The High-touch Legal Services® Blog…for Startups!

© 2009-2021 Dana H. Shultz

KYC (Know Your Customer) Isn’t Just for Banks

Photo of a bank for post about KYC (Know Your Customer)

“KYC” (Know Your Customer) refers to how banks verify the identities of prospective customers. In this post I will show why KYC can be equally important for other types of businesses.

One of my European clients (“Client”) provides in-demand horticultural products. In 2013, we formed a Delaware corporation by which Client does business in North America.

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Foreign Qualification Can Be Easy, or It Can Be Difficult

geauxBIZ screen shot for post about foreign qualification

Foreign qualification is how a given state permits an entity, such as a corporation or limited liability company, from elsewhere to do business in that state. In this context, “foreign” can mean from another state or from a different country.

Recently, one of my international clients formed a corporation in Delaware. We have been qualifying that corporation to do business in about a dozen other states. This post explains how easy, or how difficult, various states makes the foreign qualification process.

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What are Liquidated Damages?

Photo of a $100 bill for a post about liquidated damages

This post explains the meaning of the legal term “liquidated damages“. It is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology .

Sometimes a contract specifies an amount that a party must pay for breaching that contract. The legal terms for that amount is liquidated damages.

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What Does “Represent and Warrant” Mean?

Photo of contract being signed for post about meaning of the phrase "represent and warrant"

This post discusses the meaning of the phrase “represent and warrant“. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

Distinguishing Representations from Warranties

To understand what the contractual phrase “represent and warrant” means, we need to know what representations and warranties are.

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California Corporate Officers are Employees

Logo of the Employment Development Department for post about California corporate officers being employees

This post discusses why – especially now that Assembly Bill No. 5 (AB-5) has taken effect – in California corporate officers are considered employees rather than independent contractors.

California Corporate Officers Employees by Statute

The starting point is California Unemployment Insurance Code Section 621. This Section states, in relevant part:

“Employee” means all of the following:

(a) Any officer of a corporation.

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Stakeholders Matter, but Shareholders Still #1

Quora logo for post about corporate stakeholders based on a Quora answer

This post about corporate stakeholders is based largely on my answer to a Quora question. Please see How many companies do you think will adopt the Business Roundtable’s statement that the purpose of a corporation is to take into account ALL stakeholders

The Business Roundtable describes itself as an association of chief executive officers of America’s leading companies. On August 19, 2019, the Roundtable garnered headlines when it announced that it had redefined the purpose of a corporation to promote an economy that serves all Americans. In my opinion, that characterization is not accurate.

Roundtable Statement about Stakeholders

Here is what the relevant portion of the Roundtable’s Statement on the Purpose of a Corporation says:

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Which Personnel Records Can an Employee Inspect?

Image of magnifying glass for post about inspecting personnel records

This post describes California employees’ rights to inspect, and receive copies of, their personnel records.

The relevant statute is California Labor Code Section 1198.5(a), which states:

Every current and former employee, or his or her representative, has the right to inspect and receive a copy of the personnel records that the employer maintains relating to the employee’s performance or to any grievance concerning the employee.

(more…)

What is Dissociation?

"Goodbye Friends" sign for post about dissociation from a partnership or LLC

This post explains what dissociation is. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

Definition of Dissociation

Dissociation is the process by which one:

  • Stops being a member of a limited liability company (LLC); or
  • Stops being a partner in a partnership.

Alternatively, this process sometimes is called withdrawal.

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What is Reincorporation?

Image of moving van, symbolizing reincorporationIn How Can I Move My Corporation to Another State?, I explained that there are three ways to move a corporation from one state to another. This post describes one of those ways: Reincorporation.

Three Ways to Move among States

That earlier post described those three ways to move a corporation to another state as follows: (more…)

How to Redomesticate when Your State Won’t Permit It

Great Seal of the State of California for post about how to redomesticate an entity

In How Can I Move My Corporation to Another State?, I discussed redomestication, i.e., how to move a legal entity from one state to another. In this post, I explain how to redomesticate an entity when the existing state’s law prohibits redomestication.

California Corporation Cannot Redomesticate

About a year ago, the CEO of a California corporation contacted me. He was relocating to Pennsylvania, so it made sense to move his corporation there, too. Unfortunately, California does not permit its corporations, in contrast to limited liability companies (LLCs), to redomesticate. (Please see the CA Secretary of State’s Conversion Information page.)

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Protect Your IP when You Hire a Freelancer

Upwork logo for post about freelancer work product and intellectual property

This post explains how to make sure that you own work product and intellectual property (IP) when you use a freelancer service. Most of the following first appeared on Quora. Please see How can I protect my source code and its Intellectual Property Right while working with a very large team of remote freelancers (Upwork and Fiverr etc)? Are freelancing platforms ensuring IP protection?

When you use a freelancing platform, you need to ensure that you have an agreement with each freelancer. And that agreement must assign to you all work product and all intellectual property rights.

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Fictitious Business Name Publication: Which Newspaper?

