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The Business of Selling a Business

By Brendan Mitchell

For business owners looking to sell soon, there is still plenty to be optimistic about.

Capital for purchasing businesses continues to flow thanks to low interest rates from banks and investment portfolios lingering near high-water marks.

Meanwhile, the Massachusetts economy has pushed to new highs from Boston to Springfield. Most recent reports show unemployment rates at historic lows, with both sides of the state making improvements. MGM Springfield and Encore Boston Harbor have attracted out-of-state plates. Private equity and public companies, both flush with cash, continue to show confidence in the state through investments in their workforce and current business as well as construction and new business acquisitions. We’ve seen national tax reform increase cash flows to businesses across the country.

These factors have helped to keep buyers engaged as retiring Baby Boomers head for the exits. The timing has been great for some business owners cashing out recently, but buyers have become more selective in some industries. While some businesses are snagged as soon as they go to market, many are aging on the shelf with buyers and sellers unwilling to bridge pricing gaps.

When figuring the value of their business, owners can fall into the trap of including sentimental value in their estimation. Some are relying on what a similar business sold for in a different market or, worse, have a target number they drew up without any real anchor to reality.

For business owners who have dedicated their lives to a business, it can be hard to take a step back and objectively consider what their business is worth. Business owners who are willing to take an objective look at the value of their business can be proactive now instead of reactive when they are ready to retire and list their business for the first time.

The value of a business is dynamic. While there is no way to get a buyer to price sentimental value into a purchase price, there is a potential to make changes to the business that will increase the value over time.

There are three approaches to valuing a business — asset, income, and market approaches. For most privately held companies, valuators rely on either the income approach, market approach, or a combination of the two. The basic formulas for these calculations are widely available online, but what owners can do with this information may be less obvious.

First, it’s important to know that the years leading up to the valuation or sale are the most important. A long history of profits can show stability for a small business; however, only the most recent three to five years are going to be considered in a calculation. Small-business owners with eyes on an exit have a tendency to disconnect from the business during this most important period when they should be pushing in the opposite direction.

Flat revenues or increases in expenses during this period have the potential to erase even decades of growth and profitability. Owners should resist the temptation to ‘pull the parachute’ as they get closer to the finish line. Continue to push for revenue growth and pay close attention to expense control. This is the time to let the numbers showcase the full potential of the business.

Nobody knows the ins and outs of a small business like the owner. Buyers and valuators weigh heavily on the impact the seller’s exit will have on the future of the business. Owners should focus on replacing themselves in the areas in which they are most intertwined in the business to lessen the impact. To identify these high-dependency areas, owners can interview managers and employees, noting issues that cannot be resolved without them.

Key areas of focus generally depend on the industry or business model but usually include sales generation, relationship management, product development, strategic decision making, or day-to-day business management. If continuity can be achieved through process improvement or process documentation, it should be a key focus. Some results can be found through training current employees and empowering them. Consider restructuring tasks and delegating the current owner’s duties to rising managers.

Revisit labor costs. Business owners with family members at above-market wages face a double expense. While they may overpay weekly on purpose, it will cost them a multiple of that annual salary when it’s time to cash out. For hourly workers, be ready to field questions about how the rising minimum wages will impact more labor-intensive businesses.

Finally, clean up the financial statements. For various reasons, including tax motivations, small-business owners have a tendency to let their personal and business lives collide on their company financial statements. Documentation is important for any personal expenses being charged to the business. Owners should be ready to prove which expenses were not necessary for the business so that buyers and valuators exclude the expenses to calculate the value — buyers will not report findings to the IRS.

Performing a financial analysis can also help owners understand how their business compares to the rest of the industry, making them ready to articulate strengths and defend or improve weaknesses.

Overall, the current market remains friendly to someone looking to sell their business. It’s also a great time to be proactive in managing an exit strategy, whether it lies around the corner or several years out. Getting realistic about the value of their business enables owners to take steps to improve it and make informed decisions.

Brandon Mitchell is a certified valuation analyst and supervisor in auditing and consulting for Blumshapiro, the largest regional accounting, tax, and business-advisory firm based in New England, and winner of the Massachusetts Lawyers Weekly Reader Rankings for Best Appraisal Service and Best Accounting Firm.

Law

The #MeToo Movement Has Vast Implications in This Sector

The #MeToo movement has brought about change and challenge — from a liability standpoint — in workplaces of all kinds. And this includes the broad spectrum of education. Indeed, recent cases indicate that courts may soon hold schools, colleges, and universities strictly liable for any sexual misconduct by their staff toward their students.

By Justice John Greaney, Jeffrey Poindexter, and Elizabeth Zuckerman

By now, we’ve all seen the #MeToo movement change how Massachusetts and the nation are talking about sexual harassment and other misconduct in the workplace, in schools, in social settings, on sports teams, in public places, and in our private lives.

Justice John Greaney

Jeffrey Poindexter

Elizabeth Zuckerman

The movement has ended careers, felled prominent figures, and made many newly aware of the great number of people — men and women — who face sexual harassment at some point in their lives. It has also reminded students, teachers, professors, administrators, and parents that schools and institutions of higher education are far from immune to this type of misconduct, and that students are sometimes victims of the very staff, faculty, and coaches expected to educate, guide, coach, and protect them.

Against this backdrop, administrators of Massachusetts schools, colleges, and universities have a special reason to take note of the rising tide of complaints about sexual harassment and other gender-based discrimination. The sea change in how sexual harassment is viewed, along with the development of Massachusetts law surrounding sexual harassment in schools, colleges, and universities, suggest that Massachusetts courts may soon hold these institutions strictly liable for any sexual misconduct by their staff toward their students.

That means, whether or not the school, college, or university knew about the conduct, whether or not the institution was negligent in any way, it could be on the hook for substantial damages if a staff member commits sexual harassment. In other words, even without doing anything wrong, or knowing anything wrong was happening, an educational institution could be liable for the entirety of the harm that befalls a student.

As a result, schools, colleges, and universities need to act now to implement policies which provide the best defense if a claim of sexual harassment is made.

