis and implement a prevention plan will have products deemed adulterated (and thus unlawful), subject to fines and penalties.

Avoid Illegal Additives. Food production facilities will also have to follow the lists of illegal additives or chemicals that get issued by FDA, Homeland Security and Dept of Agriculture.

Create a Terrorism Defense Plan. Food production facilities also have to implement processes to prevent intentional contamination. Some of the measures will probably include limiting access to production, background checks on employees, adopting tamper-resistant packaging and using sealed delivery trucks.

The Stakes for Failure

The Poor Guy Who Signs the Report. An individual in charge of the food facility has to sign the plan and report verifying that (a) the prevention program is in place; (b) the plan is adequate and effectively and significantly minimizes hazards; and (c) the plan is reviewed periodically to ensure its effectiveness. This verification puts the signor at risk of liability. Farsighted food producers will want to make sure their insurance covers liability under the Food Safety Modernization Act.

FDA Can Shut You Down. The FDA can now order a food product recall, suspend or shut down a food production facility if there is a probability of adverse health consequences or death. This is a big change, since before the FDA would have to negotiate with a food producer to get them to pull a bad product. The FDA will also be inspecting plants more frequently (no less than every 3 years for high risk facilities and every 7 years for lower risk facilities). If the FDA wants to see documents about a plant or hazard prevention plans, the plant has to produce them. The FDA can also detain food if it thinks it is adulterated or misbranded.

4. Supplement Makers

The FDA is going to issue new guidance on when an ingredient in a supplement is a “new dietary ingredient (“NDI”)” requiring NDI notice to the FDA and what proof of safety is required.

5. Grocery Stores

Grocery stores will now be obligated and deputized to alert customers about food product recalls. Store managers should stay abreast of requirements and sources of product recall information.

6. Food Importers

Reacting to the contamination of candy by a Chinese producer’s milk products, the Food Safety Act shines a flashlight on imported foods to make them safer. If you are an importer[iii] of foods, you will be required to put in place a Foreign Supplier Verification Program by January 5, 2013,[iv] ensuring that production facilities are certified in compliance with Good Manufacturing Practices and meet other FDA food-safety standards under the Food, Drug, and Cosmetic Act. That means that food importers will probably need to collect safety certificates from 3^rd party testers, just like manufacturers of kids’ products currently do. There will also be a list on the FDA website listing importers in compliance with these requirements.

The FDA will also be setting up offices in at least 5 foreign countries to work with government officials and food producers to improve the safety of their products.

Entry of imported food products into the U.S. may be expedited based, in part, on the facilities’ compliance history, the exporting country’s food-safety standards and regulatory capacity, and third-party certifications, among other things. This could ease the burden on importers and food manufacturers.

EXEMPTIONS

Small businesses that make food just for themselves, or who market most of their food directly to consumers, such as through farmers’ markets, bake sales, public events and fundraising events.
Small food processors that sell less than $500,000 per year and sell most products directly to consumers in producer’s state or within a 275 mile radius of where it was processed or harvested are exempt from the preventive controls/HACCP provisions in Section 103 of the bill, as long as they tell the consumer where the food came from.
Small farms that sell less than $500,000 per year and sell mostly products directly to consumers in the producer’s state or within a 275 mile radius of where it was processed or harvested are exempt from produce safety standards under Section 105 of the bill, as long as they tell the consumer where the food came from.
In addition, some small businesses will have more time to comply with some of the food safety rules. The FDA also has the power to tailor or exempt small businesses from the hazard analysis and preventive control requirements based on size and risk.

OPPORTUNITIES

Like all legislation, there are burdens and there are opportunities buried in the text. The new obligations discussed above present opportunities for business. Below are a few other potential opportunities.

For Insurance Brokers. Insurance brokers may want to ask food production clients if they want to review or purchase coverage for the signor of reports to the FDA.

For Trainers. A critical component of the Food Safety Modernization Act is an emphasis on training people around the country on food safety. The law provides for grants for training. These grant programs could become an area of opportunity for a government contract to provide training. Health and Human Services will develop a planned response to food borne illness outbreak, which could also open up opportunities.

For Consultants. The Food Safety Modernization Act will also require food production facilities and other players in the food supply chain to ramp up their work with consultants to provide the hazards analysis and prevention plan.

Miscellaneous. The law requires Health and Human Services and the department of Education to create food allergy management guidelines. Grants are available to implement these management guidelines in schools. Leading companies test high-risk ingredients and require a combination of internal audits and well-executed third-party audits to check on safety procedures used by suppliers. The produce track and trace program will be an enormous public/private collaboration, requiring all kinds of things, such as tags, databases, technology and documentation.

[i] Centers for Disease Control and Prevention

[ii] There will be no change in who is regulated by the FDA. Section 403 of the Food and Drug Act still divides food and agricultural products between FDA and USDA. Further, who is a “food production facility” is still defined under Section 510 of the Bioterrorism Act of 2002. Owners, operators, or agents in charge of domestic or foreign facilities that manufacture/process, pack, or hold food for consumption in the U.S. are required to register the facility with the FDA. Foreign facilities that manufacture/process, pack, or hold food also are required to register unless food from that facility undergoes further processing (including packaging) by another foreign facility before the food is exported to the United States. However, if the subsequent foreign facility performs only a minimal activity, such as putting on a label, both facilities are required to register.

[iii] Food “importer” is (a) the U.S. owner or consignee of the article of food at the time of entry into the United States; or (b) if there is no U.S. owner or consignee, the U.S. agent or representative of a foreign owner or consignee at the time of entry into the United States. 21 U.S.C. § 385(a)(2).

[iv] Foreign Supplier Verification Program includes compliance with Section 418 (hazard analysis and preventive controls) and Section 419 (produce standards); and (b) is not adulterated under Section 402; (c) is not misbranded under Section 403(w) (allergen labeling).

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