DBAstore.com logo for post about FBN publication

A fictitious business name (FBN) is California’s term for a DBA (“doing business as”). This post explains the State’s FBN publication requirement and describes how I have selected newspapers for this purpose.

Once you file your FBN statement with the clerk of the applicable county, you have 30 days to arrange for a “newspaper of general circulation” in that county to publish that statement once a week for four weeks. Business and Professions Code Section 17917(a)

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What are Non-voting Shares?

Photo of a ballot for post about non-voting shares

This post explains what non-voting shares are and why a corporation might want to authorize them. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

In this post, I will focus on non-voting common shares. Preferred shares raise issues that go well beyond voting rights. (See What Is Preferred Stock?)

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Should We Authorize Preferred Shares when We Incorporate?

Certificate for preferred shares

This post discusses whether founders should authorize preferred shares, in addition to common shares, when they incorporate.

As I discussed in What is Preferred Stock?, corporations typically issue preferred shares to institutional investors, such as venture capitalists (VCs). The term “preferred” refers to preferences that those shares have relative to common shares.

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How Most States Chose “Shareholder” as Delaware Kept “Stockholder”

Cover page from Delaware Laws 1875 for post about terms shareholder and stockholder“Shareholder” and “stockholder” are synonyms. This post explains how most states came to use the former term in their laws, while Delaware consistently has used the latter.

Before Delaware had a general corporation law, Delaware’s legislature created each corporation. The Constitution of Delaware – 1831 so provided in Article II, Section 17, but made no mention of stockholders (or shareholders).

Following a constitutional amendment, Delaware adopted its first general corporation law in 1875. (See Laws of the State of Delaware, Vol. 15 – Part 1, beginning at page 181.) That law includes a few references to “stockholder”, none to “shareholder”. (more…)

Non-solicitation Provision Overturned in California

Graphic with reference to California Business and Professions Code, referenced in a case upholding an employee non-solicitation provisionIt is common knowledge that California generally prohibits post-employment non-compete provisions. However, people know far less about law pertaining to post-employment non-solicitation provisions.

In this post, I will describe existing post-employment non-compete and non-solicitation case law. Then I will discuss a recent case that may signal a new direction.

Background – Non-competition Provisions Disfavored

Business and Professions Code Section 16600 is the statutory basis for California’s post-employment non-compete prohibition: (more…)

Board Members Aren’t Necessarily Equal in Delaware

Logo of the State of Delaware bor post about board members having unequal voting rightsPeople typically think about corporate board members having equal voting rights: One director, one vote. However, for Delaware corporations, that is not always the case.

Delaware Statute – Board Members

This unusual situation is the result of a Delaware statute. (more…)

What Is a Smart Contract?

Screenshot of a Google search for " smart contract "The term ” smart contract ” has been appearing a lot, lately. (A recent Google search returned more than 4 million hits!) But there is confusion and misunderstanding concerning what this term means.

This post explains what smart contracts are, and what they are not. (more…)

Delaware Corporation Stockholders Can Waive Inspection Rights

Seal of the Delaware Division of Corporations, symbolizing this post by Dana Shultz about how stockholders can waive inspection rightsSeveral years ago, I wrote about stockholder inspection rights. (See Which Financial Information Must a Corporation Provide to its Shareholders? ) This post explains how stockholders of a Delaware corporation can waive inspection rights.

Delaware General Corporation Law Section 220 gives stockholders a right to “inspect for any proper purpose, and to make copies and extracts from…[t]he corporation’s stock ledger, a list of its stockholders, and its other books and records”. Furthermore, “proper purpose” means “a purpose reasonably related to such person’s interest as a stockholder.” (more…)

How Does a Corporation Declare a Dividend?

Photo of cash symbolizing post about how to declare a dividendThis post discusses the process by which a corporation may declare a dividend. This is part of Dana Shultz’s Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminology.

Please note that this post assumes that the corporation will pay a cash dividend to its shareholders. If, instead, the corporation wishes to pay a stock dividend (issue more shares to existing shareholders), then somewhat different rules will apply. (more…)

What Does ” Reserved ” Mean in a Contract?

Logo for Quora, where Dana Shultz wrote about why one sees " Reserved " in a section of a contractIn this post I will explain why one sometimes sees ” Reserved ” in a section of a contract. I first presented this information in a Quora answer. Please see What is a “Reserved” clause in a contract?

Sometimes Sections are Deleted from Contracts

Sometimes (especially in olden days), when one no longer needed a Section in a contract, the lawyer drafting or revising the contract didn’t want to remove that Section entirely. The reason for this reluctance? Removal would require changing the numbering of the following Sections. (more…)

Blame Your Lawyer – An Underappreciated Legal Service

Photo of Scrabble tiles spelling "lawyer" for post about how to blame your lawyerIn this post I will explain why, sometimes, it can be helpful to blame your lawyer for something that really is not the lawyer’s fault.

In my experience, this situation typically arises when a client is negotiating business terms with a counterparty. (more…)

GDPR and CCPA – Two Approaches to Privacy

Logo for Quora, where Dana Shultz wrote about GDPR and CCPAThis post compares the EU’s General Data Protection Regulation and the California Consumer Protection Act of 2018 (GDPR and CCPA).