In Massachusetts, Chapter 151C of the General Laws, the Massachusetts Fair Educational Practices Act (MFEPA), provides students who have been subjected to sexual harassment by a teacher, coach, guidance counselor, or other school personnel with a cause of action against the educational institution. MFEPA declares that “it shall be an unfair educational practice for an educational institution … to sexually harass students in any program or course of study in any educational institution.” In conjunction with General Laws c. 214, § 1C, the right for students to be free of harassment can be enforced through the Massachusetts Commission Against Discrimination (MCAD) or through the Superior Court.

“Administrators of Massachusetts schools, colleges, and universities have a special reason to take note of the rising tide of complaints about sexual harassment and other gender-based discrimination.”

The statutes also define sexual harassment broadly, including “any sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature when: (i) submission to or rejection of such advances, requests, or conduct is made either explicitly or implicitly a term or condition of the provision of the benefits, privileges, or placement services or as a basis for the evaluation of academic achievement; or (ii) such advances, requests, or conduct have the purpose or effect of unreasonably interfering with an individual’s education by creating an intimidating, hostile, humiliating, or sexually offensive educational environment.”

Chapter 151C has been interpreted several times in the courts in Massachusetts, including when:

• A male athletic director of a Massachusetts community college was reported to have provided alcohol to female students in exchange for sexual favors. Several years later, more complaints about his behavior led the college to implement a policy to prevent sexual harassment.

Reports of further inappropriate conduct led to an investigation and agreement that he would no longer coach female athletic teams. However, he continued to work at the school and, eventually, resumed coaching a women’s basketball team. Students who had been coached by the athletic director brought claims against both him and the school.

• During the investigation into a rape of a student by a teacher at a Massachusetts high school, it was disclosed that a male guidance counselor had been involved in sexual misconduct with students. The superintendent of the school district acknowledged that he was aware of continuing reports about the guidance counselor’s inappropriate relationships with students after a female student alleged that the counselor had brought her to his home on two occasions and attempted to coerce her into having sex.

• Parents reported the inappropriate conduct of a male middle-school science teacher to the vice principal and a guidance counselor. The teacher had made inappropriate comments and touched female students, and had been told by school officials to stop on three occasions. The teacher was fired after an internal investigation, but not before he allegedly molested an 11-year-old student.

Despite occasions to consider the applications of Chapter 151C, Massachusetts courts have not yet decided whether schools, colleges, and universities will be held strictly vicariously liable for sexual harassment. In the cases referenced above, it appears the schools or colleges knew about the misconduct and, at least passively, allowed it to continue.

That means that the schools or colleges could be considered negligent, because they knew, or should have known, an employee’s behavior was problematic, but they failed to act, or failed to take adequate measures to remedy the situation. However, if Massachusetts courts rule for strict liability under Chapter 151C, it will mean that it is no defense that the institution did not know what its employee was doing, or even that it took reasonable measures to screen that employee before hiring.

Instead, the mere occurrence of sexual harassment by an employee will be enough to make the institution liable to the victim.

There are indications this may be the direction in which the courts go, because a closely related statute, Chapter 151B, which governs sexual harassment in the workplace, does impose strict liability. It seems entirely possible that the courts will conclude that liability under Chapter 151C should be no different, given that the two statutes relate to the same subject matter and share a common purpose.

Furthermore, because the operative statute is clearly intended to protect vulnerable students from abuses of power by those entrusted with their well-being, it seems likely that the courts may conclude that a strict standard of liability is consistent with the underlying purposes of the statute.

“The rising awareness of the problem of sexual harassment and assault appears to make it more likely that courts will conclude that the only way to stem the tide of abuse is to put the burden on those in the best position to protect vulnerable students — the schools they attend.”

This argument seems strengthened by the popular mood regarding sexual harassment. The rising awareness of the problem of sexual harassment and assault appears to make it more likely that courts will conclude that the only way to stem the tide of abuse is to put the burden on those in the best position to protect vulnerable students — the schools they attend.

Two recent decisions suggest this result may be coming. In a 2016 federal court case, Doe v. Brashaw, Judge Douglas Woodlock gave the first indication that the courts may come down on the side of strict liability under Chapter 151C. He noted there was no clear guidance in the text of the law on whether negligence was required to hold the school, college, or university liable.

Weighing the arguments on each side, he concluded it made sense, at least at the early stage in the case at which he was reviewing the matter, to apply a strict vicarious liability standard.

More recently, in 2017, another federal judge again noted that the standard was unsettled and deferred considering the argument, made by the Massachusetts Institute of Technology as defendant, that it was entitled to a more favorable standard than strict liability.

Given the significant risk that Massachusetts schools, colleges, and universities will be considered liable for their employees’ misconduct, regardless of what they knew, or didn’t know, about it, how can these institutions respond? The answer is that schools, colleges, and universities need to ensure their sexual-harassment, disciplinary, and hiring policies are up to date.

This will allow these institutions to avoid hiring or retaining employees who show any indication that they will engage in sexually harassing behavior, and also allow the institutions to respond rapidly and effectively if any employee does. In addition, schools, colleges, and universities need to appropriately train and supervise all employees.

For many institutions, this will mean implementing new requirements for training and new policies for ensuring sexual harassment cannot go on in a school, college, or university without rapid detection. In addition to in-house training, the institutions should consider learning sessions taught by outside consultants, particularly law firms, with experience in handling sexual misconduct in the educational environment.

Outside investigations by impartial law firms will, when appropriate, removed the inference of bias on the part of the educational institution when considering possible misconduct by a teacher, administrator, or staff member. In sum, educational institutions need to be prepared to act quickly and decisively when faced with a complaint of sexual harassment in order to remediate any misconduct.

Justice John Greaney is a former justice of the Supreme Judicial Court and senior counsel at Bulkley Richardson. Jeffrey Poindexter is a partner and co-chair of the Litigation Department at Bulkley Richardson. Elizabeth Zuckerman is an associate in the Litigation Department at Bulkley Richardson.

