In this week's episode Nasir and Matt discuss the Dumb Starbucks store that surfaced in Los Angeles, an NFL player voiding his contract for more guaranteed money, and employees at Starbucks questioning a disabled veteran with a service dog. They also welcome special guest Reggie Lal to discuss Ponzi schemes in real estate investing. Nasir and Matt then answer questions concerning when to get a nondisclosure agreement signed, whether a closed business can be sued, and how to handle a competitor slashing prices.
— Mark McCune (@MarkMcCune) February 8, 2014
NASIR: Welcome to Legally Sound Smart Business!
This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: Thanks for joining us this week again!
This is where we cover business legal news and answer some of your business legal questions.
What do we have first up today?
I think we have our coffee/Starbucks episode.
MATT: Yeah, this is heavily Starbucks episode. We’re going to book in today’s episode of Starbucks stories, but I’m sure many of you probably saw this first one and maybe some of you know the full story and some of you don’t.
For those that don’t, there’s a coffee shop in LA that opened up called Dumb Starbucks. It just mirrored a normal Starbucks but just had the word “dumb” in front of everything. The name, every single drink just had the word “dumb” in front of it. They even have the same Starbucks logo with just “dumb” in front of Starbucks. It was pretty much an exact mirror of a Starbucks.
For those of you that don’t know, basically, it was kind of a PR stunt done by this guy. Who was it? Nathan Fielder. He has a show on Comedy Central. Actually, he did some pretty funny stuff last year. I saw some of his show.
NASIR: I didn’t even know he was famous yet. I thought it was just he kind of just came out of nowhere.
MATT: Well, I hate to bring it up this early in the show, but the first episode I saw, he just does these crazy things. He went into a pizza place and he basically tries to do fake ways to generate more business and he offered a free pizza if you didn’t get your pizza within 30 minutes like the old Domino’s way. but the free pizza, he would actually deliver, these were like the size of a circle you would make with your hand – like, a very small circle.
NASIR: Yeah, because he didn’t specify what size.
MATT: Right, exactly. It’s stuff like that.
This story got a lot of press and people were asking about, “Is this legal?”
Dumb Starbucks came out – and, I guess, more so Nathan – he said, “It’s illegal because it’s a parody.” And so, there are use under the fair use that allow this to happen, but I don’t know if you know about the story or what your take is on this.
NASIR: When I first saw it, I assumed – and I think I’m correct on this – that whoever was behind this, they went through great trouble to first determine whether or not they were going to get away with it. I assume some attorney definitely advised him as to how to proceed, but I do see some loopholes.
Fair use under parody is a very difficult thing to do because you have to take each case specifically because – think about it this way – if you’re going to parody anything, you have to use the original mark. No matter what, you’re going to be actually using or infringing upon a trademark. And so, therefore, you have to make sure that not only does it serve its purpose – meaning it also has to be comedic, but also done in a way that is not commercial in nature. And so, the one concern I had with this is that, on Saturday and Sunday, apparently, he was giving out coffee – lines out the door, three-hour or four-hour wait – but he also had prices so it’s unclear whether he was actually selling the coffee as well because, if he’s selling the coffee, how can you argue it’s a parody because then you’re almost in the business of selling coffee which is the exact thing that trademark infringement is trying to prohibit when it comes to the protections for Facebook.
MATT: Yeah, and it’s closed down.
NASIR: Yeah, because it was just a temporary thing, obviously.
MATT: It was a temporary thing. Also, I guess the health department showed up and I’m assuming Starbucks called them and said they had shown up to this place. I’m sure they don’t have everything in order. But, on the weekend, they gave away free coffee. That’s why they had those long lines. It was just free coffee until they ran out.
MATT: My guess is they never had an intent to actually sell any coffee or do anything. Just poking fun at it. But the way they described it was it’s not a coffee shop. It’s actually an art gallery. That’s where the parody falls into the coffee you’re buying is actually art. It was really weird. It was all PR stuff. It’s not a real business trying to make money. Obviously, they aren’t making money if they didn’t even charge for anything.
NASIR: Yeah, if they’re not charging, then that’s a whole different story. Also, even with the health department, I wonder again if they’re just giving away free coffee, it’s the same thing if you have people come to your art gallery and you serve them coffee. You don’t need a health permit for that. I assume, in LA, they don’t have that kind of silly restrictions.
