Sometimes the solution is not legal at all

I had a meeting with the principals of a new client today.  The company had former employees who stole customer lists and had just started to contact those customers for a new competing business. 
After much discussion about what would be the best course of action, cease and desist letter, the course and cost of potential litigation, I asked how much business the company had lost.  I asked since they were wondering what would be the best thing to do.

The principals told me that they had not lost any yet.  I agree with one of the principals who asked if maybe the best course would be to do nothing.  They then came up with a new idea.  Send out an offer to the customers that they think have been contacted by the former employees and give them an incentive offer.  If they have been contacted by a competitor, they would get two weeks free service on showing proof of the contact with the competitor.  The idea being the company keeps its customers and gathers further evidence against the former employees. 

The principals were delighted with this idea and I heartily agreed.  I told them that the best outcome would be to beat the old employees in the marketplace.

Authorities Regarding Vicarious Liability in eCommerce

On November 4, 2010, I gave a presentation entitled "Vicarious Liability in eCommerce: The Legal Exposure of Internet Businesses for the Wrongdoing of Others" for the San Diego County Bar Association.

 A few attorneys who could not attend asked if I could share the authorities on which I based my presentation.  I gave them the authorities and I thought I would share them here also. 

Statutes


California Unfair Competition Act, Business and Professions Code 17200, et seq.

Federal Trade Commission Act, 15 U.S.C. 41, et seq.

U.S. Copyright Act , 17 U.S.C. 101, et seq.

Cases

A & M Records, inc. v. Napster, Inc. (2001, 9th Cir.) 239 F.3rd 1004.

Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. (2005) 545 U.S. 913, 125 S.Ct. 2764, 162 L.Ed.2nd 781.

Emery v. Visa International Service Assoc. (2002) 95 Cal.App.4th 952, 116 Cal.Rptr.2nd 25.

Schulz v. Neovi Data Corporation, et al. (2007, 4th Dist.) 152 Cal.App.4th 74, 60 Cal.Rptr.3d 810.

Perfect 10, Inc. v. Visa International Service Assoc. (2007, 9th Cir.) 494 F.3rd 788.

Perfect 10, Inc. v. Amazon.com, Inc., et al. (2007, 9th Cir.) 487 F.3rd 701.

Federal Trade Commission v. Neovi, Inc., et al. (2008, S.D.Cal) 598 Fed.Supp.2d 1104.

Federal Trade Commission v. Neovi, Inc., et al. (2010, 9th Cir.) 604 F.3rd 1150.

Why Hire an Attorney to Incorporate

Given the rise of the use of online companies to form corporations, many people ask why they should use an attorney to form a business entity such as a corporation.  The reason is because online companies do not do three important things that business owners must address when they incorporate.

What online companies do:

They do what you tell them to do.
They file articles of incorporation.
They obtain Federal Employment Identification Number (FEIN).
They appoint the initial director(s) of the corporation.
Send the customer a notebook with a bunch of forms.
They might draft organizational minutes and bylaws and file SOI with state.

What online companies don't do:

Do not finish organizing the corporation.

Do not issue stock.
Do not file necessary notices to make stock issuances lawful.

Most importantly they don’t address the Three Crucial Questions business owners miss.

The Three Crucial Questions are:

What type of entity, where, and why?
What is the entity’s capitalization?
What happens if:  a partners dies, becomes disabled or says “I’m out of here”

These issues are vital.  Why do you want a LLC in Delaware?  What are you paying for your stock; what are you putting into your corporation?  What happens if you die or just quit working in the business?

The online companies won't help with these issues and others.  An attorney can help business owners to work them out.  Business owners who don't work through these issues are asking for serious trouble.