Law

What to Expect When…

By John Gannon, Esq.

My wife and I recently welcomed our first child into the world. We are over the moon in love with our daughter and excited to see where this amazing journey will take us.

John S. Gannon

John S. Gannon

As an employment attorney, this process got me thinking about the topic of parental leave. That’s the legal term for providing job-protected time off from work to employees so they can bond with a newborn or newly adopted child.

Massachusetts state law requires almost all businesses to provide some job-protected leave for the birth or adoption of their child, and the federal Family and Medical Leave Act (FMLA) obligates employers with 50 or more employees to provide additional time off and protections to new parents. Although at first glance these laws may seem easy to administer, there are plenty of traps for those who do not have a deep understanding of how parental leave needs to be administered. Here are a few things employers should be aware of when an employee requests and takes parental leave.

What Does Your Policy Say?

Hopefully, you have a policy that addresses parental leave. If not, it’s time to get one on the books. Even if you have a policy, it’s never a bad idea to be make sure the language is up to date and consistent with state and federal laws governing time off to bond with a child. For example, the Massachusetts Parental Leave Act (MPLA) requires employers with six or more employees to provide eight weeks of unpaid leave to full-time employees for the purpose of giving birth or for the placement of a child for adoption.

If you have more than six employees, you need to have a policy and practice that addresses parental leave. Notably, up until a few years ago, this law was commonly referred to as the Massachusetts Maternity Leave Law, because the language of the statute provided leave protections for female employees only. The law was amended a few years ago to expand parental-leave protections to employees in Massachusetts of all genders.

If your policy refers to maternity leave instead of parental leave, it’s time to update your handbook as several employment laws have probably been added or changed since your last review.

Intersection of the FMLA

Employers covered by the FMLA have additional obligations that go beyond the requirements of state-mandated parental leave. For starters, under the FMLA, eligible employees are entitled to take up to 12 work weeks of FMLA leave in a 12-month period for a number of different reasons, including the birth of a child and to bond with a newborn or newly adopted child.

Both mothers and fathers have the right to take FMLA leave to bond with a child. Importantly, when an employee takes time under the FMLA to bond with a child, the eight weeks of state-mandated MPLA runs concurrently. This means that an employee with 12 weeks of available FMLA is entitled to 12 total weeks of parental leave, as the MPLA is used at the same time as the FMLA is used. However, questions arise when employees use FMLA for a reason unrelated to the birth or adoption of their child.

For instance, suppose an employee used 12 weeks of FMLA earlier this year to care for a sick parent. This month, the employee approaches you requesting leave to care for a child who is expected next month. That employee would no longer be entitled to 12 weeks of FMLA to care for the newborn, but would still be entitled to the eight weeks of MPLA under state law.

Leave Employees on Leave Alone

They call it leave from work for a reason. Employers need to resist the urge to contact employees on leave with work-related questions, especially if the leave is unpaid.

A call or two about something basic, such as the location of a file or document on the system, is probably fine. However, requesting attendance at meetings or on phone conferences will cross the line, as will the assignment of projects or other tasks. Not only are you taking parents away from a special and important time in their lives, but you are also potentially creating a situation where you are unlawfully interfering with an employee’s right to take time off under the FMLA or MPLA.

Plus, if the employee is taking unpaid parental leave, which is typically the case, you will need to be sure that the employee is compensated for any work performed during parental leave, including answering calls or responding to e-mails. This can be tough to account for, so the best practice is to let employees on parental leave enjoy their time off without work-related distractions.

Final Thoughts

I learned firsthand that parental leave was a special time for me and my newborn. Employers need to openly encourage employees to take all available parental leave, and should consider offering benefits that go beyond those required by state and federal law.

The U.S. Department of Labor reported in a policy brief on parental leave that longer leaves promote better child bonding, improve outcomes for children, and even increase gender equity at home and at the workplace.

A generous parental-leave policy is also a fantastic recruiting and retention tool, as it sends a message that the business values its workforce and is committed to bettering employee work-life balance.

John Gannon is a partner with Skoler, Abbott & Presser, P.C., one of the largest law firms in New England exclusively practicing labor and employment law. He specializes in employment litigation and personnel policies and practices, wage-and-hour compliance, and non-compete and trade-secrets litigation; (413) 737-4753; [email protected]

Law

Mediation: Art of Compromise

By Julie A. Dialessi-Lafley, Esq.

Mediation. Most, if not all of us, have heard the word, but what does it really mean to engage in mediation?

Many people familiar with mediation may think of it in the context of divorce or family-law matters, and, indeed, the process often provides families in conflict with meaningful solutions. But families aren’t the only ones who can benefit from the skills of a trained mediator. In fact, almost any issue or dispute that might be addressed in court could also potentially be solved by mediation.

Mediation is a process in which two or more parties discuss their disputes with the assistance of an unrelated third party — a trained mediator. The mediator assists the disagreeing parties with communication and with the terms of any settlement of the disputed issues. Resolution by agreement is the goal.

Mediation can be used for all kinds of disputes. Many couples facing divorce choose to engage in mediation rather than a court process. Issues of neighbor-to-neighbor disputes are ideal for mediation, and many schools use mediation internally to resolve student-to-student conflicts. Mediation can also address disputes involving business transactions, accidents or injuries, construction, workers’ compensation, employment issues, or labor and community relations. Almost any matter that does not involve complex procedural or evidentiary issues could be addressed through mediation.

Another appealing aspect of mediation is the relatively low cost. Mediation is normally more cost-effective than litigation in court, and certainly it is far less formal than a court process.

Mediation can take place at nearly any stage of a dispute. Conflicting parties may be able to avoid litigation altogether by mediating disputes prior to filing a court action. However, even once litigation is filed, mediation is usually still an option. If the parties agree to engage in mediation while a case is pending, they can do so in a good-faith effort to find a solution outside the courtroom. The parties can also opt out of the mediation process at any time.