Again, I think you’re right – definitely, he found a fine line with the advice of an attorney to make sure that he found that fine line and, if he gets away with it, very clever. I know Starbucks set them a cease and desist letter, but I don’t think we know yet whether Starbucks is actually going to pursue anything, especially if they’re not using the mark anymore.
MATT: Their initial reaction was, “Hey, this is kind of funny, but you need to stop.”
Sticking with the comedy thing, it reminds me of when they do one of those roasts and the person that’s getting roasted, they’re laughing at the same time. If you take it too far, it’s like, “All right, you need to dial it back a little bit.”
It’s funny – just one more thing about this – he was on Jimmy Kimmel’s show this past week and he’s sitting there and he said, “You know, the health department came.” And I didn’t know this. “I could get up to six months in jail for operating without these licenses and stuff like that.” So, I don’t know how it worked out. It was at least interesting. I’m sure he accomplished what he wanted to accomplish and that was just make himself and his show more well-known.
I mean, if he was able to get on Jimmy Kimmel and get other publicity, I mean, it was all over online, if he had a show on Comedy Central, I assume that’s what the purpose was – to promote his show.
NASIR: Good for him to get some nice publicity. That’s fun.
MATT: Yeah, well, I’ll have to come up with my own idea for that.
NASIR: You can just put “dumb” in front of anything, I suppose.
MATT: Yeah, I know, I’m just trying to think of what business I’m going to do.
NASIR: Just don’t do Top Floor Legal. That’s all.
MATT: All right.
So, we’ll get into the first question. This comes from a tech company in Crowley, Texas.
“When should I get an NDA signed when speaking to people outside of my business?”
That’s a non-disclosure agreement.
NASIR: You know, I hate NDAs.
I know a lot of attorneys push upon it and I know a lot of people use them all the time. But I don’t like my clients signing them unless it’s absolutely necessary. Sometimes, you have to because it makes sense to, but I think they’re overused and the problem too is that, since they’re overused, the different templates out there are varying in nature, but sometimes they’re so general that it could also be used as a pretext to litigation. In other words, just to find something wrong to create a dispute because sometimes they’re so easy to be breached.
For me, a lot of times, especially tech companies, they have a startup idea or whatever and they want to protect it, even having that conversation. I mean, imagine you’re having a meeting with somebody and say, “Look, I have an idea, but you have to sign this NDA which basically says that I don’t want you to be able to talk about this idea or steal my idea.” It’s kind of a weird premise to starting a relationship in the first place. A lot of times, if you’re just protecting an idea, then – I don’t know – you have to really figure out what is the actual confidential information that you’re protecting.
MATT: I agree completely. I come from the stance of “what are you afraid of?”
You know, you think you share this with someone and they’re just going to steal everything, and they have the time, the resources, and everything to do it better. It also depends on who you’re talking to. When you’re talking to investors, I won’t even bother at all. They’re not going to do anything about it.
NASIR: Yeah, most investors don’t refuse to sign NDAs. It depends upon whether it’s an established business or not. If you’re sharing financials and things like that, then that’s different.
MATT: You don’t have to share everything. Talk more conceptually. You don’t have to give absolute specifics. Unless you’re dealing with an investor, it’s a little bit different. But, if you’re just talking to somebody else, share the cookie and not the recipe or something like that.
NASIR: I think you just made that up. I’ve never heard that. I’m terrible at idioms, but I do enjoy mesing them up.
So, the person is asking when they should use an NDA. To me, I have a couple of rules. One is to never sign an NDA unless it’s absolutely necessary. If you have ideas to protect, that’s fine. Have them sign an NDA, but make sure that it doesn’t affect your objective with the relationship. I think that’s also a priority. Don’t get too carried away because – remember – even with this NDA, you’re going to have provisions in there. At least a good NDA is going to exempt confidential information that may already be known in the public or be known to them before the NDA was signed or before a certain date, depending on what’s specified.
I think, for this tech company, if you’re sharing real confidential data or confidential information or information that, if it was public, would have an adverse effect to your business, then get an NDA signed. That makes sense.