It includes much of a Quora answer that I wrote on this topic. Please see How does the California Consumer Privacy Act of 2018 compare to GDPR?

Disclaimer: This comparison, of necessity, is limited to the broadest generalizations. While the California Consumer Privacy Act or 2018 (“CCPA”) is of a respectable length, the EU’s General Data Protection Regulation (“GDPR”) has 99 Articles, most with several Sub-articles – and that’s preceded by 173 lengthy paragraphs of recitals! Consequently, most of what follows is, in reality, subject to significant additional details, qualifications and exceptions that are too numerous to include here.

Now available for download: A four-page GDPR-CCPA comparison table that includes many more details than are in this post.

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Delaware’s Franchise Tax – A Tale of Two Methods

Seal of the Delaware Division of Corporations, symbolizing this post about two methods for calculating Delaware's franchise taxIn an earlier post, In Delaware, No Par Value Can Cost a Bundle, I discussed the two methods by which Delaware’s franchise tax for a corporation may be calculated. This post discusses the history of those two methods.

To some extent, this post is educated guesswork. It is based on a Quora question that I answered. Please see What is the rationale/reason (not math) behind the two methods of calculation for Delaware’s domestic franchise tax fee?

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ABC Test for Employee Misclassification in California

Banner of the California Courts, the Supreme Court having rendered an opinion about the ABC Test for employee misclassificationThis post discusses a recent decision by which the California Supreme Court adopted the so-called ABC Test for misclassification of employees as independent contractors.

The relevant case is Dynamex Operations West, Inc. v. Superior Court, decided on April 30, 2018. (more…)

May an LLC Manager Be a Minor?

Hand drawn workflow diagram representing an LLC manager whi is a minor

This post discusses whether an LLC manager (the person who manages a limited liability company) may be a minor.

In May a Minor Form an LLC?, I discussed whether the organizer of an LLC may be a minor. In that post, I noted that only five states – Colorado, Illinois, Minnesota, Oregon and Texas – prohibit a minor from organizing an LLC. So, those are the states to which I paid the closest attention in writing this post. (more…)

What is a Managing Member?

Logo for Quora, where Dana Shultz wrote about the meaning of the term " managing member "The post is about the definition of the term ” managing member “. I am writing this because of a Quora question that I answered a short while ago. Please see What is the difference between a managing member and a member in an LLC?

I have not confirmed whether all of the following background information applies equally to all states. However, I know that it applies to enough states that I will present the following as applying throughout the U.S., generally. (more…)

If You Incorporate in the U.S., You Can’t Remain Anonymous

Graphic: no anonymous usersRecently, two different individuals emailed me about their desire to form and run a legal entity while remaining anonymous.

I had to tell them that they could not achieve their objective. This post explains why that is the case.

Initial Formation is Easy

It is easy for a founder to be anonymous when taking the first step to form a corporation or a limited liability company (LLC). (more…)

Software Escrow No Longer Required

Picture of a lock box, symbolizing software escrowSoftware escrow requirements once were common in my law practice. In this post, I will explain why that no longer is the case.

I have seen such arrangements principally with respect to software that a developer hosts (software as a service – SaaS). In a software escrow, the developer delivers a copy of the software’s source code to an escrow company. The developer provides updated versions of the source code from time to time.

If the developer goes out of business, the escrow company delivers the source code to the developer’s licensee (customer). The licensee then has the right to use and modify the source code for its own internal purposes. (more…)

What Does “Amended and Restated” Mean?

Alaska Air Amended and Restated Certificate of Incorporation“Amended and restated” is a term that lawyers use a lot. (A Google search produces approximately 792,000 results.) This post discusses that term’s meaning and why lawyers use it. This is part of Dana Shultz’s Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminology.

“Amended and restated” can apply to virtually any type of legal document. Examples:

  • Certificate/articles of incorporation;
  • Corporate bylaws;
  • Limited liability company operating agreement;
  • Any other type of agreement;
  • etc.

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Important Independent Contractor Agreement Provisions

Logo for Quora, where Dana Shultz wrote about independent contractor agreement provisionsI am writing this post because of a Quora question that I answered. Please see What are the most important provisions in an independent contractor agreement?

Independent Contractor Agreement Business Terms

As concerns business terms, the most important provisions in an independent contractor agreement pertain to the following. (more…)

What Are the Types of Partnerships?

Logo for Quora, where Dana Shultz wrote about the types of partnerships in the U.S.I am writing this post about types of partnerships because of a question that I answered on Quora. Please see Why would a group of people organize their business as a partnership?

in the U.S.,  there are different types of partnerships. (more…)

How to Form an LLC

Logo for Quora, where Dana Shultz answered a question about how to form an LLCI am writing this post about how to form an LLC (limited liability company) because of a question that I answered on Quora. Please see What are the basic requirements for forming of a LLC in US?

The following is an overview of the steps required to form an LLC properly in the U.S.: (more…)

Is an Operating Agreement Required for an LLC?

