The High-touch Legal Services® Blog • For Startup/Early-stage Companies

I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.

Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?

A. According to CEB’s Selecting and Forming Business Entities, 2d ed., Section 11.19:

• As a member-manager, you have a fiduciary obligation to the LLC and the other member that, among other things, precludes having an adverse interest (which is what the competing store would be).
• Assuming that you can resign as manager while retaining your membership (one would need to look at the Articles of Organization and the Operating Agreement to determine whether and how this is possible), CA law would not impose a fiduciary duty on you, but courts have held in analogous situations (limited partners in partnerships) that a fiduciary obligation can exist under certain circumstances (such as access to confidential information).

In summary, I see no way you can compete with the LLC with complete safety. If you cannot agree upon a buyout amount, dissolution might be the best way to proceed – please see the post at the link below.

Q. Our op. agreement is a tiny legalzoom thing, so why wouldn’t I be able to resign as manager?

A. My concern is that the Articles of Organization (apparently) state that the LLC is managed by all of the members. While I know of no statutory or case authority on this point, it may be that the only way for you to resign properly would be to amend the Articles to specify that the LLC is managed by one manager (the other member).

Related posts:

• Can I form an LLC without a lawyer?
• How to Kill Your Company when that’s the Only Choice

Photo credit: Rafael Reverte via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

The evening of Wednesday, March 10, the Silicon Valley Association of Startup Entrepreneurs will present “Demystifying VCs: How to Make the Right Impression” at the beautiful Crow Canyon Country Club. Tasty buffet dinner included!

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

I recently answered a LinkedIn question about whether providing Software as a Service (SaaS) is considered a “distribution” under the open-source GNU General Public License. The question and answer are reproduced, in slightly edited form, below.

Q. Is hosting a software as a SaaS offering considered as ‘distribution’ under GPL / LGPL open source licenses?

A. I believe that SaaS hosting is not intended to be considered distribution.

To start, please note the following from A Quick Guide to GPLv3:

GPLv2 talks about “distribution” a lot—when you share the program with someone else, you’re distributing it. The license never says what distribution is, because the term was borrowed from United States copyright law. We expected that judges would look there for the definition. However, we later found out that copyright laws in other countries use the same word, but give it different meanings. Because of this, a judge in such a country might analyze GPLv2 differently than a judge in the United States.

GPLv3 uses a new term, “convey,” and provides a definition for that term. “Convey” has the same meaning we intended for “distribute,” but now that this is explained directly in the license, it should be easy for people everywhere to understand what we meant. There are other minor changes throughout the license that will also help ensure it is applied consistently worldwide.

Then we have the following from Section 0 of GPLv3, itself:

To “convey” a work means any kind of propagation that enables other parties to make or receive copies. Mere interaction with a user through a computer network, with no transfer of a copy, is not conveying.

I assume that your SaaS setup merely allows use of the software, without transferring a copy, thus SaaS hosting does not constitute conveying and was not intended to constitute distribution.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

California’s budget crisis is affecting how quickly entrepreneurs can form their business entities: Standard turnaround time for hand-delivered Articles of Incorporation now is close to four weeks. (The situation for limited liability companies [LLCs] is better at two weeks, though still much longer than it was just half a year ago – see LLC Formation in Record Time.)

According to the filing service that I use in Sacramento, this is the worst turnaround time they have ever experienced and is attributable to the Secretary of State not filling empty staff positions because of the State’s budget problems.

Fortunately, if quick turnaround is important, 24-hour expedited filing is available for an additional fee of $350.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

This past December, a Missouri Court of Appeals held that a user was bound by a website’s terms and conditions, even though she was not obligated to click to signify assent to those terms (Major v. ServiceMagic, Inc.).

The court noted that where a user is obligated to click to signify agreement to terms, such “clickwrap” agreements are routinely enforced. Where clicking is not required, a site’s “browsewrap“  agreement usually will be upheld if the user has actual or constructive knowledge of the terms and conditions before using the site.

On ServiceMagic’s site, next to each “Submit” button was a blue hyperlink to the site’s terms of use that stated “By submitting you agree to the Terms of Use”.  The court held that the terms were sufficiently conspicuous to be enforced.

The court distinguished Specht v. Netscape Communications Corp. In that case, when Netscape allowed users to download certain software, a reference to license terms would have appeared only if the user scrolled further down the page. The U.S. Court of Appeals for the Second Circuit held that the terms would not be enforced because users (a) did not receive reasonable notice of the existence of the terms and (b) did not unambiguously assent to those terms. (Interesting side note: The opinion was written by then Circuit Judge, now Associate Justice of the Supreme Court, Sonia Sotomayor.)

Bottom line: If you want your site’s online terms to be enforced, requiring that the user click to denote acceptance is best, but providing notice of, and a link to, the terms can suffice.

Related post: Changing Online Terms of Use? Be Sure to Give Notice First!

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.