Here in Massachusetts, the courts generally cannot order parties to engage in mediation. However, if an existing agreement, contract, or other independent rule requires mediation prior to litigation, the court may be precluded from hearing a matter until the parties attempt to resolve their dispute in mediation.

In fact, the courts tend to favor the mediation process and encourage parties in civil disputes to work toward their own agreements. If litigation is pending, but the parties come to an agreement through mediation and present it to the court, that agreement is likely to become the official order or judgment of the court. If only this writer had a quarter for every time a judge said to litigants, “you are better off trying to come to an agreement you can live with than to let the court decide.”

Unlike a judge or arbitrator, mediators do not decide the outcome of the dispute. They assist the parties to air their differences, identify the strengths and weaknesses of their respective sides, and find a resolution that everyone can live with.

For some people, a common misconception is that by going to mediation they will be giving up rights or forced into an outcome with which they don’t agree. For other people, a desire for the proverbial ‘day in court’ may be enough to keep them from engaging in mediation. In fact, the mediation process allows for a considerable amount of flexibility, and the mediator will design the process around the needs of the participants.

But what is the actual process like? For a typical day-long mediation, the experience normally follows six stages, each with a specific purpose.

Mediator’s Opening Statement

With everyone in the same room, the mediator makes introductions; explains the goals, expectations, and rules of the mediation; and encourages respectful dialogue with the goal of resolution.

Parties’ Opening Statements

Each party has an opportunity to give their perspective of the dispute without interruption. This can include the facts, impact, and general ideas about resolution.

Joint Discussion

Parties may remain together to begin dialogue on the issues, respond to opening statements, and engage in more in-depth work with the mediator. Normally this is determined by the conduct and emotions of the people in the room, and the mediator’s perception of their ability to work together respectfully in the same room.

Private Caucuses

Parties are placed each in separate rooms, and each is given time to meet privately with the mediator. This may continue for the majority of the in-depth work. The mediator, through this private discussion, determines the appropriate way to proceed.

Joint Negotiation

After private caucuses, parties may come back together to communicate directly. However, this does not usually happen until a settlement is reached, or the time scheduled for the mediation ends.

Closure

If the parties reach an agreement, the mediator will likely put the main provisions in writing and ask each side to sign it. If the parties are unable to agree at the time, the mediator will help determine if they want to work toward a solution within mediation.

Conclusion

Mediators are normally patient, persistent, and have plenty of common sense. Effective mediators are good listeners and negotiators, and they’re understanding of human nature. A mediator has to be articulate in order to accurately restate and relate to the positions of the conflicting parties. They may be attorneys, laypeople with training or certifications, volunteers in court-sponsored programs, privately retained, or even retired judges. Attorneys who are also mediators cannot represent one side or another, nor can they give legal advice while in the role of mediator.

One of the most important roles of the mediator is to help the parties understand that accepting less than what they may feel they ‘deserve’ is essential to a fair settlement. As the old saying goes, ‘if everyone walks away feeling slightly unhappy with the agreement, it is probably a fair agreement.’

Despite everyone walking away slightly unhappy, mediation is typically successful and satisfactory. Statistically, parties are more likely to abide by an agreement they reach on their own than an order from a court. The nature and structure of the mediation process results in its high success rate.

Attorney Julie Dialessi-Lafley is a certified mediator and a shareholder with Bacon Wilson, P.C. She has extensive experience with all aspects of family law, including pre- and post-nuptial agreements, separation, divorce, child custody and parenting time, and grandparents’ rights. In addition to family law, she represents clients in matters related to accidents and injuries, civil litigation, and probate and estate planning; (413) 781-0560; [email protected]

Opinion

Opinion

By Christine Palmieri

September is National Recovery Month. ‘Recovery’ is a word that gets used a lot in the world of mental health and addiction services, sometimes so much so that I think we can easily lose sight of what it represents. In my role with the Mental Health Assoc. (MHA), I often have the opportunity to talk to newly hired staff about the idea of recovery. We discuss what it means and what it can look like in the context of working with people who have experienced trauma, homelessness, psychiatric diagnosis, and substance problems.

When I ask new staff the question, “what does it mean to recover?” I frequently hear things like “getting better” or “getting back to where you were” or “having a better quality of life.” Although I tell staff there are no wrong answers to this question, secretly I think there are. They’re common and easy, but insufficient.

As with many things, I think it’s easier to talk about what recovery is by defining what it isn’t. For me, recovery isn’t a cure. It isn’t a finish line or a place people get to. It isn’t a goal that can be neatly summarized in a treatment plan. I believe recovery is a process that is unique and intimately personal to the individual going through it. Ultimately, though, I think the answer to the question “what does it mean to recover?” should be “it isn’t for me to say.”

I believe recovery is a process that is unique and intimately personal to the individual going through it.

As providers of services, or as loved ones, community members, and policy makers, I don’t believe it’s up to us to define what recovery means or looks like for people going through it. Each person needs to examine and define what it means to them. For the rest of us, I think the more important question is “what makes recovery possible?” When the question is posed this way, we are able to engage this idea of recovery in a much different and more productive way. This question offers the opportunity to share the responsibility and partner with those we support.

The analogy of a seedling is often used when describing this process of recovery, and one I use when I talk to our new hires about their roles and responsibilities as providers of service. Seeds are remarkable little things. For me, they represent unlimited potential. A seed no bigger than a grain of rice contains within it everything it needs to grow into a giant sequoia. But no seed can grow without the right environmental conditions. No amount of force or assertion of control can make a seed grow. It needs the right soil, the right amount of water, and the right amount of light.

In the same way, within each person who has experienced trauma, homelessness, psychiatric diagnosis, or problems with substances, I believe there lies unlimited potential for growth, and each person needs the right environment for the process of recovery to take place. As providers, loved ones, community members, and policy makers, we very often control that environment. Metaphorically, we provide the soil, the water and the light.

Soil is the place where recovery begins. It offers a place for the seed to grow roots, to gather strength, security, and safety. Soil is what keeps trees rooted tightly to the ground through storms. It is our responsibility to offer environments where people in recovery feel safe and secure, to try out new ways of coping and new ways of managing the difficulties and challenges that life presents to all of us.

