Grounds for suing a business partner
Individuals forming a business partnership usually begin with optimism and big dreams. However, many soon learn that running a business is challenging on many fronts, regardless of the size or industry. Businesses are made up of unique people; just as every person is different, every relationship is different. Sometimes, circumstances arise when the business suffers, and therefore the relationships erode; sometimes, the reverse of this occurs.
In any case, circumstances sometimes prevent the business from succeeding, and the pressure gets to them and impacts their behavior. Other times, partners find that they simply do not get along. For this reason, many partnerships experience adversity, and not all necessitate legal action.
However, the partner’s infractions go beyond simple misunderstandings, and the person intended to violate the business, the partnership, or both. Therefore, using one’s business partner is often necessary in these cases, which include:
Violations of Intellectual Property
Some business partners violate their partners’ intellectual property rights, which is an actionable offense. For example, companies often own trademarks, patents, and copyrights. Partners cannot use this intellectual property without first getting company permission. Sometimes, a partner develops their intellectual property, and they have the rights to that property and must grant permission to someone for them to use it.
For example, Cory and Matt run a sneaker company called Sizzle out of Long Beach, CA. When they formed the company, Cory and Matt came up with a trademark symbol for the sides of each pair of sneakers. A year later, Cory found out that Matt runs a side business, where he uses Sizzle’s symbol to sell clothes and profit off of the sales.
Matt has violated Sizzle’s intellectual property, and in doing so, he has also taken advantage of his partner. Therefore, Cory has every right to file a lawsuit against Matt for this breach of his trust and the company’s insignia.
Contract Violations
If a company partner breaches contractual agreements, legal action may be justified. When creating a partnership, most individuals opt into various contractual agreements. These may include:
- An employment agreement
- A partnership agreement
- A non-disclosure agreement (NDA)
- A non-compete agreement
When someone violates one of these agreements, the victim is entitled to sue to collect damages. When two partners enter any contract together, they pledge to maintain the agreement and not violate it.
For example, Sara and Alexis run a tea shop in Los Angeles called “Tea Time.” When they formed the company, the two tea-enthusiasts signed many different agreements, and Sara did not keep very good track of the contracts. One of these agreements was a non-compete contract with very specific stipulations: even if the partners terminate the business, neither partner can open a similar business in LA for five years. In addition, the terms of a “similar business” were spelled out in the contract: no tea shops or stores, coffee shops, bakeries, smoothie shops, and more.
After a year, Sara tells Alexis that Alexis will be working fewer hours. Although Alexis is not happy with this change, Sara informs her that she needs to spend more time with her uncle, who is ill. Alexis accepts this news and begins working longer hours to make up for Sara’s absence.
However, when Alexis discovers Sara has no uncle, she is mystified. A few weeks later, Alexis discovers that Sara is opening a new tea shop one block away. Alexis is furious, and her anger is justified because her attorney informs her that Sara has violated the terms of the non-compete she signed. Sara refuses to close her shop, and Alexis has no choice but to sue Sara for a breach of the no-compete contract.
Theft or Fraud
When a company partner commits theft or fraud, they have not only taken part in a serious offense, they have taken something that is not theirs. Sometimes, business partners decide to steal property or money that belongs to the company or another partner.
Faced with these egregious actions, individuals can file a claim with the authorities in an attempt to regain their property or return the company property to the business. Since embezzlement, theft, and fraud are criminal matters, contacting the police and an attorney is essential. Sometimes, partners who commit these acts claim the lines between “company money” and their funds, but this cannot simply happen when running an honest, well-intentioned business.
Bill, Toby, and Kramer run a janitorial business called “Klean Ups” in Del Mar, California. After a year, Bill, in charge of finances, notices that the company’s profits are dipping lower and lower. So bill does some investigating and finds out that Toby has been siphoning five percent of the company funds away from the business and investing it into the stock market for his gains.
Bill and Kramer confront Toby, but when he attempts to justify his actions, they realize they must call an attorney and remove Toby from Klean Ups from Klean Ups before he does any more damage.
Breaches of Fiduciary Duty
Fiduciary duties are considered breached when one partner does what is best for themselves instead of doing what is best for the company first. For example, when business partners come together to form a company, they pledge that the business comes first. Sometimes, however, business partners place themselves first. When partners do so, usually, their actions are bad for business.
For example, Ziggy and Bunny run a “Toned and Taut” gym in Los Angeles, California. The pair made an excellent profit for a few years but began losing customers due to a surprising workout-at-home craze.
