Small Changes <i>Can</i> Lead to Expensive Consequences

No one should be surprised by singer Jimmy Buffett's e-commerce success (in addition to his side gigs in music and in the restaurant business).

And it's no surprise, either, that his hit song, “Changes in Latitudes, Changes in Attitudes” highlights the risks that online firms face constantly after so-called typical business decisions: “nothing remains quite the same” ' including these companies' ability to conduct their regular business.

For many businesses, the advice that “a change would do you good” (in the words of Sheryl Crow) is terrifically good ' if costly processes of day-to-day and other types of business can be streamlined through e-commerce transactions.

After all, as has been well documented in this publication and elsewhere, e-commerce has helped many firms to cut costs, improve efficiency and provide immediate access to competitive intelligence.

Not All Perks, Though

But not everyone has reaped only benefits. Besides the many people in commercial sectors whose business model was decimated ' music sellers and travel agents, at the dawn of e-commerce, and, more recently, publishers of books and music ' sometimes that change can hurt any business and its people, and for no good reason.

Consider, for example, the recent case of a technology firm whose principals decided to relocate the company from New York to Pennsylvania, for everyday tax planning. At the corporate level, the move was done through a typical reincorporation merger, in this case, of the existing New York entity into a newly formed Pennsylvania shell company ' as plain vanilla as the practice of corporate law ever gets. Yet the business owner was shocked to discover that such “routine” tax planning would cost him his SSL certificate, a critical intellectual property right for any firm with any Web presence (such as most e-commerce ventures).

Why did this occur? Because of heightened post-9/11 security procedures, the firm that administered the company's SSL certificate, GeoTrust, initially refused to renew the existing certificate to the merger survivor, because of “discrepancies” in the company's information. As a result, GeoTrust required a potentially expensive opinion of legal counsel to assure it that the holder of the certificate (and the security that it provides) was still entitled to that benefit. The client's request said, in part:

You have been asked by your client to provide a legal opinion to aid them in obtaining a GeoTrust Extended Validation SSL Digital Certificate [see, http://en.wikipedia.org/wiki/Extended_Validation_Certificate]. The Extended Validation (EV) SSL Certificate standard is intended to provide an improved level of authentication of entities that request digital certificates for securing transactions on their Web sites. A new vetting format, which all issuing Certification Authorities (CAs) must comply with, ensures a uniform standard for certificate issuance. This means that all CAs must adhere to the same high security standards when processing certificate requests. (Author's note: for the non-systems administrators reading this article, the use of an EV SSL Certificate is indicated by the secure green address bar.)

Because of the heightened assurance level of this product GeoTrust must take added steps, as detailed in the industry standard CA/Browser Forum EV SSL Certificate guidelines http://www.cabforum.org/EV_Certificate_Guidelines.pdf.

Despite the length of this request, it was quite easy for the firm's counsel to satisfy, because its counsel had formed the company, and represented it continuously.

Of course, when dealing with corporate counsel, “easy” does not mean “cheap” or “free.” Unfortunately, the request for identity confirmation was couched as a request for an “opinion” ' which for lawyers means a specific, stylized document applying specifically stated laws to particular facts for a particular purpose. And because opinions are commonly used to sue law firms when a deal goes sour, a request for advice in the form of an “opinion” costs several times more than would a less formal format for receiving the same advice.

However, the desired opinion had nothing to do with law ' parsing through the above quoted language reveals that it simply is a request for confirmation of facts from a source perceived to be trustworthy (outside counsel for the certificate applicant). Notwithstanding the lawyers' warning that an opinion on facts should never be given, a letter meeting the detailed request from the SSL certificate-issuing agency was assembled, reviewed and approved by the law firm's opinion committee.

As a result ' a result for which the e-commerce firm had not budgeted anything, other than the actual filing fee (who budgets legal expense for what appears to be a routine permit renewal?) ' the firm spent several hours of legal time, and tremendous anxiety over what was initially perceived as a threat to the firm's existence. In short, a routine change ' and not even a technological one, such as a server relocation or similar critical job ' became a material expense, and a source of much unneeded stress.

State Regulatory Impact

Another example of how a routine, non-technical change created the specter of potential meltdown occurred in a firm engaged in a business highly regulated at the state level follows. In each state where the firm did business, licenses ' and annual renewal fees ' were required, several times over in many states because of acquisitions of subsidiaries over the years. As a result, a consolidation was planned to take advantage of the significant (seven-figure) annual cost-savings that would occur if only one set of such licenses had to be renewed each year. Another driving factor for the consolidation was the rapid adoption of information technology in the business, which had transformed many largely paper-based processes into highly automated ones performed at a central location rather than at separate offices, additionally enhancing the competitive benefits of the quickly achieved cost-savings.