Water provides a seedling with essential nourishment. We need to find ways to support people in recovery to discover what truly nourishes them. The work of recovery is hard. It requires taking risks and feeling uncomfortable. We cannot do the work of recovery for anyone else, but we can and should work to help people in recovery find the supportive relationships, meaningful roles, and reasons to do that hard work.

Light provides the energy necessary for growth. In recovery, I believe light is offered through the hope and understanding that every person has within them the potential to live a full and active life in the community, whatever that means for them. As providers, loved ones, community members, and policy makers, it is our role to shine the light of hope for people who have experienced discrimination, loss of power and control, and in many cases a loss of their identity. We hold this hope and offer this light because we know, without question, that recovery, however it is defined, is not only possible, but is happening, right now, all around us.

Christine Palmieri is vice president of the Division of Recovery and Housing at MHA.

Law

What’s Next for the Cannabis Industry?

The cannabis industry is off to a fast and quite intriguing start in the Bay State, and two new categories of license have particular potential to move this sector in new directions: one for home delivery of cannabis products, and another for social-consumption establishments, or cannabis cafés.

By Isaac C. Fleisher, Esq.

We are nearly three years into the Commonwealth’s experiment with recreational cannabis, and the industry is finally moving beyond an amusing novelty.

The Cannabis Control Commission (CCC) reports that retail sales in 2019 alone have already exceeded $190 million, and this is just the tip of the iceberg. To date, the CCC has issued only 72 final licenses for marijuana establishments, but there are currently another 400 license applications that are pending or have received provisional approval.

Isaac C. Fleisher

This all means that, over the next few years, the Massachusetts cannabis industry is set to grow at an unprecedented rate. What we don’t know is how this growth will change and shape the industry.

Much of the excitement and rhetoric around legalization has focused on the potential to create new business and employment opportunities for communities that have been disproportionately harmed by prohibition and for local entrepreneurs. Lawmakers attempted to pursue these goals (with mixed success) through the design of the original regulations, with provisions for local control by cities and towns, special categories for equity applicants, and caps on the number of licenses that a single business could control.

The CCC has recently been grappling with these issues once again as it revises its regulations.

On July 2, after months of policy discussions and hearings, the CCC released new draft regulations for both medical and recreational marijuana, which will be open for public comment until Aug. 16. While most casual observers will not find the draft regulations to be scintillating reading material, there are a number of interesting new provisions that can tell us a lot about what the future of Massachusetts’ cannabis industry could look like.

Two new categories of license have particular potential to move the cannabis industry in new directions; one for home delivery of cannabis products, and another for social-consumption establishments (i.e., cannabis cafés).

Social Consumption

A social-consumption license would authorize businesses to sell cannabis products to customers for on-site consumption. Just think of your neighborhood bar, but it serves cannabis instead of alcohol. Under the proposed regulations, cannabis could be consumed at a social-consumption establishment in almost any form, except for combustible (i.e. smoking it the old-fashioned way), but even that possibility is left open by a provision for an outdoor smoking waiver.

Cannabis edibles would have to be prepackaged and shelf-stable, but there is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.

“There is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.”

The CCC is taking an incremental approach to this new class of license by including provisions for a social-consumption pilot program that would be limited to only 12 municipalities. Towns that participated in a working group on social consumption — including North Adams, Amherst, Springfield, Provincetown, and Somerville — would be among those able to opt into the pilot program. Licenses would initially be available only to applicants that were already licensed as a ‘microbusiness’ or a ‘craft marijuana cooperative,’ or applicants certified by the CCC as an ‘economic empowerment’ applicant or ‘social equity’ applicant. The pilot program is an interesting attempt to address the demand for new cannabis markets, while still preserving access for small, local, and minority-owned businesses.

Home Delivery

A licensed ‘delivery-only retailer’ could deliver marijuana products directly to a customer’s residence. Advocates for home delivery have long touted its potential to level the playing field between large, well-funded businesses and the small, local entrepreneurs the CCC seeks to attract.

In theory, a delivery-only licensee wouldn’t need much more than a vehicle in order to begin operating. However, the draft regulations include a number of provisions that could create substantial barriers to entry for small-time operators. Home-delivery orders would still need to go through a traditional brick-and-mortar retailer, who would presumably not be particularly interested in providing their product to competitors at wholesale prices.

Additionally, the draft regulations prohibit deliveries to any residence in a town that has banned brick-and-mortar retailers.

Numerous security provisions included in the draft regulations create further costly (and controversial) requirements for delivery-only retailers. Each delivery vehicle would need multiple surveillance cameras, and delivery agents would need to wear body cameras to record the entire delivery, including the customer. This has predictably resulted in a number of concerns about privacy and regulatory overreach.

At a recent CCC meeting, Commissioner Shaleen Title pointed out that, “to the extent that home delivery to [medical-marijuana] patients has been ongoing, there may already be security in place that goes above and beyond our regulations, and to my knowledge there haven’t been incidents … That seems to be an argument that you should not be putting in additional burdens and regulations.”

While body cameras got the most attention at the CCC’s meetings, one provision in the proposed home delivery regulations with the potential to be far more consequential is the option to use a “third-party technology platform provider” to facilitate the ordering process. In simpler terms, we could soon be saying “there’s an app for that.”

While there is still a thorny tangle of federal and state laws preventing a true e-commerce for cannabis, it’s not hard to imagine startups racing to be the first ‘Uber for weed.’ This would certainly make the consumer experience even more convenient, but it would mean yet another blow to the delivery only retailer’s profit margin, and does not seem consistent with the goal of lowering the barrier to entry for small businesses.

Of course, excitement about new markets comes with the important caveat that the rules still need to be finalized and, in some cases, there would need to be a corresponding change in state law. Nevertheless, it is encouraging to see that regulators are willing to consider new ideas for Massachusetts’ cannabis industry. The lines around the block at the first retailers have everybody seeing dollar signs, but with no statutory limits on the number of licenses that the CCC can issue, it is only a matter of time before supply exceeds demand.

