Pitfalls of Generative AI*

The use of artificial intelligence (AI) has quickly become mainstream for businesses of all sizes. AI assists businesses and their owners in communicating with customers and the public, promoting goods and services online, and streamlining internal processes by aggregating company data.  It’s no surprise that the technology has yet to be perfected, and the pitfalls go beyond AI images of six- and seven-fingered hands.  Here are some basic considerations for your commercial use of the technology.

Accuracy Matters

AI will certainly provide you with a product, but it may not be correct. A generator will pull information and data from many sources, and perhaps none from your own business. More than just proofreading, you should ensure that the end result is an accurate representation of the product or service that you offer. If customers are enticed by features that AI imputes to your product or service but do not exist, you risk claims of misrepresentation. It is also imperative to check that AI is not describing warranties or guarantees that you don’t offer customers.

Protect Your Data

If you use a platform that either pulls information from your business or has access to it, you may compromise that data. Many businesses go to great lengths to protect trade secrets and other information that become valuable business assets. To the extent that your business maintains secret or confidential information related to products, methods, pricing, market research or customers, the legal benefits of that confidentiality may be lost if it is made available to third parties, like an AI provider. Research the efforts (if any) used by the provider to protect your information and evaluate with your counsel whether you lose the benefits of trade secrets or confidential information by making it available.

Theft On Your Behalf

As stated above, AI pulls information from many sources.  Some of these sources may be protected by copyright or may otherwise be protected by law. Chances are you will never know whether the material generated for your business was stolen from a protected source.  But that source might, even through simple web searches, and that exposes you to liability for use of someone else’s intellectual property. If you are paying for your business’s AI services, be sure that your provider agrees to indemnify you for any legal action or threatened action against you for using someone else’s data.

Regardless of whether you are paying for AI services or not, consult your legal counsel and your insurance professionals to discuss your legal exposure and possible coverage for a loss.

* No artificial intelligence was used in the creation of this article.

Jeffrey R. Schmitt

Posted by Attorney Jeffrey R. Schmitt. Schmitt represents businesses and individuals in commercial litigation matters including banking and finance, real estate, condo and homeowners’ associations, professional liability defense, title disputes, transportation, and pension and retirement plans. https://www.dannamckitrick.com/jeffrey-r-schmitt/

Updated Information on the FTC Non-Compete Ban

A federal court has issued a final order declaring the FTC’s ban of non-compete agreements invalid.  The federal district court in Texas held in its final order that the rule was “arbitrary and capricious” and exceeded the FTC’s statutory authority. As a result, the FTC cannot enforce the rule against any employer, anywhere in the country, and there is no longer a nationwide ban of non-compete agreements.  While there is no nationwide ban of non-compete agreements, it is important to keep in mind that several states have fully banned non-compete provisions (California, Colorado, Oklahoma, North Dakota, and Minnesota), and many other states have banned non-compete provisions in certain circumstances.  Just as one example, in Illinois, non-compete agreements cannot be enforced against employees unless they earn at least $75,000, and there are specific statutes restricting enforcement in certain industries, such as construction, healthcare, and broadcasting.

The FTC may appeal this judge’s decision and it is always possible that there will be future attempts to ban non-compete agreements by rule or law. Therefore, we highly recommend considering other strategies for protecting your company’s proprietary information, such as non-solicitation agreements, confidentiality agreements, and trade secret enforcement. Feel free to contact us if you have any questions or would like to discuss more.

Learn more about this update by viewing the video FTC Ban on Non-Competes Blocked by Federal Court in Texas.

For details on the FTC ban on non-competes, go to Navigating the FTC’s Non-Compete Ban: Strategies for Protecting Proprietary Information. You may also view the video here: FTC’s Ban of Non-Compete Agreements. Continue reading »

Understanding the FLSA’s New Salary Test

The Fair Labor Standards Act (FLSA) sets minimum wage and overtime requirements for employees. The overtime requirement requires employers to pay at least one-and-one-half times the hourly rate of the employee for each hour the employee works over 40 hours in a regular work week.

However, certain employees may be exempt from the overtime requirements if they qualify as meeting three tests:

1. Job Duties Test;
2. Salary Level Threshold Test, and
3. Salary Basis Test.

The FLSA does not define those tests. Instead, the U.S. Department of Labor (DOL) is directed to define the exemptions and modify criteria from time to time with regulations.