First page of OA for post that answers: Is an operating agreement required for an LLC?I have written many times about limited liability company operating agreements. This post answers the following question: Is an operating agreement required?

As is the case for many issues pertaining to limited liability companies, the answer varies from state to state. To answer this question, we need to examine the relevant statutes for each state.

Most States, Operating Agreement Not Required

Most states do not require that an LLC have an operating agreement. For example: (more…)

Design Copyright Explained

Copyright Office logo fo Dana Shultz post about design copyrightMany people are familiar with copyrights for literary and musical works, movies, and the like. This post is about a different type of copyright, the design copyright.

Title 17, Chapter 13 of the United States Code contains the relevant statutes.

Design Copyright Elements

17 USC Section 1301(a)(1) identifies the basic elements of a design copyright (emphasis added): (more…)

” Legal Tender ” Does *Not* Mean that You Must Accept Cash

Logo for Quora, where Dana Shultz answered a question about legal tenderThis post about legal tender is a bit off-topic for this blog. However, I am writing it because it clears up a common misunderstanding, about which I recently wrote on Quora. Please see On every US dollar bill the message “This note is legal tender for all debts public and private” is printed. How is it then legal for some businesses to not accept cash?

The U.S. Department of the Treasury discusses whether the “ legal tender ” language on U.S. currency requires that cash payments be accepted. Quoting a portion of Legal Tender Status (link and emphasis added): (more…)

Creative Commons Commercial Licenses

Creative Commons logo for post about Creative Commons commercial licensesThis post is about Creative Commons commercial licenses. After describing each license, it discusses when you might want to use each license.

Creative Commons provides a summary of its various licenses at About The Licenses. (more…)

Assignment and Delegation in Contract Law

Logo for Quora, where Dana Shultz answered a question about the terms assignment and delegation under contract lawAssignment and delegation are terms that have specific meanings in U.S. contract law. I am basing this post on a Quora answer that I wrote recently. Please see What are assignment and delegation in contract law?

In contract law, “assignment” can have a narrower meaning and a broader meaning. To start, I will discuss the narrower meaning. (more…)

Canonical Questions on the Law® Series Explained

Logo for Quora, where Dana Shultz created the Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminologyThis post explains what the Canonical Questions on the Law® series is. Equally important, this post explains why I created that series of questions and answers about legal issues, concepts and terminology.

I have been active on Quora, a question-and-answer site, since 2010. In a significant change, Quora recently limited questions to 250 characters. Users no longer are able to include lengthy paragraphs containing question details. (more…)

How Much Can My Product Look Like Another Company’s Product?

Logo for Quora, where Dana Shultz answered a question about "How much can my product look like another company's product?"This post discusses how much one company’s product can look like another company’s product without creating intellectual property problems. It largely copies a Quora answer that I wrote recently. Please see How much can my product look like another company’s product without infringing the other company’s intellectual property rights in that product? (more…)

Do We Need One EIN or Two?

Internal Revenue Service logo, for post about whether a business needs one EIN or twoThis post is the result of an email exchange that I had with a foreign entrepreneur. He raised a question that I had not previously considered: When should a business have one EIN (Employer Identification Number), and when should it have two? (more…)

DBA – Notice, but No Protection

Logo for Quora, where Dana Shultz answered a question about a DBA providing notice but not protectionThis post discusses the purpose of a DBA (which is an abbreviation for “doing business as”). This expands upon a Quora answer that I wrote recently. Please see Can someone use my DBA if I operate as a sole proprietor?

Terminology

To start, I will note that business people frequently use the term “DBA”. It is short and easy to say, and people readily understand it. (more…)

Which Types of Intellectual Property Can Protect an Idea?

Logo for Quora, where Dana Shultz answered a question about types of intellectual property protectionThis post explains why the various types of intellectual property (“IP”) cannot protect a mere idea. However, IP may protect items that one creates based on such an idea.

I first wrote about this subject on Quora. Please see Which types of intellectual property protection can I receive for my idea? (more…)

What is a Corporation’s Incorporation Date?

Logo for Quora, where Dana Shultz answered a question about a corporation's incorporation dateThis post explains how a state assigns a corporation’s incorporation date and how you can find the incorporation date for a given corporation. I first wrote about this in my answer to a Quora question. Please see What is the date of incorporation? Is it the date the articles of incorporation are adopted and signed, or when the state agency accepts them (USA)? (more…)

Can We Have a Corporate Incorporator?

Sample Articles of Corporation for blog post about the corporate incorporatorMost of us think about an individual being the party that forms a corporation. As an alternative, this post discusses the corporate incorporator, i.e., a corporation that forms another corporation. (For information about incorporators generally, please see What Does an Incorporator Do? )

To start, I wondered whether various states’ statutes permit a corporate incorporator. (more…)

Units are to LLCs as Shares are to Corporations

Logo for Quora, where Dana Shultz answered a question about LLC unitsI am writing this post about limited liability company (LLC) units because of a question that I answered on Quora. Please see Why would an operating agreement for an LLC have a Schedule A and also a quantity of Class A interests?