In states that are further along in this process there is already evidence of a boom-bust cycle, as oversupply causes wholesale prices to plummet and smaller operators are forced out of the market. In Massachusetts, where the cannabis industry is still relatively nascent, there is still opportunity for regulators, consumers, activists, and entrepreneurs to play important roles in shaping the future of the industry.

Attorney Isaac C. Fleisher is an associate with Bacon Wilson, P.C., where his practice is focused on business and corporate law, with particular emphasis on the rapidly expanding cannabis industry. An accomplished transactional attorney, he has broad experience in all aspects of business representation, for legal matters ranging from mergers and acquisitions to business formation and financing; (413) 781-0560; [email protected].

Accounting and Tax Planning

Section 199A

Section 199A of the Tax Cuts and Jobs Act was created to level the playing field when it comes to lowering the corporate tax rate for those businesses not acting as C corporations. For most profit-seeking ventures, qualifying for the deduction is not difficult, but for rental real estate, it becomes more difficult.

By Lisa White, CPA

On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, bringing with it a plethora of changes, affecting, albeit in varying degrees, every taxable and non-taxable entity and individual.

One of the primary focuses of the act was to lower the corporate tax rate to a flat rate of 21%. In order to keep the taxable-entity landscape equitable, however, a provision was necessary for those businesses not operating as C corporations.

Thus, Section 199A was created, providing for a deduction of up to 20% of qualified business income from a domestic business operating as a sole proprietorship, partnership, S corporation, trust, or estate.

The first step in assessing the benefit of the Section 199A deduction is to determine if there is a qualified activity. The statute uses Section 162 of the Internal Revenue Code to designate qualification — which is difficult since Section 162 does not actually provide a clear definition of what constitutes a trade or business.

“What might be the easiest way to approach making the determination is the ‘walks like a duck, quacks like a duck’ scenario. If the activity is a profit-seeking venture that requires regular and continuous involvement, there should not be an issue with rising to the level of a qualified trade or business under Section 162 — and thus being eligible for the Section 199A deduction.”

Instead, case law must be used to support the position taken. What might be the easiest way to approach making the determination is the ‘walks like a duck, quacks like a duck’ scenario. If the activity is a profit-seeking venture that requires regular and continuous involvement, there should not be an issue with rising to the level of a qualified trade or business under Section 162 — and thus being eligible for the Section 199A deduction.

For rental real estate, the determination becomes a bit more complicated. If the rental activity consists of property being rented to or among a group of commonly controlled businesses, where the same owner — or group of owners — owns directly or indirectly at least 50% of both the rental property and the operating business, and the operating business is not a C corporation, then the qualifying designation is automatic. Otherwise, to make the determination, we must once again turn to case law.

Here, this becomes problematic, as there is limited history supporting the position that rental activities rise to the level of a Section 162 trade or business, as the designation heretofore was unnecessary.

In response to concerns about the lack of guidance, the Internal Revenue Service issued Revenue Procedure 2019-7, which provides for a safe harbor under which a rental-real-estate activity will be treated as qualifying for the Section 199A deduction. In addition to holding the rental property either directly or through a disregarded entity, other qualifying factors include the following:

• Separate books and records are maintained for each rental activity (or rental activity group);

• At least 250 hours of rental services are performed each year on each rental activity; and

• For tax years ending after 2018, contemporaneous records are maintained detailing hours of services performed, description of services performed, dates on which services were performed, and, who performed the services.

When making the determination of whether an activity rises to the level of a trade or business under the general rules, each activity must be assessed separately, and no grouping is permitted.

Alternatively, the safe-harbor provision provides an opportunity to elect to group rental activities together in order to meet the other qualifications. The caveat here is that commercial properties must be grouped only with other commercial properties, and likewise for residential properties. Once made, the grouping election can be changed only if there is a significant change in the facts and circumstances. The rental services performed that qualify for the 250-hour requirement include tasks such as advertising, negotiating leases, collecting rent, and managing the property, among others. Financial-management activities, such as arranging financing or reviewing financial statements, do not qualify as ‘rental services,’ nor does the time spent traveling to and from the property. The rental services can be performed by the owners of the property or by others, such as a property-management company.

The safe-harbor election is available to both individuals and pass-through entities and is made by attaching a signed affidavit to the filed return stating that the requirements under the safe-harbor provision have been met.

It’s important to note here that, although meeting the safe-harbor requirements will qualify the activity for Section 199A, it does not provide automatic qualification under Section 162. Similarly, failure to satisfy the safe-harbor requirements does not mean the activity automatically does not qualify for the deduction. Instead, support for the position will just need to be derived from considering other relevant factors and/or case law that can be used as precedent.

Additionally, the safe-harbor election cannot be made for residences used personally for more than 14 days during the year, nor for properties rented on a triple-net-lease basis, a scenario where the tenant is responsible for the taxes, insurance, and general maintenance related to a rental property.

If pursuing the Section 199A deduction for rental property without using the safe-harbor provision, some factors to consider documenting would be the type of property rented, the day-to-day involvement of the owner (or the owner’s agent), and the types and significance of any ancillary services provided.

It seems the courts have applied a relatively low threshold in finding rental activities to rise to the level of a Section 162 trade or business, but it’s also important to note that implications of that designation have changed significantly. One thing is for certain: if the position is taken that the rental activity is a trade or business for the Section 199A deduction, then it needs to be treated as a trade or business in all other aspects, as well, which could mean additional filings (i.e. Forms 1099) and becoming subject to different tax regulations (i.e. interest-limitation rules).

Ultimately, although the Section 199A deduction was implemented as a means of leveling the playing field for the tax impact of entity choice and could potentially offer significant tax savings, in order to take advantage of the deduction, the related activity must first qualify for the deduction.

Reaching this designation is relatively easy for most business operations, but might require more analysis when considering rental activities. There are some options available, such as the safe-harbor and grouping elections, but the related tax impact should be carefully considered prior to making any election.