At the same time, you know, a lot of times, there’s a mutual NDA. A mutual NDA is where both parties are saying that, “Whatever we disclose to each other is going to remain confidential.” A lot of NDAs are mutual. I would suggest not to use a mutual NDA unless the other party actually is divulging confidential information to you. Don’t use your mutual NDA as a standard NDA.
For example, an investor, a lot of times, that investor is not sharing confidential information of them. Again, just another reason not to give some pretext of a dispute or a lawsuit.
MATT: I agree completely. It’s good advice.
NASIR: Oh, thank you.
MATT: All right, let’s jump into the next story here for this week. It’s a little past the season.
NASIR: Yeah, football is over.
MATT: Football is over, but there’s a story that came out. Matt Cassel is going to void his contract. For those of you who don’t follow – I mean, I follow football pretty well, but I didn’t even know what team he was on this year because his career has kind of just gone downhill – basically, NFL contracts are crazy themselves. I won’t get into that just how they’re all set up, but he essentially was going to have a contract where he was going to get 3.7 million for next year. Only $500,000 was guaranteed, but he voided the contract because he believes he can sign another deal to get more guaranteed money. That’s kind of what I was hitting on when I said NFL contracts are just weird because you can sign these huge contracts and then a lot of times they can just cut players and not have to pay them money. It’s all about the guaranteed money.
NASIR: They always leave themselves an out. It seems like even Matt Cassel had some kind of out to get out of it.
One thing I like – this is more of a legal geek kind of perspective here – is they referred to an option and options are probably one of my favorite things to do in contracts from a business perspective because, when you have an option in your agreement, basically, you’re almost betting for the future. You’re pre-negotiating for something that’s going to happen down the line that a lot of times is an unknown.
A good example just to illustrate it is in a real estate lease. You have, let’s say, a five-year term and an option to renew for another five years – at a certain price, sometimes. And so, the cool thing about that is that you can pre-negotiate what that price is going to be five years from now and maybe, especially if the option is exercisable by the tenant, then maybe that fair market value is actually more than the price that you end up paying. And so, then you exercise that option and then you end up benefiting. But the best part is, if that fair market value of that rent is below the option amount, then you could just walk away from the contract or try to renegotiate with no problems.
They mentioned Vikings having an option to renew his contract which now is apparently voided by this Cassel guy – this Mad Cassel of the Vikings.
MATT: Yeah. I mean, options are pretty common. In professional sports contracts, you’ll see a lot of players sign a three- or four-year deal with a team option or a player option or a mutual option – you know, year five or whatever it is. It’s pretty common and the guaranteed money thing is common as well. It’s just pretty interesting because you don’t see a lot of guys do this – give up money. I guess it’s only $500,000 guaranteed, but it’s just an interesting decision. It’s similar to players who are going to be free agents. I guess it’s the same thing. They have contracts, they have an option, they climb the option and go into free agency again and think they can get more money. I know that happens in the NBA a lot. It’s a good way to blend sports and law here with the option in this NFL contract.
NASIR: Yeah, very interesting. I think it kind of shows you how creative you can get on these regular business deals. Sometimes, you have to think out of the box in order to hedge your bets and to manage your risk, you know, just in case X or Y or Z happens.
MATT: Yeah, teams sometimes get bet on these player options as well when they sign these long deals and guys are getting paid way too much and you know they’re not going to turn down that money.
NASIR: Oh well.
MATT: Let’s get into the next question. I do not know where this one is from, so I’ll just read the question.
“If my business is closed, can someone sue me?”
NASIR: I think we’ve covered this question possibly in the past – maybe not the exact same verbiage.
First of all, can someone sue you? Someone can always sue you. But the question and what you mean is, “Will I be found liable if someone sued me for a business that I already closed?”
I think it depends on whether you closed it properly or not. It depends upon how your business was held. Was it a sole proprietorship? In that case, we have an example of one of our clients whose husband passed away under a sole proprietorship and they owned a restaurant and they owned a building and so forth. But, now, because both the husband and wife were sole proprietors, even though the business is defunct, we have all these creditors going after them personally, individually, and they’re individually responsible because there’s no entity veil. But, if there is a corporation or LLC, you still have to make sure you dissolve that accordingly to make sure you’re not personally liable.