The Job Duties Test specifies certain duties that the employee must perform if the employee is to be classified as an executive, administrative, professional, outside salesperson, or a computer-related occupation. Additionally, highly compensated employees are also eligible if they fit within a specific job duty test. These employees must all meet the Salary Level Threshold Test and be paid a predetermined and fixed salary that is not subject to reduction (Salary Basis Test). Continue reading »

It’s Now Easier to Prove Discrimination With Job Transfer or Other Change in Terms or Conditions of Employment

Jaytona Muldrow was a plainclothes sergeant in the St. Louis City Police Department’s specialized Intelligence Division. In connection with her duties in the Intelligence Division, Muldrow was deputized as a Task Force Officer with the FBI and was granted FBI credentials and an unmarked take home car. When a new captain was assigned to supervise the Intelligence Division, the Police Department transferred Muldrow from the Intelligence Division (at the new captain’s suggestion) to a uniformed position in the City’s 5^th District, supervising the day-to-day activities of neighborhood patrol officers. While Muldrow’s rank and pay remained the same, her responsibilities, perks and schedule did not. She no longer worked with high-ranking officials in the police department, lost her FBI credentials and the take-home car, and had to work weekends (while in the Intelligence Division she worked Monday through Friday).

Muldrow filed suit against the City of St. Louis under Title VII of the federal Civil Rights Act in the federal District Court for the Eastern District of Missouri, claiming she was transferred because she was a woman. The District Court granted summary judgment in favor of the City, holding that Muldrow’s transfer did not cause her a materially significant disadvantage, as it did not result in a diminution of her title, salary or benefits and had caused only a minor change in her working conditions. The Eighth Circuit Court of Appeals affirmed the decision of the District Court.

In Muldrow v. City of St. Louis, issued April 16, 2024, the U.S. Supreme Court reversed the decision, holding that it was not necessary to show that an injury resulting from an action taken by an employer because of an employee’s protected status (e.g., sex, race, religion, or national origin) resulted in significant injury. Instead, Justice Kagan, writing for a six-member majority of the Court, stated that “an employee must (only) show some harm from a forced transfer to prevail in a Title VII suit…” (emphasis added). This same standard of “some harm” will also apply to any other change in the terms and conditions of employment made as a result of the employee’s protected status. The other three justices each wrote opinions concurring in the result. Continue reading »

Contracts: The Importance of “Boilerplate” Clauses

In business, the word “boilerplate” is often a negative term. However, common contractual clauses, or “boilerplate” clauses, are often significant and helpful. They should not be overlooked or dismissed.

Attorneys’ Fees and Expenses

One common boilerplate clause relates to an aggrieved party’s ability to recover attorneys’ fees and expenses that they have incurred as the result of the other party’s breach of contract. Generally, U.S. courts follow the “American Rule,” which means that each party to a lawsuit will bear their own attorneys’ fees and costs, regardless of the outcome of the case. A common boilerplate clause allows for such an aggrieved party to recover the attorneys’ fees and costs that they have incurred because of the other party’s breach of contract.

Notably, the presence of such an attorneys’ fees clause can be particularly helpful even in cases of lesser value. For example, one party to a contract owes the other party $10,000 and refuses to pay. Employing an attorney to file suit to recover that $10,000 will be very expensive relative to the amount that might be recovered. In fact, if there is any complexity to the case, then hiring an attorney can quickly become prohibitively expensive – without an “attorneys’ fees” clause.

Providing Notice

Clauses relating to the methods for providing “notice” to the parties can also be helpful and significant.  They can determine to whom notice must be given, how the notice must be given, or when the notice is deemed given.

State Law Applied/State for Litigation

Often transactions or agreements will span multiple states. In such cases, helpful clauses include determining which state’s law will apply or in which state the dispute will be litigated. Continue reading »

Changes in Missouri Law Regarding Restrictive Covenants in Business Sales

Authored by Ruth Binger with assistance from Kristina M. Stevenson, contributor

Recent changes in Missouri law have impacted the enforceability of restrictive covenants in the sale of businesses, particularly those involving business entities and owners. These modifications, detailed in Revised Statutes of Missouri (RSMo) 431.204, arguably reduce protections extended to business purchasers.

Effective August 28, 2023, a covenant prohibiting solicitation of employees between a business entity and an owner cannot extend beyond a two-year period following the termination of the owner’s affiliation with the entity. Essentially, this means that after two years from the sale of their business, an owner is permitted to solicit employees previously associated with the entity.

Moreover, the revisions have introduced more stringent conditions for covenants prohibiting the solicitation of customers. These non-solicitation covenants must now be limited to customers with whom the owner had prior dealings and cannot extend beyond five years after the owner’s termination of business ties with the entity. This adjustment opens the door for sellers to solicit customers they had not previously interacted with. Continue reading »

Employee or Independent Contractor Classification under the Fair Labor Standards Act Effective March 11, 2024

The U.S. Department of Labor (DOL) has modified the Wage and Hour Division Regulations to replace its 2021 analysis for determining whether a worker is an employee or independent contractor (Final Rule). The previous test gave greater weight to control and opportunities for profit and loss.

Effective March 11, 2024, under the Final Rule the employee or independent contractor classification determination will focus on the economic realities of the worker’s relationship and whether the worker is either economically dependent on the potential employer for work or is in business for himself. In short, is the worker dependent upon the business to which it renders services for work?

Economic dependence does not focus on the amount of income the worker earns, but rather whether the worker has other sources of income from other customers. To determine economic dependence, the DOL assesses seven factors and conducts a totality-of-the-circumstances analysis. No one factor carries more weight. The DOL looks at the working relationship, the workplace, and the particular industry.