Be sure to consult with your tax advisor if you have any questions.

Lisa White, CPA is a tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3542; [email protected]

Law

Date with Destiny

By Timothy M. Netkovick, Esq. and Daniel C. Carr, Esq.

Timothy M. Netkovick

Timothy M. Netkovick

Daniel C. Carr

Daniel C. Carr

As everyone knows, paid family medical leave (PFML) is coming to Massachusetts on Jan. 1, 2021. To that end, the Department of Family and Medical Leave recently released its final regulations that will govern PFML.

The final regulations provide much-needed clarity on some aspects of PFML, while other aspects remain vague.

Prior to the final regulations being rolled out, one of the most common questions was whether PFML would apply to employers who have places of business in locations other than Massachusetts. The final regulations make clear that the definition of an employee in the Commonwealth of Massachusetts will be very broad. The regulations state that an employee will be eligible for PFML leave if the service provided by the employee is entirely within the Commonwealth or the service is performed both within and outside the Commonwealth, but the service performed outside the Commonwealth is incidental to the individual’s service within the Commonwealth.

An employee is also eligible for PFML if the service is not localized in any state, but some part of the employee’s service is performed in the Commonwealth and (1) the individual’s base of operations is in the Commonwealth, or (2) if there is no base of operations, then the place from which such service is directed or controlled is within the Commonwealth, or (3) the individual’s base of operations or place from which such service is directed or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in the Commonwealth.

Therefore, even employers who do not have a physical place of business in Massachusetts, but who may have salespeople in Massachusetts, will want to review the PFML regulations with their employment counsel to determine any potential impacts to their business.

“Even employers who do not have a physical place of business in Massachusetts, but who may have salespeople in Massachusetts, will want to review the PFML regulations with their employment counsel.”

Once an employee begins PFML leave, an employer cannot require an employee to use other forms of paid time off (PTO) prior to PFML leave. However, an employee can choose to use accrued PTO provided by their employer instead of PFML. If an employee chooses to use accrued PTO, the employee is required to follow the employer’s notice and certification processes related to the use of PTO.

If an employee is going to use accrued PTO, employers are required to inform employees that the use of accrued PTO will run concurrently with the leave period provided by PFML. It will be important for employers to track the use of accrued PTO, as they will also be required to report the use of accrued PTO by employees or covered individuals upon request by the Department of Family Medical Leave.

Employers have the ability to establish their own private PFML plan instead of participating in the state administration process. If an employer is going to utilize a private PFML plan, the plan must confer all the same or better benefits, including rights and protections, as those provided to employees under PFML, and may not cost employees more than they would be charged under the state plan administered by the department. A private plan will also need to be approved by the Department of Family Medical Leave before it is implemented.

While the clear intent of the PFML regulations is to line up with the Family and Medical Leave Act (FMLA) as much as possible, there are also several key areas of difference.

The first noticeable difference is that PFML applies to every employer, regardless of size. Furthermore, as covered employers are aware, under the FMLA, an individual is entitled to leave if they work for 1,250 hours within the previous 12-month period. That 12-month period can be a calendar year or rolling period. PFML contains no such service requirement or minimum hours worked.

Furthermore, an employee is eligible for 20 weeks of leave for their own serious health condition under PFML as opposed to 12 weeks under the FMLA.

It is clear that questions still remain regarding the implementation of PFML. It is also clear that PFML and FMLA will not perfectly align. Employers will therefore want to consult with their employment counsel as they continue to prepare for PFML.

Timothy M. Netkovick and Daniel C. Carr are attorneys with Royal, P.C.; [email protected], [email protected]; (413) 586-2288

Law

A Disturbing Trend

By Amelia J. Holstrom, Esq.

Amelia J. Holstrom, Esq.

Amelia J. Holstrom, Esq.

The #MeToo movement exploded back in 2017. With #MeToo in the news almost a daily, women everywhere became more comfortable coming forward and reporting harassment and telling their stories.

As a result, women felt empowered, but has sharing their stories hurt them in other ways? According to a recent survey conducted by LeanIn.org, the answer to that question might be yes.

Over the past two years, LeanIn.org — an organization dedicated to helping women come together and achieve their goals — conducted surveys to gain an understanding of what individuals are experiencing at work. One of the surveys revealed that, in the post-#MeToo world, women may be receiving less support at work from male managers and may be hindered in their ability to seek career advancement.

The survey, titled “Working Relationships in the #MeToo Era,” suggested that 60% of male managers reported they were not comfortable participating in common work activities — mentoring, working alone, or socializing — with women.

To put that into perspective, according to LeanIn.org, that percentage was only 32% just a year ago. The survey also noted that senior-level men were 12 times “more likely to hesitate to have one-on-one meetings” with junior female employees, nine times “more likely to hesitate to travel [with junior female employees] for work,” and six times “more likely to hesitate to have work dinners” with junior female employees. According to the survey results, 36% of men said they avoided mentoring or socializing with women because they were concerned about how it might look.

Worrisome Results for Employers

The results suggest that #MeToo may actually lead to more gender discrimination in the workplace. If male members of management distance themselves from mentoring, working alone with, and socializing with women, they might be creating legal liability for their employer because they are giving women less opportunity to advance and succeed with the organization.

For example, while work performance is always a factor in decisions regarding promotions, skills learned through mentoring and workplace connections and relationships also play an important role. If a female employee is denied a promotion due her lack of mentorship and/or workplace connections and relationships, and she did not have access to those things like her male colleagues did simply because of her gender, the employer could be subject to a gender-discrimination lawsuit.

The survey did contain some good news for employers: 70% of employees, compared to 46% in 2018, reported that their company was doing more to address sexual harassment. The increase in this statistic is likely because more employers are conducting annual sexual-harassment training in the post-#MeToo world. Unfortunately, the remainder of the survey results suggest that training alone is not enough.

Proactive Steps

Employers should continue to address harassment in the workplace through their anti-harassment policies and by conducting annual anti-harassment training, but they also need to do more to educate employees regarding other forms of discrimination.