MATT: Yeah, and that involves paying your creditors. These questions are tough though because we just don’t have all the information. We don’t know what type of entity it is. We don’t know what they’re getting sued for. We don’t know if this was a creditor before or when they were dissolving or if they dissolved. There’s a lot of uncertainties with this, so it’s a pretty tough question to answer. But I think we did a good job just generalizing the process you would go through.
NASIR: I can’t remember if I covered it last week, but it’s so important, when you leave a business, to wrap it up properly. It’s such a frustrating thing because, a lot of times, people are closing the business because it wasn’t successful. And so, that means that you have an unsuccessful business that you’re going to have to pay extra effort, maybe even some money, in order to get out properly which is like adding salt to the wounds, right?
MATT: It’s essentially the same thing as a divorce. It’s a business divorce – well, in a way.
NASIR: In a way. A business divorce is a good example. You have to handle it properly.
MATT: I don’t know if we have anything for our break. Did you have anything for our break?
NASIR: Well, I don’t know if you want to give an update to P90X?
MATT: Still going strong.
NASIR: You’re still going strong? That’s good.
MATT: Yeah, this is Day 10. I think I’ll be able to make it.
NASIR: You said it’s a two-month program, right?
MATT: Three months. It’s 90 days. Three months.
Let’s jump into the next story here. This is close to home. Southern California Real Estate Investment – it was a Ponzi scheme. I guess these owners got in trouble for it.
Essentially, they bought property through mortgages and they raised money from investors to renovate the property and they would rent out the property. But the problem was, when they were securing this money from investors, they were misleading them into exactly what they were doing. I think a lot of people are familiar with how a Ponzi scheme works. Just draw a triangle and work your way down.
Have you encountered anyone that’s ever done this? Does it sound like something that you’re familiar with?
NASIR: I’ve gotten calls of victims that have actually gone through this, but I haven’t represented them at all. I think this demonstrates that it doesn’t matter how much legal protection you have, if the deal is not honest and the people that you’re working with are not good, you’re going to get into trouble.
Let’s get Reggie Lal on the land. I want to get him. He’s probably done a ton of investment real estate deals. I want to get his perspective on how you can pick apart a deal and how do you even know if you can trust the other party or not.
Hey Reggie! Are you there?
REGGIE: Yes, I am! I am.
Do you know, I get calls all the time on once they’re in it and it’s not going well – an investment, a potential investment – “How do I undo it? How do I get out of it? Help me!”
First of all, I feel very sorry for them. A lot of them are elderly. A lot of them have put up their life savings in hope of one last big run to kind of end the investment game with a big, big bang. Almost all of them follow a very similar pattern.
If you look at these things, usually, it’s done by operators offering unusually high returns. Who doesn’t want, you know, on a zero-rate environment of interest, who wouldn’t want 10, 12, 15, 20, 30 percent? That’s where you’ve got to exercise some caution.
NASIR: Yeah, the old adage – “It’s too good to be true.”
REGGIE: Exactly! Common sense has to prevail. A borrower can borrow against a secured asset like a home at four or five percent. Secured loans from a bank may run six, seven, eight percent? How can somebody possibly pay you 20, 30 percent? It just can’t be true.
NASIR: How is someone supposed to know what are the going rates like that?
REGGIE: First of all, get good advisors. Get people like Top Floor – good legal, good tax advice. You guys are more on the cutting edge just with the stuff on your blog, the people you talk to. Get someone to kind of look it over. I would suggest to all my students, before you write a big check, run it by at least two other people and have them bless it or shoot holes in it – your team of advisors, first and foremost.
NASIR: I’m still surprised that these guys get away with this. Well, apparently, they’re not getting away with it but, in a sense, they’ve gotten away with it for so long. This wasn’t the only real estate Ponzi scheme going out there right now. There was just another one on the east coast as well for just about the same amount of money. I’m still surprised people get fooled by this.
REGGIE: You know, they even have a TV show about it – American Greed. There is a pattern. You know, if you look at these things and kind of study it which I do for fun because I’m quite often asked help with them, there’s always prevailing patterns. The organizer or leader or fundraiser is typically a very charismatic person – usually someone that you go, “Wow! I want to be like them. I wish I had assets like them.” It’s always someone that’s very believable. Otherwise, you wouldn’t do it. The patterns follow. They offer you unusually high return. They typically don’t have much skin in the game – meaning their own money.