Under the Final Rule, Section 795.105, DOL, uses the following tools and/or factors in its determination: Continue reading »

CTA Reporting Requirements Have Begun!

Reporting requirements for affected entities under the Corporate Transparency Act (“CTA”) went into effect January 1, 2024. In our article “Be Sure You’re Ready: The Corporate Transparency Act is Coming Soon!,”  we provided detailed information on the CTA’s applicability and reporting requirements. Now that the CTA is in effect and entities must report beneficial ownership, let’s take another look.

The Facts About the CTA

• The CTA is a bipartisan act passed in 2021 by Congress to create a beneficial ownership information reporting requirement because many states, including Missouri, do not have requirements in place to collect beneficial ownership information of certain entities. An estimated 32.6 million entities are affected by the CTA.
• For entities already in existence prior to January 1, 2024, that do not qualify for any of the 23 exemptions available, Beneficial Ownership Interest (“BOI”) Reports are due by December 31, 2024.
• New entities formed in 2024 are subject to a 90-day BOI Report filing deadline (extended from the original 30-day deadline). Entities formed January 1, 2025, or later are subject to a 30-day BOI Report deadline.

How and What Does an Entity File?

• An entity can file its own report – at no cost – on the Financial Crimes Enforcement Network (“FinCEN”) website at https://boiefiling.fincen.gov/fileboir.
• Required information to be filed for an entity includes the legal entity name, any trade names or dbas, the principal place of business address, and all taxpayer-identification numbers issued to the entity.
• Owners of at least 25% of interest in the entity and those with substantial control of the entity must report their legal name (including middle name), home address, date of birth, unique identifying number from an accepted identification document (generally a state-issued driver’s license or passport), name of the state or jurisdiction of the identification document, and an image of the identification document.

Who Has Access to Filed Information?

• FinCEN’s database of entities will not be freely accessible to the public.
• Federal, state, local, and tribal officials, as well as certain foreign officials, may submit a request for information for authorized activities related to national security, intelligence, and law enforcement. If a reporting company consents, certain financial institutions may be granted access in certain circumstances. For more information on access, please visit FinCEN’s website at https://fincen.gov/boi.

Cue the Scammers Continue reading »

What to Do If You Might Have Been Ineligible for the Employee Retention Tax Credit Claim

The COVID-19 Pandemic was cause for many new programs to be created by the U.S. government to keep businesses afloat and employees retained in unprecedented times. One of these programs was the Employee Retention Tax Credit (“ERC”) which incentivized employers to retain employees while business was down. The program was available regardless of the size of the employer and included tax-exempt organizations.

To be eligible for the ERC, employers had to (1) be either fully or partially suspended by government order due to COVID during the calendar quarter or (2) have gross receipts below 50% of the comparable quarter in 2019.

The IRS began sending out letters in December 2023 to more than 20,000 taxpayers who received disallowed ERC claims. Letter 105 C, Claim Disallowed is being sent to a first group of taxpayers because the entities either (1) did not exist during the eligibility period (March 13, 2020, through December 31, 2021), or (2) did not have paid employees during the ERC’s applicable time period (ERC is a credit against qualified wages).

Letter 105 is being sent out to taxpayers prior to payment in an effort by the IRS to help ineligible taxpayers avoid audits, repayments, and penalties. Many employers were encouraged to file ERC claims by “promoters” who received monetary commissions based on approval. Issuance of a disallowance letter prevents promoters from receiving funds to which they are not entitled. Continue reading »

Five Common Mistakes Business Owners Make When Organizing an LLC in Missouri

1. Not Having an Operating Agreement

An Operating Agreement (“OA”) is a crucial document that establishes the ownership of the LLC, the rights and duties of the company’s members and managers, and the operating rules for the company. While the OA is not filed with the Missouri Secretary of State (“SOS”), it is required by law. Without an OA, your LLC runs the risk of losing its limited liability protection and the members of the LLC could be held personally liable.

2. Not Updating the Operating Agreement

The OA establishes the ownership of the LLC, how the LLC conducts its business, and how it is taxed.  There are several ways for an LLC to be taxed, including as a disregarded entity or an S-corporation.  Including this in the OA and acting in accordance with the OA are very important.  If tax status, ownership, or any other portion of the OA changes, it should be promptly amended to reflect the change(s).

3. Not Registering a Fictitious Name Used By the LLC

If an LLC transacts business in a name other than the legal entity’s name, that name must be filed as a fictitious name (also known as a “d/b/a” or “doing business as”) with the SOS. A fictitious name is any name business is transacted under other than the true name of the legal entity. For example, if the legal name of the LLC is “Flett Enterprises, LLC” and it owns a restaurant named “Andy’s BBQ,” the owner should register “Andy’s BBQ” as a fictitious name. If not, the owner(s) risk personal liability for operating “Andy’s BBQ” in their individual capacity. Continue reading »