San Diego Connect's Springboard Program

On Monday, September 27, I attended an orientation for San Diego Connect's Springboard program. Great program for entreprenuers. I would recommend Springboard to anyone with a new business with a new idea/product. It is designed to help such companies to obtain funding.  Check out the program's website at http://www.connect.org/programs/springboard/

Works Made for Hire - Independent Contractors Own their Copyrights

We train our clients in how to register their copyrights with the U.S. Copyright Office.
Something that came up in such a training session the other day is worth repeating here.
Employees that create original works for their employers (articles, artwork, designs, etc.) do not own the copyrights to those works. Their employers own the copyrights under the Works Made for Hire or (Work for Hire) rule.
However, independent contractors do not follow under the Work for Hire rule unless the contractor and the company that the contractor is working for have an agreement that the contractor's work is for hire.
In this day and age, companies are hiring more and more independent contractors on a project by project basis. Sometimes the projects can the creation of critical property for the company, such as source code for software or web designs.
The independent contractor owns the copyrights to that work unless the company that hire the contractor obtains an work for hire agreement to the contrary.
Get those contractors to sign work for hire agreements!

Unfair Trademark Dilution Laws Explained

I was asked to comment on the lawsuit filed by Facebook against Teachbook.

Facebook sues Teachbook.com for using 'book' in its name - latimes.com

Facebook is suing under Federal trademark law including, in particular, the trademark dilution statutes found in Federal trademark law.

According to the LA Times article about the case, Facebook initally objected to Teachbook's application for a trademark registration. Such objections are handled by the Trial and Appeals Board of the US Patent and Trademark Office. That should be good enough but the TTAB will only decide if Teachbook is confusing similar with Facebook - which it probably is not.

Facebook's lawsuit, on the other hand, is based on Federal trademark dilutions law. To understand that, you must understand that traditional trademark law protects against infringement.

Infringement is (very generally) when a trademark that is confusingly similar to another, older trademark. The infringing trademark must be used in the same class of goods or services, or close to the same class of goods or services, and must be so similar as to create the likelihood of consumer confusion.

So, infringement is very specific to the use of the trademarks involved, the class, the markets, etc.

In 1995, in an apparent reaction to the rise of the Internet, Congress enacted the Trademark Dilution Act which amended the U.S. trademark laws. The law was backed by large established companies.

Under the dilution laws, the owner of a trademark can stop the use of a similar trademark even though the other trademark does not create even a likelihood of confusion. In other words the defendant's trademark does not need to legally infringe.

Under the dilution laws, the owner of a trademark (the plaintiff in a lawsuit) can stop the use of a similar trademark if 1) the plaintiff's trademark is famous, and 2) the defendant's trademark is will cause tarnishment or is exploiting the famous trademark's goodwill.

The language of the statues is rather vague as to what is a "famous" mark, etc.

The most famous case regarding dilution was the Victoria's Secret case. Victoria's Secret (VS) sued the owners of a small lingerie shop in Kentucky for dilution. The name of the shop was Victor's Little Secret. Eventually, the U.S. Supreme Court heard the case and decided that the Victor's Little Secret trademark did indeed dilute the VS trademark but VS had no case since it hadn't been damaged.

The U.S. Congress immediately amended the dilution laws to provide that the owner of the famous mark did not need to prove damage. Congress has since further strengthened the law to give a greater edge to the owners of famous marks.

Today, the shop is not called Victor's Little Secret. After many years of litigation, VS and Congress bludgeonded the shop's owners into submission even though VS never proved that it had been harmed.

I strongly dislike dilution law. I represent entrepreneurs and small business owners - the people who own companies like Victor's Little Secret and Teachbook. I have had small business owners see me about cease and desist letters from major law firms that represent large corporations. I have told my clients that the other side has a weak case, even for dilution, but other side can sue and take the case to trial. The problem is that my client's can't possibly afford to litigate a trademark case in Federal court.

And that is what the dilution law is designed to do: to allow the owner of a "famous" trademark to force the small business into court and stay there.

I have litigated hundreds of business litigation cases and tried dozens. It is an expensive process. If a case had no legal merit, then it can be thrown out on a Motion to Dismiss (in Federal court). If a case has no factual basis, it can be disposed of with a Motion for Summary Judgment. Both of those motions can be made long before trial.