NASIR: That’s a good point,
REGGIE: They’re typically overleveraging. So, the investor pool is taking the top end risk – meaning there’s nothing left when it gets down to their turn. They’re taking most of the risk.
NASIR: Let me ask you one last question. I think this is a good one.
We get into a lot of situations. We advise our clients, when they enter into partnership agreements or going into business with anyone, they always ask us, “What kind of legal protections can you have?” One concern I always have is how well they know them and the actual person that they’re dealing with.
Now, you’ve done a bunch of real estate deals. I’m sure you’ve dealt with a number of different people in different capacities – whether as an investor or you’re investing or what-have-you.
In your perspective, how do you really engage that person to determine whether you can trust them or not with your money, with your business? What’s your process?
REGGIE: Terrific question!
One of my favorite saying is, “History is a great indicator of how things are going to go.” It has a way of repeating itself. Some basic questions, the sad part is we often will do more due diligence on a tenant that we’re about to rent to than we will to a fund that we’re going to invest hundreds of thousands of dollars.
NASIR: So true.
REGGIE: Because they’re so big, we think they’re great. Do some basic stuff like look at the deal. Does the deal make sense? What’s your collateral? What’s your operator like? What’s their past history? Do they have decent credit now? What’s their background? Do they have personal assets? Have they been through a serial bunch of challenges with credit, judgments, bankruptcy? What kind of an asset protection plan do they have in place? Is it super complex where you can’t reach them and they’re going offshore using multiple entities and crazy stuff? Are they signing for anything? Are any of the credits on their side? Can they guarantee any of it? Do some commonsense stuff.
NASIR: Very cool. I think that’s a great insight.
Reggie, do you want to give a quick plug for what you do and any websites or anything like that?
REGGIE: Yeah, I’m a local broker in the California area. I founded the San Diego Investment Club and I’m just the serial entrepreneur that is in venture capital – capital for real estate and things like that, short-term projects. Go to my website, you can find out more – BeTheSmartInvestor.com.
NASIR: All right, very good, and we’ll post that on our show notes as well.
Thank you so much for being on! I think that’s a really cool insight, especially how you know when to deal with somebody. I think that’s very important.
REGGIE: Thanks for having me on, guys!
It’s great to be on the Top Floor for once!
That was good. We should probably say a disclaimer that we did not ask for all those nice things he said about Top Floor Legal.
NASIR: You weren’t there. I totally coached him how to do that.
MATT: Oh. Okay. Well, I want to go on the record of saying I didn’t ask for that.
NASIR: Also, I’m also joking, just in case that wasn’t clear.
MATT: Here’s our last question for today.
“I found out a competitor of ours is price slashing like crazy. There’s no way they’re turning a profit, so I can only assume they are trying to weed us out. What are our options?”
NASIR: You know, this happens online a lot, especially with Amazon stores or eBay stores or what-have-you. You’ll have nice business and, all of a sudden, someone else will come into the market and just be undercutting you. Of course, the nature of online shopping, you can easily see the difference in prices. Of course, people are just going to pay the cheaper price if it’s the same product, but what are their options? I don’t think they have any. I think there is something called predatory pricing which is what you’re describing, and I suppose if that competitor is a huge conglomerate then there may be some anti-trust issues. But, in the United States, anti-trust laws are for the protection of consumers and not for the business owners. And so, first of all, anti-trust litigation is a very difficult thing to go forward with, but you’re going to have a hard time convincing a court that a competitor that is lowering the price to put you out of business is somehow bad for the consumers because, well, they have a low price. You’d have to show that, somehow, they’re so huge that they’re just trying to get you out of the business. once they get you out of the business, they’re going to hike their prices up which I guess may be the case, but I think it’s unlikely.
MATT: Yeah. I’ve worked on anti-trust cases before. It’s pretty tough to show this and prove it. It’s very fact-intensive. I guess another thing, another option would just be – you know, this obviously depends on the situation – maybe you just wait it out and see what happens. If they’re operating with significantly lower prices, they’re probably not even turning a profit. They’re probably taking a loss. Maybe you sit around. Yeah, you might get less customers, but your competitor is also losing money instead of making money. Like I said, it all depends on the situation.
One of the most common spots I’ve seen this is gas stations that are right across the street from each other.
