After promulgation of the first Uniform Partnership Act in 1914, William Draper Lewis of the University of Pennsylvania Law School, one of the principal draftsman of the Act, described the debate over the legal personality of partnerships at a meeting of the UPA drafting committee and commentators:

"[T]hose with the largest practical experience present were opposed to regarding the partnership as a 'legal person' because of the effect of the theory in lessening the partner’s sense of moral responsibility for partnership acts."

William Draper Lewis, The Uniform Partnership Act — A Reply to Mr. Crane’s Criticism, 29 Harv. L. Rev. 158, 172-173 (1915).

Does this concern over the "moral responsibility" of partners seem odd to you? It is an argument that often has been raised with regard to limited liability, but in the partnership context, the supposed effect ("lessening the partner’s sense of moral responsibility for partnership acts") appears to emanate merely from a change in the nature of the partnership relationship, rather than any change in actual liability risk.

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I start off teaching my Business Associations class with a focus on partnerships and thus I am always looking for interesting partnership stories. I ran across one in the Chicago Tribune that seemed really intriguing. Rush Simonson brought suit against Kenneth Griffin, hedge fund manager of Citadel Investment Group—one of the biggest hedge funds in the country. Simonson’s suit indicated that he and Griffin were former partners, and that Griffin essentially breached their partnership agreement, continuing their “business” in Chicago and cutting him out of their profits. Simonson has abruptly dropped his suit claiming that while he was not being compensated for his action, it was the “right thing to do.” Nevertheless, the charges make for an interesting tale.

Apparently Griffin and Simonson had formed two partnerships while Griffin was in college at Harvard. Simonson claimed that he left a position in a brokerage firm to participate in their partnership businesses and provide Griffin with operational expertise. After graduation Griffin moved to Chicago and founded Citadel. Simonson also claimed that Griffin left with the secret intention of continuing their business in a different structure, and running the business without Simonson. Buttressing his claim, Simonson came across an article (while at the dentist) indicating that Griffin had started Citadel while in his college dorm. This kind of claim involves, among other things, a current day and interesting version of the Meinhard duty. In addition, assuming there was some violation of Griffin’s fiduciary duty, it raises some rather thorny issues of how one goes about parceling out the profits associated with a business that according to Bloomberg News made a trading profit of about $5 billion last year. Of course Griffin claimed all along that he properly ended the partnerships after graduation and Simonson’s suit was without merit. In dropping the suit, Simonson appears to validate that claim. But it still makes for good classroom discussion.

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We have been quiet on Open Source Media, which is now Pajamas Media ... again. Frankly, I have a hard time getting excited about this story, though with a little encouragement from Ann, I did notice a business organizations angle. Take a look at Dennis the Peasant's account of his dealings with Roger Simon. The story bears a striking resemblance to the facts of Urban Decay, where a California appellate court held that two women who developed ideas for a cosmetics company had formed a partnership. Roger Simon responds:

Mr. Kelly [aka Dennis the Peasant] believes that somehow Charles Johnson and I have knifed him in the back in a business deal. He is indeed correct that we had several discussions with him and one meeting in Los Angeles. After that nothing substantive occurred. No contracts were ever signed. No investment was made. Nothing happened. Communications dwindled to zero. It was like the many preliminary business conversations that peter out before fruition in most of our lives, certainly in mine and probably in yours. Then Charles and I developed a different approach to the business. We found investment elsewhere and Mr. Kelly, when he heard about it, turned into an online stalker. He has threatened to sue me on several occasions. I invite him to go ahead and do it. I look forward to the contents of his website being read aloud in court.

Whether contracts were signed is irrelevant to the existence of a partnership. Same goes for the investment. But the portion of Simon's statement that I have italicized could be a crucial difference between Pajamas Media and Urban Decay. The key inquiry: Is Pajamas Media a different business than the one envisioned during those early talks between Simon, Kelly, and Johnson? If it is the same business, I could see a pretty strong argument for partnership under Urban Decay.

Stepping away from the result in Urban Decay, I think that Simon lands on the core issue in many cases involving inadvertant formation of a partnership, namely, whether the initial negotiations constitute formation of a business or merely preparation for incorporation. Every corporation or LLC is preceded by some planning, but such planning does not necessarily result in the formation of a partnership.

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One of my favorite cases in my Business Organizations casebook features the cosmetics company Urban Decay (Holmes v. Lerner, 74 Cal.App.4th 442, 88 Cal.Rptr.2d 130 (Cal. App. 1999)). It is not a famous case, and I found it only because I was scouring recent partnership cases for a good formation issue. This case involves a disputed founding, and the facts are wonderful. Read an excerpt below the fold, and then I have a little story.