LLC Membership Interests: Percentages

We can specify LLC membership interests in either of two ways. (more…)

At-will Employment – Why It Is the Norm in the U.S.

Logo for Quora, where Dana Shultz answered a question about at-will employmentAt-will employment permits either an employer or an employee to terminate their relationship at any time for almost any reason. This post explains why at-will employment is the norm in the U.S.

I am basing this post on a Quora question that I answered recently. Please see Why are labour laws governing companies almost non existent in North America, compared to Europe?  (more…)

You Can’t Just Stop Being a Shareholder

Logo for Quora, where Dana Shultz answered a question about how you can't just stop being a shareholderThis post explains why, in the U.S., one can’t just stop being a shareholder. I decided to write it after addressing this issue on Quora. Please see Corporate Law: What is the best method to abandon stock in a private company?

Ways to Stop Being a Shareholder

Corporate law does not permit a shareholder to unilaterally dispose of his or her shares. As a result: (more…)

Creativity and Copyright

Copyright Office logo fo Dana Shultz post about creativity and copyrightCreativity is important socially and aesthetically. It also is required for a work to be copyrightable.

The Compendium of U.S. Copyright Office Practices is the administrative manual of the Register of Copyrights. The Compendium concerns Title 17 of the United States Code and Chapter 37 of the Code of Federal Regulations. (more…)

What Does It Mean to Hold X Shares?

Logo for Quora, where Dana Shultz answered a question about what it means to hold X shares in a companyI am writing this post because of a Quora question that I answered. Please see What does it mean when you have X shares in a company?

Before addressing the significance of the number of shares, I will address the significance of shareholding, generally. (more…)

What Are My Entity’s Compliance Obligations?

Frequently, the first service I provide to a client is to form a new legal entity (corporation or limited liability company). And frequently, once that entity is formed, the client’s first question is “What are my entity’s compliance obligations?”

This post provides a high-level answer to that question.

(If you form a corporation in California, you can find additional information in the Postincorporation Matters document on the Downloads page – image above.) (more…)

How Delaware Became the Incorporation Capital

Logo for Quora, where Dana Shultz answered a question about how Delaware became the incorporation capital of the U.S.This post explains how Delaware became the incorporation capital of the U.S. It is based on a Quora question that I answered recently. Please see How did Delaware acquire its status as a corporate haven?

There are a number of law review articles about the history of Delaware corporate law and how Delaware became the home to so many U.S. corporations.

In my opinion, one of the most informative articles is Arsht, “A History of Delaware Corporation Law”, Delaware Journal of Corporate Law (1976). (more…)

Parent and Subsidiary – Who Owns What?

Logo for Quora, where Dana Shultz answered a question about parent and subsidiary ownershipI am writing this post about parent and subsidiary ownership because of a question that I answered recently on Quora and a similar question that a prospective client posed to me. (Please see Can an LLC allocate ownership to individuals on a per investment basis (vs at the LLC level)?)

I always have thought that parent and subsidiary ownership were straightforward. However, that apparently is not the case for everyone. I will use an example to explain this concept. (I will refer to corporations. This discussion can apply equally to other types of entities, such as limited liability companies.) (more…)

Consumer Review Protection Now Part of Federal Law

Seal of the Federal Trade Commission, which enforces the Consumer Review Fairness Act of 2016Consumer review protection now is part of federal law. Specifically, in December 2016, Congress passed, and then-President Obama signed, the Consumer Review Fairness Act of 2016, 15 USC Section 45b.

Interestingly, this law has some similarities to – but is more detailed than – a law that California put into effect about two years earlier. See Consumer Non-disparagement Clauses Nixed in California. However, the federal law applies only to consumer reviews that involve interstate commerce. (more…)

Constructive Notice Makes Sense – Here’s Why

Logo for Quora, where Dana Shultz answered a question about constructive noticeThis post is about a legal concept, constructive notice.

Its origin is a Quora answer that I provided. Please see If nobody reads the Terms of Service then how can they legally be acceptable as a disclaimer? (more…)

How Can I Calculate My Share Ownership Percentage?

2% graphic illustrating share ownership percentageI am writing this post about calculating one’s share ownership percentage because of an email exchange I had on behalf of a client.

We had formed a Delaware corporation with 10 million authorized shares. Of the authorized shares, 8 million had been issued to the founder.

The founder and an independent contractor had agreed on equity compensation for the contractor. The agreed-upon share ownership percentage was 2%.

The contractor thought that he should receive 200,000 shares (2% of 10 million). The rest of this post explains how and why the contractor was incorrect. (more…)

DMCA Designated Agent List Going Online

Logo of US Copyright Office, which announced that its DMCA designated agent paper filings will transition to an online systemThe U.S. Copyright Office maintains designated agent records under the Digital Millennium Copyright Act (DMCA). The Office recently announced that will be moving from paper to an online system.