NASIR: Yeah, that’s true. Do they ever lower it to a point where they lose money? I mean, you always hear that, every once in a while, gas stations are giving it some crazy low amount just to get more attention on the news or something.
MATT: Well, from what I understand, gas stations don’t make money on the gas. They make money on all the other stuff – basically, what’s inside of the store.
NASIR: They make money. It’s just a thin profit margin. It’s not like they’re selling it wholesale. It’s just not as much as people think it is.
MATT: I guess the pricing is driven by demand a lot of times. People I’ve talked to before in the industry who’ve owned gas stations say you’re pretty lucky to break even at times. It can be pretty bad. But I’m sure there’s lots of gas stations out there that lose money if they try to do this sort of tactic.
Well, I think we answered that for him.
NASIR: Yeah, pretty much give up your business. That’s the only option.
MATT: As promised, we started with a Starbucks story and we’re going to end with a Starbucks story.
NASIR: I like how you’re saying it like people were anxious to get to the last Starbucks question. We’re delivering.
MATT: This is also a Dumb Starbucks story but not the same sort of dumb, and this is my opinion, of course – 100 percent my opinion. This is based out of Houston – a Houston Starbucks. I guess they had a guy come in. He’s an Iraq war veteran, had an amputated leg due to bone cancer. He had a service dog with him. He tried to go into this Starbucks and they basically stopped him at the door and told him – let’s see. I can’t remember if they told him that dogs weren’t allowed in. They definitely asked him questions they weren’t allowed to ask him as well which, apparently, if you have a service dog, they’re very limited on what they can ask you. I guess it is, “Is the dog a service animal required because of a disability? What work or task has the dog been trained to perform?” Yeah, because you can’t ask about the disability. Basically, everything else you can’t ask and that’s what they did here.
NASIR: Why even get to number two? I understand, okay, you have no-pet policy. But if they’re a legitimate service animal, I won’t even go further than that to determine what task or work the dog has been trained to do because who cares? Even if you don’t think it’s legitimate, what’s interesting is this guy was in the area to speak about the benefits of service animals. It’s like the worst-case scenario. You have an Iraq war veteran. He has an amputated leg and he’s there as an expert to talk about service animals. And then, this Starbucks employee asked him these questions. Did you go over the questions? “You’re not blind. Why can’t you pick up things from the ground yourself?” It’s so crazy!
Starbucks had a good response, though. I mean, obviously, they’re welcoming to service dogs and so forth, but this is just poor training, frankly.
MATT: Yeah, I don’t even know what to think about this. I agree with you on the questioning, too. What does it matter? Is this dog a service animal? Yes. Okay. There’s no reason to know what work or tasks the dog has been trained to perform. I don’t even see how that’s applicable in any situation. But definitely don’t do what they did.
NASIR: This is similar to even an employer context from an anti-discrimination for disability aspect. You can maybe ask what tasks they’re limited to do, but you can’t ask what their actual disability is. I know that’s strange but there is a difference. I know Starbucks has a – I don’t know if it’s rigorous – extensive training program and I almost want to say that it’s very unlikely that they did not cover this. Maybe that employee just missed that day or wasn’t paying attention.
MATT: Yeah, they’re definitely known as a company that trains their employees pretty heavily and there’s always a rotten apple in the bunch. There we go, I’ll do it for you.
NASIR: I thought the apple doesn’t fall far from the tree.
MATT: That’s if all the employees did that.
NASIR: Okay, that’s true, all right.
Well, let’s just end this episode. It’s starting to just tear apart at the seams. That’s an idiom, too.
MATT: Yeah, it’s derailing pretty quickly .But we didn’t tell them, you know, if you have your own question, you can send it in to firstname.lastname@example.org.
NASIR: So, do that and make sure you give us information. For example, the last question, there wasn’t enough details for us to really give that person the answer they were looking for.
MATT: Yeah, you don’t have to give every single detail, but at least what kind of company we’re dealing with, where it’s located, because those are pretty important in answering the question. If not, we have to be general.
NASIR: Matt’s only saying that because he doesn’t want to read long questions, by the way.
MATT: Ten words or less.
NASIR: All right. Well, thank you for joining us and have a good week!
MATT: And keep it sound and keep it smart.