The following is an excerpt from the judicial opinion describing the earliest days at the company:

Sandra Lerner is a successful entrepreneur and an experienced business person. She and her husband were the original founders of Cisco Systems. When she sold her interest in that company, she received a substantial amount of money, which she invested, in part, in a venture capital limited partnership called " & Capital Partners." By the time of trial in this matter, Lerner was extremely wealthy. Patricia Holmes met Lerner in late 1993, when Lerner visited Holmes' horse training facility to arrange for training and boarding of two horses that Lerner was importing from England. Holmes and Lerner became friends, and after an initial six-month training contract expired, Holmes continued to train Lerner's horses without a contract and without cost.

In 1995, Lerner and Holmes traveled to England to a horse show and to make arrangements to ship the horses that Lerner had purchased. On this trip, Lerner decided that she wanted to celebrate her 40th birthday by going pub crawling in Dublin. Lerner was wearing what Holmes termed "alternative clothes" and black nail polish, and encouraged Holmes to do the same.(Fn 1) Holmes, however, did not like black nail polish, and was unable to find a suitable color in the English stores. At Lerner's mansion outside of London, Lerner gave Holmes a manicuring kit, telling her to see if she could find a color she would wear. Holmes looked through the kit, tried different colors, and eventually developed her own color by layering a raspberry color over black nail polish. This produced a purple color that Holmes liked. Holmes showed the new color to Lerner, who also liked it.

Fn 1 There were references throughout the trial to Lerner's "alternative" look and to "alternative" culture. Lerner, who referred to herself as an "edgy cosmetics queen," described "alternative culture" as "not really mainstream," "edgy," and "fashion forward." As an example, she noted her own purple hair. She defined "edgy" as not trying to be cute, and being unconventional.

On July 31, 1995, the two women returned from England and stayed at Lerner's West Hollywood condominium while they waited for the horses to clear quarantine. While sitting at the kitchen table, they discussed nail polish, and colors. Len Bosack, Lerner's husband, was in and out of the room during the conversations. For approximately an hour and a half, Lerner and Holmes worked with the colors in a nail kit to try to recreate the purple color Holmes had made in England so they could have the color in a liquid form, rather than layering two colors. Lerner made a different shade of purple, and Holmes commented that it looked just like a bruise. Holmes then said that she wanted to call the purple color she had made "Plague." Holmes had been reading about 16th century England, and how people with the plague developed purple sores, and she thought the color looked like the plague sores.(Fn 2) Lerner and Holmes discussed the fact that the names they were creating had an urban theme, and tried to think of other names to fit the theme. Starting with "Bruise" and "Plague," they also discussed the names "Mildew," "Smog," "Uzi," and "Oil Slick." Len Bosack walked into the kitchen at that point, heard the conversation about the urban theme, and said "What about decay?" The two women liked the idea, and decided that "Urban Decay" was a good name for their concept.

Fn 2 Plague is described as "rich violet with a blue sheen."

Lerner said to Holmes: "This seems like a good [thing], it's something that we both like, and isn't out there. Do you think we should start a company?" Holmes responded: "Yes, I think it's a great idea." Lerner told Holmes that they would have to do market research and determine how to have the polishes produced, and that there were many things they would have to do. Lerner said: "We will hire people to work for us. We will do everything we can to get the company going, and then we'll be creative, and other people will do the work, so we'll have time to continue riding the horses." Holmes agreed that they would do those things. They did not separate out which tasks each of them would do, but planned to do it all together.

The opinion proceeds to detail the development of the company and concludes that Lerner and Holmes formed a partnership. The case has many interesting features -- not the least of which is that Urban Decay seems to have lost its edge ... just take a look at some of the current products on its website. Another interesting feature is that the website does not mention Pat Holmes in the company history. A jury awarded Holmes over $1 million in compensatory and punitive damages from this case.

One of my students, Shakira Ferguson, was curious about this omission, and contacted Urban Decay, requesting an explaination. This was the response she received via email:

Pat Holmes was a friend of Sandy Lerner at the time Urban Decay was started. Many of Sandy's and Wende's friends contributed ideas, energy and enthusiasm to the business because people were excited about the prospect of a countercultural, revolutionary cosmetics company. Unfortunately, we are not able to mention all of the friends in the company history.

If you read all of the facts of the case, Holmes seems far from the trivial participant that she is portrayed as here, but it's hard to imagine what else the company would say. After all, the remedy did not include an injunction requiring Urban Decay to name Holmes.

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