DMCA Background

The DMCA protects online service providers against liability for user-provided content that infringes third parties’ copyrights. (Please see Terms of Use and the Digital Millennium Copyright Act (DMCA) .) However, there are several requirements for that protection to exist. (more…)

Corporate Officers Need Not Be Human Beings (in Many States)

Logo for Quora, where Dana Shultz answered a question, stating that corporate officers need not be human beingsThis post discusses my surprise at finding that there apparently is no requirement that corporate officers be human beings.

My answer to a Quora question is the basis for this post. Please see Could an A.I. create a company and do all the functions typical of another company?

I was about to write an answer stating that corporate officers be natural persons (human beings). But with a bit of research, I found that apparently is not the case! (more…)

What are Novelty and Non-obviousness?

Logo for Quora, where Dana Shultz answered a question about novelty and non-obviousness for utility patentsNovelty and non-obviousness are requirements for a utility patent to be granted in the United States.

This post explains the meaning of novelty and non-obviousness. I have based this on my answer to a Quora question. Please see What exactly defines novelty and non-obvious in regards to patenting?

USPTO on Novelty and Non-obviousness

I have copied, below (emphasis added), portions of what the U.S. Patent and Trademark Office says about these criteria. For more information, please see General information concerning patents. (more…)

How Can I Avoid Misappropriating Trade Secrets?

Logo for Quora, where Dana Shultz answered a question about how one can avoid misappropriating a former employer's trade secretsThis post discusses how one can avoid misappropriating a former employer’s trade secrets. I first wrote about this topic on Quora. Please see How does one make sure one doesn’t misappropriate software trade secrets?

Definition of Trade Secret

Unfortunately, there is no single definition of “trade secret”. Definitions vary somewhat from state to state, and the U.S. government recently created its own definition. (Please see Trade Secrets Receive Federal Protection.) (more…)

What is a Certificate of Determination?

Logo for Avvo, where Dana Shultz answered a question about: a Certificate of DeterminationOne of my Avvo answers led me to write this post. Please see CA corp Certificate of Determination: must it include tag-along and drag-along provisions?

Corporations, by default, issue common shares to shareholders. However, corporations also can issue preferred shares. Preferred shares have characteristics (“preferences“) that typically make those shares more desirable than common shares. Please see What is Preferred Stock?

(more…)

Document Discriminator Appears on Driver’s Licenses

Logo for Quora, where Dana Shultz answered a question about the Document Discriminator that has been appearing on various states' driver's licensesThis post about the so-called Document Discriminator on driver’s licenses is somewhat off-topic for this blog. However, I find this tidbit of information so interesting that I feel compelled to write about it.

I first presented this information in a Quora answer that I wrote last month. Please see What does the DD on a Michigan driver’s license mean?

DD = Document Discriminator

DD is an abbreviation for Document Discriminator. A number of states started adding this piece of information to their driver’s licenses several years ago. (more…)

When is a Shareholder Vote Required?

Logo for Avvo, where Dana Shultz answered a question about: when a shareholder vote is requiredThis post discusses when a California corporation must hold a shareholder vote.

It is based on an Avvo answer that I wrote recently. Please see Beside elections, are there corporate decisions that REQUIRE the vote of the shareholders?

California Shareholder Vote Requirements

A corporation must hold a shareholder vote to approve the following actions. Please note that this may not be a comprehensive list. Reference links are to the relevant California Corporations Code sections. (more…)

Employment Law for Foreigners

Logo for Quora, where Dana Shultz answered a question about U.S. employment law for foreignersThis post is about employment law. It is directed particularly to people from other countries who are not familiar with U.S. employment practices.

It is based on my answer to a Quora question.  Please see What are the most important aspects of American labor law that a foreigner trying to make a terrestrial logistics company in (any state of) the U.S. should take into consideration?

I am providing this answer based on my experience helping dozens of international clients conduct businesses in the U.S.

(more…)

$800 Franchise Tax is Due Even if LLC is Canceled

Logo for Quora, where Dana Shulltz answered a question about California's $800 franchise taxThis post about California’s $800 franchise tax is based on my recent answer to a Quora question.

Q.: In California, can someone shut down an LLC before the $800 franchise tax is due on the 15th day of the 4th month?

A.: One can cancel a California limited liability company before the 15th day of the fourth month. However, such cancellation will not eliminate the obligation to pay the $800 annual franchise tax. (more…)

Trade Secrets Receive Federal Protection

Photo of volumes of the United States Code, symbolizing DTSA protection of trade secretsThis post discusses the civil and criminal protections for trade secrets available since May 12, 2016 under the federal Defend Trade Secrets Act (DTSA).

Relevant definitions in the DTSA roughly follow – with numerous modest differences – those in the Uniform Trade Secrets Act , which has been adopted, with various modifications, by almost all states. (more…)

May a Minor Be a Partner?

Logo for Avvo, where Dana Shultz answered a question about: May a minor be a partner in a partnership?This post answers the following question: May a minor be a partner (in a partnership legal entity)? It is based on my answer to an Avvo question. Please see In California, can a minor be a partner in a General Partnership?