The problem with a dilution case is that a large corporation can easily claim it has a famous trademark and that a similar trademark is diluting it. Since it is an issue of fact whether or not the large corporation's trademark is famous and whether or not the other trademark is diluting it, the case not be thrown out on a motion to dismiss or summary judgment. The parties must engage in expensive discovery and hire expensive experts to testify about how famous is the plaintiff's trademark and about dilution, and go to trial - and the small guys can't afford it.

I explained this to an entrepreneur one time after he received a nastygram from a major law firm claiming that his trademark diluted a so-called famous trademark. I told him he could win against the other side but he would have to hire a trademark litigation firm and pay them huge sums of money. He said, "Forget it. I'll just change my company's name." And the other side was a company we had never heard of until my client received the cease and desist letter.

The ultimate problem is that the law is not only completely unfair but it creates uncertainty. As an attorney, if someone comes into see me about starting a company called Teachbook and whether they would get in trouble with Facebook, I have say, "Well, it's not infringement, but they might sue for dilution."

The client, of course, will want to know whether or not that is likely to happen, and I have to reply that I simply don't know - but I do know that they can't afford it.

The result is that the Victor's Little Secrets and Teachbooks of America are at the mercy of large corporations and a Congress that facilitates them.

The only thing that they can do is stay as far away from famous trademarks as possible and consult with an attorney before launching new brand.

So, there is my populist rant about dilution law.

You can check an attorney's discipline history

Before you retain an attorney, you can check the attorney's discipline record on the State Bar's website. This can be important. My wife is working on a case in which the client's previous attorney did a very poor job representing the client. She is now trying to salvage the case.

The previous attorney had a history of discipline by the California State Bar and was disbarred in Nevada at the time he was filing this case in California. He is now being prosecuted by California State Bar.

Don't let your employees sign contracts.

I recently settled a lawsuit in which my client was sued because an employee of my client, a small business, signed a contract. The contract was a services contract that my client thought could be terminated at will.

After my client terminated the service, the service company produced a contract that had been signed by an employee of my client. The employee was an administrative assistant who was little more than a glorified receptionist. The employee signed the contract in the name of the President of the company - which was a corporation. The employee had no authority to sign the contract. The contract was for five years and my client's President would never have agreed to that term.

After brief litigation. we settled the case for the price of continuing to litigate the case to trial. We had an excellent defense to the lawsuit but it was better to settle than continue to spend time and money on the matter.

This was a very unhappy experience for my client to say the least. We are not sure why the employee signed the agreement since the employee left the state over a year ago. We think that the customer service representative for the other party lied as about the meaning of the document.

A few lessons from the case:

1. Instruct all employees that they are not authorized to promise anything on behalf of the company. Even if they are directed to negotiate a deal, they should be clear that they final approval for anything binding the company must come from its officers/owners.

2. Instruct your employees that they are not to sign anything on behalf of the company. Tell them that they should not sign any document other than receipts for deliveries. Tell them to be careful of sales persons or customer representatives who want them to sign something. Ofter those persons will say that the document is just to finish up the paperwork. Employees must be firmly instructed to not any such document.

3. Employees should inform representatives of vendors and customers that the only authority to make a decision for the company is with the officers/owners of the company. They should be trained to make that clear up front in any negotiations with outside parties.

A little training and instruction of your employees can save your company a lot of grief.

Branding vs. designs in the clothing business

I have represented several clients in the apparel industry. I recently had a consultation with a client that was planning to start a business that sold clothing. Several issues came up during that consultation that are common issues among businesses selling clothing. One of those issues was branding vs. designs.

Often entrepreneurs will often say that they have a great idea for a name or design for their brand which they will put on the clothing they sell. They have a great tag line or design and want put it on t-shirts or some other article of clothing and they will want to protect that tag line or design from being taken by a competitor.

However, they are confusing branding with clothing designs. Branding is the establishing of a trademark or trade name under which a product is sold. The trademark or name identifies the source of the product. Victoria's Secret is the trade name (the brand) for a company that sells women's lingerie. It is the name on the tags on the clothing sold.