As simple as that concept appears to be on paper, the proverbial devil was in the details. As the company had grown over time through acquisitions, it had relied heavily on marketing initiatives using new fictitious names, which the company is required to register in each state where it conducts business. That meant that when counsel analyzed the legal requirements for the consolidation, it had to compute the cost of updating those filings to match the desired final corporate structure. While none of the changes was substantively difficult, each change required many filings ' and the payment of more fees, particularly expediting fees to ensure that all of the simultaneous changes occurred in a timely fashion to satisfy the requirements of regulators in several states (the “to do” checklist itself was many pages long).

To complicate matters even more, the business had many contracts with other regulated firms, which, as is typical in many industries, could not be transferred without prior written consent. As if the thousands of dollars of filing fees (in a cost-saving deal) were not insult enough, the legal expense to analyze each contract to determine what consents would be required was itself a significant expense (albeit not enough to deter anyone from proceeding with the consolidation to achieve the ongoing annual savings from the licensing consolidation). As in the case of the merger affecting the ability to renew an SSL certificate, here, what appeared to the business executives to have the makings of a simple deal (and from a balance sheet perspective, it was uncomplicated) had costly legal ramifications.

PA Supreme Court Ruling

A recent Pennsylvania Supreme Court ruling, in a case involving a software firm that went through several structural and ownership changes while it was being sued by a client because its software failed to perform, illustrates a similar complication from corporate changes (as well as how longstanding legal rules can change without warning). In Fizzano Bros. Concrete Products, Inc. v. XLN, Inc. ' A.3d. ', 2012 WL 1020945 (Pa., 2012), the software licensee sued the second removed purchaser of the software developer's assets over the problems with the program. Although the purchasers of the developer's assets used standard contract language that stated it assumed no responsibility for the obligations of the original developer, the state supreme court allowed the case to proceed because a de facto merger could have occurred, even in the absence of any continuity of ownership. The court did not eliminate the obligation to show continuity to hold the transferee liable ' it simply allowed the claimant to show evidence of such continuity other than through traditional equity ownership. Here, the unexpected aspect of change was not in the way the licensor's business operated, but rather in the ground rules of liability. The court justified its break from precedent because of a desire to be “attuned to the transactional realities” of modern deals.

Not All Smiles, After All

Another case of a business doing something that seemed simple, and in accordance with common sense, illustrates yet a different aspect of how making changes to a business' basic form of operation can have unexpected consequences. In Goldberg v. Bureau of Professional and Occupational Affairs (bit.ly/IzzX6b), a 2011 Pennsylvania Commonwealth Court case, a dentist, Dr. Steven Goldberg, formed a professional corporation with the name American Dental Solutions, PC, that did not include his own name (e.g., Dr. Steven Goldberg, DMD, PC). Presumably, he chose that name for marketing purposes, including online marketing ' “Dental Solutions” is much more likely to be returned in a search than “Goldberg.”

Because he did business under the exact name of his professional corporation, Dr. Goldberg apparently did not see the need to register a fictitious name with the state corporate bureau or with the state Board of Dentistry, which was his undoing. Even though he practiced under the exact legal name of his entity, the court reasoned that because that name was not the name of the licensed individual dentist, he was still required to register the name of his professional corporation as a fictitious name with the Board of Dentistry. Although one member of the appellate panel wrote a lengthy dissent on the bizarre ruling, it was to no avail. The court applied a literal (and seemingly nonsensical) interpretation of the regulators' name rules to sanction the dentist and his corporation for using a prohibited name.

Clear Messages

Fictitious Names and Marketing

For e-commerce firms and their counsel, the lesson is clear: When trying innovative marketing concepts, whether as simple as using the name American Dental Solutions rather than Dr. Steven Goldberg, DMD, PC, carefully analyze the firm's obligations under contract, under applicable regulations and under common law, to be certain, to the extent possible, that whatever benefits the entity expects to realize from the program do not trigger new registration or other legal obligations.

While an intermediate appellate court decision on a non-technical issue such as a dentist's office name may seem irrelevant to e-commerce firms, I think that it instead stands for the proposition that firms planning any change, no matter how small or seemingly within the rules, must plan for change, and even more so where e-commerce and the Internet are involved.

'Structural Changes'