As initially written, this answer applied solely to California. However, an update, below, discusses applicability to other states. (more…)

Moonlighting Employees Protected by California Labor Code

California Labor Code, which has a section that protects employee moonlightingMoonlighting employees in California have a right to hold down their second jobs (or to work on startups in their spare time).

The right to moonlight – and to engage in other activities on one’s own time – is expressed in Labor Code Section 96(k).

Labor Code Section 96

Section 96 identifies, generally, the types of employee claims that the California Labor Commissioner is obligated to accept. These include, for example, claims pertaining to payment of wages and expenses; damages arising from misrepresented conditions of employment; claims for vacation pay; and awards for workers’ compensation benefits.

Moonlighting is addressed as follows. (more…)

DTSA (Defend Trade Secrets Act) Requires Notice to Employees

Photo of Obama signing a bill, symbolizing enactment of DTSAUntil recently, trade secrets were solely a matter of state law.  However, on May 11, 2016, President Obama signed the DTSA, the Defend Trade Secrets Act of 2016.

Because of the DTSA, trade secret misappropriation suits with an interstate component now can be filed in federal court. For more information about civil and criminal enforcement, please see Trade Secrets Receive Federal Protection. (more…)

Are Dissolution and Cancellation the Same?

Logo for Avvo, where Dana Shultz answered a question about dissolution and cancellation of a limited liability company (LLC).This post is about dissolution and cancellation of limited liability companies (LLCs) in California.

It is based on an Avvo question that I answered. Please see What is the difference between a canceling or dissolving LLC? (more…)

CA-RULLCA Receives Corrections Two Years Later

Photo of CA Corporations Code, which contains CA-RULLCA statutesIn RULLCA Brings New LLC Laws to California in 2014 , I explained how California’s version of the Revised Uniform Limited Liability Company Act (“RULLCA” or “CA-RULLCA” – Corporations Code Sections 17701.01 – 17713.13 ) was to take effect January 1, 2014. This post describes changes to CA-RULLCA that took effect on January 1, 2016.

Most of the changes were minor clean-up of the sort that one expects when major new legislation is adopted. However, some of the changes are noteworthy. (more…)

Corporate Compliance Center Joins Hall of Shame

Part of notice provided by Corporate Compliance CenterIt is time to add another corporate compliance vendor – Corporate Compliance Center – to this blog’s Hall of Shame.

This story is so common that it would be boring if we weren’t discussing scam artists. (more…)

Monthly Missives Compilation Now Available

Picture of a calendar, symbolizing Dana Shultz's monthly missivesFrom late 2004 to early 2016, I published a not-quite-monthly email newsletter on various business-related legal topics – what I called my “monthly missives“.

I recently compiled the nearly 100 emails and have made the collection available on the Downloads page.

(more…)

Apple-FBI “Backdoor” Blog on Quora

Picture of FBI logo and Tim Cook symbolizing the Apple-FBI "backdoor" disputeI am fascinated by the Apple-FBI dispute concerning opening a “backdoor” to an iPhone used by one of the San Bernardino killers. As a result, I recently created the Apple-FBI “Backdoor” Blog on Quora.

The blog’s first two posts list:

  • Significant court filings and orders for that case.
  • Quora questions and answers that help explain the nature and details of the Apple-FBI dispute.

I intend to update those posts over time, and to add new posts when it is appropriate to do so.

Photo credit: Apple vs. the FBI: A Closer Look – Late Night with Seth Meyers

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Why Aren’t All LLCs Manager-managed?

Logo for Quora, where Dana Shultz answered a question about manager-managed LLCsThis post about manager-managed limited liability companies is based on a Quora question  that I answered. Please see Why are not all LLCs manager-managed?

In this post I will refer to California law. I expect that the law of many, if not all, other states is similar.

Default is Member-managed…

The default is that a limited liability company is member-managed. Corporations Code Section 17704.07(a) states: “A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.” (more…)

HTML Code Receives Copyright Protection

An example of simple HTML codeHTML (HyperText Markup Language) is the standard markup language that is used to create web pages. In a recent decision, the U.S. District Court for the Northern District of California determined that HTML code may receive copyright protection.

The case is Media.net Advertising FZ-LLC v. Netseer, Inc. Plaintiff Media.net alleged, among other causes of action, copyright infringement. (more…)

Yes, a Stranger Can Cancel Your LLC!

Logo for Quora, where Dana Shultz answered a question about how a stranger can cancel your LLC or corporationThis post discusses how (amazingly!) an unauthorized stranger can cancel your LLC (limited liability company) or corporation. It is based on a Quora question that I answered. See What prevents someone from filing a restated certificate of incorporation for a Delaware corporation in which they are not authorized to do so?

Unfortunately, the ease with which entity-formation documents can be filed in the U.S. – while facilitating business startups – does allow unauthorized filing of such documents. This means that, whether accidentally or intentionally, a stranger can cancel your LLC (or corporation). (more…)

What is a DMCA Counter Notification?

Screen shot from YouTube tutorial re filing a DMCA counter notification

Screen shot from YouTube counter notification tutorial

In Terms of Use and the Digital Millennium Copyright Act (DMCA), I discussed DMCA provisions pertaining to takedown notices. This post discusses how an online service provider should respond to a takedown notice and the role of the counter notification.