On the other hand, the designs, including words, that are placed on clothing are not legally considered trademarks or trade names. Designs are ornamental and not trademarks in that they do not designate the source of the clothing.

Trademarks and trade names are legally protected and can be registered. Designs can not be legally protected in the same way. Unique designs on clothing can be protected under copyright law as long as the design is not part of the clothing design. Clothing designs can not be protected under copyright law.

The bottom line for entrepreneurs in the apparel industry is that they must make a distinction between their brand (that is the trade name of their clothing line) and the designs that they put on their clothing. Of course, sometimes brands will be placed directly on clothing. "Guess" puts its brand directly on its jeans but that brand is also on the clothing tag. Designs without a brand attached to them do not build goodwill.

The distinction is important because designs come and go but brands can be established and remain. For that reason, I advise apparel industry entrepreneurs to focus on their brand and think more in terms of how their designs will promote the brand. This makes for a stronger, legally protectable brand and is good marketing as well.

Three Principles of eCommerce

The Federal Trade Commission has recent begun cracking down on on-line businesses for consumer fraud and unfair business practice. The FTC is suing businesses for using pre-populated ordering forms in which a consumer will order one thing and might not be aware that he or she is also ordering something else in a pre-checked box on the bottom of the order form - and out of sight on the web page.

The FTC is also also suing to stop false advertising of websites. Often an advertisement, such as a banner ad on a web page, will seem to advertise one thing but, when the consumer clicks the ad, the consumer is directed to a web page selling something else.

I am frequently asked by clients to give an opinion or advice as to whether or not a particular procedure or advertisement is unlawful.

Due to increased enforcement in these areas of ecommerce, I have formulated three principles which will keep most ecommerce business owners out of trouble.

When advertising or doing business on-line, a business owner should consider the viewpoint of the consumer (since this is the standard that will be used by the FTC and other regulatory agencies) and consider the following:

1. Landing Page Expectations. If a consumer clicks on an advertisement, will the consumer land on a page which the consumer would reasonably expect to land on? If the consumer is misled, even a little bit, then the advertisement will be considered false advertising. False pricing information an advertisement is a classic example. If an ad shows picture of a bottle of shampoo and $7.99, but on the landing page for the ad, the consumer discovers that the bottle of that brand of shampoo is actually $13.99, then the advertiser is guilty of false advertising.

2. Purchase Expectations. Is the consumer only buying what the consumer would reasonably believe to be buying? For instance, a company might advertise the sale of a product with a free 60 day subscription to a magazine. But, buried in terms and conditions is a clause that states that after 60 days, the consumer's credit charge will be charged for the subscription unless the consumer cancels first. The FTC, and the courts, have determined that this is an unfair business practice. Everything that the consumer is buying or might buy must be obvious on the online order form. Nothing buried, no pre-populated forms, no email notifications after the fact.

3. Knowledge of Wrongdoing. If you know that someone is doing something illegal or legally shady on-line, do not do business with them in any way. No even passively. For instance, if a website is running an illegal lottery, or some other illegal activity, do not provide links to the site. You can be held to be an aider and abettor of the illegal activity. Also, do not provide links on your website to an unknown business, and periodically check the links that you do provide on your website.

Adding value to your business through good legal processes

Last month, I was again on the radio with the Smarter Small Business radio show.



Colm Kelly, the host, and I discussed adding value to your business through good legal processes.



I came on about 30 minutes into the show.

The Branding Process

In December 2009, I appeared on the Smarter Small Business radio show with the host Colm Kelly. Also appearing was Colleen Connery of CoCo & Associates.
Colm is the owner of Smarter Small Business and a business consultant. Colleen is the owner of Coco & Associates and a marketing expert.
For the first 30 minutes of the show, Colm and Colleen discuss the process of developing a brand. I join them and we discuss protecting brands.
This is an excellent discussion of how to approach branding
Below is the video the show.