At this point, Ziggy starts using the gym to sell his healthy sandwiches and smoothies. Ziggy begins to sell his line of products during his shifts, and he doesn’t see any problem with the idea that he takes in all the profits. Meanwhile, Bunny must open, clean, and oversee the gym daily, and her duties multiply as she makes up for Ziggy’s lagging.
Because Ziggy acts wholly for himself and not on behalf of the business, he breaches his fiduciary duty. Ultimately, Toned and Taut go bankrupt, and Bunny sues Ziggy for the profits they lost out on when Ziggy was running the gym.
Just like breaching a contract, violating one’s fiduciary duty when involved in a contract is a serious action. In addition, breaching fiduciary duty typically harms the business and partner relationships.
Abandonment
Abandonment occurs when a partner leaves the company before dissolving it. Typically, a partnership agreement covers the appropriate dissolution of the company. However, if one partner violates the agreement by leaving the business, the other partner has the right to sue their partner.
Sometimes a partner decides to simply leave a struggling business, and the other partner is left to deal with the repercussions of their absence and the company’s failure. In addition, abandonment can leave the existing partner or partners stuck with debt, liabilities, or a long list of tasks to take care of to “wind up” the business.
In addition, abandonment may be considered an illegal action and can prompt a lawsuit.
When abandonment occurs, we suggest contacting an experienced attorney. Remember, business partners have rights under the partnership agreement they signed and the law.
The situations above are not the only times when legal action against a partner can be warranted. Although there are other reasons to take a business partner to court and different variations, these provide a sense of the most common situations. When such offenses occur, individuals should document the actions and words of the partners who act harmfully and contact a licensed attorney.
What Are Alternatives to Litigation for Business Partners?
Business partners who feel violated or feel the company has been violated should contact a breach of contract law attorney. Suing someone creates conflict, and if the goal is for the partners to continue working together, they should explore other remedies first. Likewise, lawsuits can negatively impact the company’s reputation, profits, and brand.
Of course, some situations deteriorate rapidly, and one or both partners realize they cannot continue working together. However, if the partners believe they can save the company and also that they might continue running it together, they can look to other options first. For example, mediation and arbitration are widely used solutions to disputes that offer privacy, affordability, and less risk of resentment and company dissolution.
Mediation
When business partners look to mediation to resolve disputes, they do so because it has proved highly successful in the past. Mediation emphasizes sincere negotiation and employs a neutral third party to help facilitate productive conversation.
The main goal of mediation is to cut through all the pretense and figure out exactly where the dispute lies. Then, the partners are encouraged to reach a solution. The next step is a hearing or a trial if the partners and mediator cannot find a solution.
Arbitration
Similar to mediation, arbitration takes place outside of a court of law. The process involves the partners who seek to settle their issues before a decision-maker who must remain neutral. This “arbitrator” can be a single person or a panel of individuals. The arbitrator must listen to the details of the case and then make an informed decision about the result.
Arbitration often works because it employs the same techniques as used in court but replaces a jury with an arbitrator and lowers the pressure on everyone. Often, partners get to see their problems in a new light and achieve clarity.
Alternatives to lawsuits not only exist, but they can also be effective. However, sometimes partners realize that legal action is the only answer. The court must resolve the business disagreement if arbitration or mediation does not work.
When Should Individuals Call a California Business Litigation Attorney?
At Nakase Wade, our California business lawyers and corporate attorneys help company partners identify and remedy problematic situations quickly.
If you are struggling with a business disagreement and considering a lawsuit, you need an attorney who has been through the process. Our lawyers are skilled professionals, and we deal with business disputes with a mix of compassion and realism. Our first concern is to ensure that you are protected from your partner’s actions and that your company is safe.
We will listen to the case details when you contact us and provide support and solutions. If your partner violates your rights or endangers the business, we will work quickly to mitigate any further offenses or damages. If you would like to try arbitration or mediation, we will answer your questions and ensure that you and your partner are set up for success.
When taking your business partner to court, we will be there with you every step, from consultation to the court of law.
Nakase Wade provides unparalleled assistance to those considering suing a business partner, as well as to individuals who have been sued by someone they are working with. Our business litigation lawyers and corporate attorneys will help you understand when it makes sense to take legal action and identify alternate plans.
Contact Nakase Wade today for a free consultation. We understand business disputes, and we want you to understand your rights.
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