First, employers should have an equal-employment-opportunity policy that clearly outlines that discrimination based on gender or any other characteristic protected by law is expressly prohibited. The policy should also outline how an employee may file an internal complaint of discrimination at the workplace.

Second, employers should add annual anti-discrimination training to their training agenda. Implementing effective training will demonstrate that you care about the issue and are taking it seriously, which could help you defend against a lawsuit if an employee decides to bring one.

Finally, employers should remember that gender discrimination doesn’t just arise in this context. Businesses should take a close look at compensation practices to be sure there are no pay-inequity issues. Studies show that women in America earn about 80 cents for every dollar paid to men. Not only is this wage gap a fundamental problem, but it can also lead to serious legal trouble for an employer. Case in point: the World Cup-champion U.S. women’s soccer team’s lawsuit alleging pay inequity and “institutionalized gender discrimination.”

Bottom Line

It is clear that #MeToo has led to important changes in the workplace, but LeanIn.org’s recent study suggests that employers need to continue to be proactive and take steps to create a culture free from harassment, but also address other forms of discrimination.

The full survey results can be found at leanin.org/sexual-harassment-backlash-survey-results.

Amelia J. Holstrom is an attorney with Skoler, Abbott & Presser, P.C., one of the largest law firms in New England exclusively practicing labor and employment law. Holstrom specializes in employment litigation, including defending employers against claims of discrimination, retaliation, harassment, and wrongful termination, as well as wage-and-hour lawsuits. She also frequently provides counsel to management on taking proactive steps to reduce the risk of legal liability; (413) 737-4753; [email protected]

Law

The Neutral Patent Evaluation

By Mary Bonzagni

Business owners often ask themselves, ‘why embark on a path of securing a U.S. patent when enforcing your patent rights in court will inevitably be a very costly and time-consuming endeavor?’ Amazon may have helped to remove the presumption embedded in that question by offering an attractive alternative to the costly and time-consuming litigation route.

As we all know, Amazon dominates the e-commerce marketplace worldwide. For many consumers (like me), Amazon has become the first and primary source for virtually anything we may need (or want). Dominance, however, has come with a price. Mounting pressure from intellectual-property owners for Amazon to take responsibility for conduct in its marketplace has apparently pushed Amazon into choosing to relinquish its former ‘hands-off’ approach to infringement concerns.

Neutral Patent Evaluation

For U.S. utility patent owners (not U.S. design or foreign patent owners) who have identified infringing products on the Amazon retail or Marketplace platform, Amazon now offers its neutral-patent-evaluation procedure.

The benefits of this procedure include its low cost ($4,000) relative to litigation and its streamlined approach to resolving patent disputes (two weeks to four months). Plus, the parties do not waive any rights to pursue their respective claims in court.

By way of this procedure, a patent owner files a request for an evaluation of their infringement allegation against an Amazon retailer. The Amazon retailer is given the option of either responding to the allegation or removing the accused product listing. If the Amazon retailer choses to respond, then Amazon assigns a neutral evaluator who is a qualified patent attorney, and each party then pays a deposit in the amount of $4,000 to the evaluator. The deposits are held in escrow during the evaluation procedure. The prevailing party will have its deposit reimbursed, while the non-prevailing party will forfeit its deposit, with the forfeited deposit paying the fees/costs of the evaluator.

“While the benefits of this process are apparent, there are limitations.”

While it is not same-day Shipping, this procedure takes only a few weeks (if the Amazon retailer does not participate in the procedure) or up to a maximum of four months (if the Amazon retailer does participate in the procedure). To assure that this procedure concludes within this relatively short term, Amazon limits the evaluation procedure to one patent claim, does not allow any challenges to the validity of the asserted claim, allows only written arguments of a specified length (no discovery or oral arguments), and imposes strict response deadlines.

If the evaluator decides the accused product is covered by the asserted patent claim, then Amazon will remove the listing of the product from its online marketplace. Irrespective of the evaluator’s finding, however, should either party obtain a judgment or order from a court of competent jurisdiction that the accused product does or does not infringe the asserted patent claim, or that the asserted patent claim is invalid, then that party may submit the judgment or order to Amazon, which will honor it by either removing or relisting the product.

During the neutral patent evaluation, the parties may not talk directly to the evaluator but may talk to each other regarding the possibility of reaching an amicable resolution to the dispute. If this happens, then the evaluator may keep a portion of the deposits received from each party as compensation for work completed.

While the benefits of this process are apparent, there are limitations. For example, the outcome of this process determines only whether a product may continue to be sold on Amazon; it does not limit other avenues of commerce for allegedly infringing products. Plus, the procedure only applies to third-party merchants. In other words, products sold by Amazon itself, cannot be challenged using Amazon’s neutral-patent-evaluation procedure. It is also problematic that Amazon does not inform the parties how neutral evaluators are selected. Nonetheless, in my opinion, this procedure is attractive for what it does offer.

Amazon’s Other Programs

Amazon has other programs as well that are designed to protect IP rights. Amazon’s brand-registry program provides owners of registered trademarks with tools for searching and identifying potential infringers of their registered trademarks on the Amazon platform. Amazon also allows IP owners to report patent, trademark, and/or copyright infringement directly to Amazon by way of its report-infringement form. If Amazon accepts the infringement claim, then it will remove the reported content and will take appropriate (but unfortunately confidential) action against the retailer. If Amazon rejects the infringement claim, then they will not take any further action. Amazon will, however, provide the claimant with the reason for its rejection of the claim.

Conclusion

As more and more consumers flock to e-commerce sites, the hope is that Amazon’s neutral-patent-evaluation initiative will be picked up and further developed by other online marketplaces, or perhaps developed into an all-inclusive system that serves to address not only patent, but also trademark and copyright, infringement in a way that all online marketplaces can collaborate on.

Mary Bonzagni is a partner at the law firm of Bulkley Richardson, where she focuses on intellectual-property matters; (413) 781-2820.