17 U.S.C. Section 512(c)(1)(C) states that for a provider to be protected by the DMCA, it must respond to a valid takedown notice by “respond[ing] expeditiously to remove, or disable access to, the material that is claimed to be infringing….” (more…)

Limited Liability – a Definition

Logo for Quora, where Dana Shultz answered a question about the meaning of limited liabilityThis post on the meaning of the term limited liability is based on a Quora answer that I provided.

Please see What does limited liability and unlimited liability mean in case of companies? (more…)

Attorney-Client Confidentiality vs. Attorney-Client Privilege

Graphic with reference to California Business and Professions Code, the source of attorney-client confidentiality obligationsAttorney-client confidentiality” and “attorney-client privilege” are terms that non-lawyers frequently mistake for one another or misuse. This post explains the difference between those terms.

While this post cites California law, similar considerations are likely to apply in other states.

Attorney-Client Confidentiality

An attorney’s obligation to maintain client information in confidence is set forth in Business and Professions Code Section 6068(e) . (more…)

Hyperlink in Email Can Create Binding Terms

Stained-glass seal of U.S Court of Appeals for the Second Circuit which decided hyperlink caseIn Online Terms can be Binding, even if You don’t have to Click!, I discussed enforceability of a website’s “browsewrap” terms of service. This post discusses how an email hyperlink can create binding contractual terms.

Lawsuit Brought in New York

Elizabeth Starkey filed suit in the U.S. District Court for the Southern District of New York against travel company G Adventures, Inc. The suit alleged that a G Adventures employee sexually assaulted Starkey during a vacation trip. (more…)

What Does an Incorporator Do?

Logo for Quora, where Dana Shultz answered a question about the role of an incorporator in corporate formationThis post discusses the role of the incorporator when a corporation is formed. I decided to write this after answering a Quora question. Please see When a third party files Articles of Incorporation as the incorporator for a company, what are the necessary steps to ensure that the company is legally released to the directors?

The incorporator signs the corporation’s Articles or Certificate of Incorporation. When I form a corporation for a client, the client typically takes that role.
(more…)

Corporate Personhood May Be More than a Legal Concept

Logo for WSJ.com, which published an article about corporate personhoodCorporate personhood – the idea that business entities may have some of the same legal rights and responsibilities as human beings – is a contentious legal concept. However, in his recent Mind and Matter column in the Wall Street Journal (Our Brains Say Corporations Are People, Too), neuroendocrinologist Robert Sapolsky cited studies showing that as far as the human brain is concerned, corporate personhood is not merely a legal concept.

Quoting a portion of that column (emphasis added): (more…)

FTC Says Gag Clauses Violate Federal Law

Seal of the Federal Trade Commission, which filed a Complaint about gag clausesLast year, I wrote about a California law that prohibits non-disparagement clauses in consumer contracts. (See Consumer Non-disparagement Clauses Nixed in California.) Recently, the Federal Trade Commission took the position that such “gag clauses violate federal law, as well.

Roca Labs’ Obesity Treatment

Roca Labs, Inc. claims that it has an alternative to bariatric surgery as a treatment for obesity. Roca says that its “proprietary regimen decreases hunger motivation, decreases urge to eat, and reduces gastric capacity by 45% to 65%.” (more…)

Consider Fair Use Before Sending DMCA Takedown Notice

Logo for YouTube, which was involved in a case illustrating why one must consider fair use before sending a DMCA takedown noticeThis post is based on a recent federal appellate case, Lenz v. Universal Music. That case held that one must consider fair use as a possible defense for an online service provider before sending a takedown notice under the Digital Millennium Copyright Act (DMCA).

DMCA Background

I provided an overview of the DMCA in Terms of Use and the Digital Millennium Copyright Act (DMCA). Quoting a portion of that post: (more…)

Google Scholar Offers Case Research for the Masses

Logo for Quora, where Dana Shultz answered a question about Google ScholarThis post about Google Scholar is a bit off-topic, discussing free online legal research, which is not necessarily a startup issue. However, this information is based on my answer to a Quora question that I am pleased to share here. See Where does Google Scholar get its case law (full-text court opinions) from?

I was intrigued by this question, having wondered, myself, how Google Scholar obtained full-text case law (court opinions). (more…)

“Work Made for Hire” Can Convert a Contractor to an Employee

California Labor Code, whcih can convert a contractor to an employeeIn California, a “work made for hire” (WMFH) provision in a contract can convert a contractor to an employee. This post describes the statutory basis for this little-known area of the  law.

Before providing details, I will note that the (likely unwanted) ability to convert a contractor to an employee will arise only under narrowly-defined circumstances.

  • The independent contractor must be an individual rather than a legal entity (a corporation or limited liability company).
  • The relevant contract must expressly specify WMFH treatment for the contractor’s work product.
  • The contractual relationship must be governed by California law. (I don’t know whether any other states have similar laws.)

(more…)

Personal Cell Phone Use for Work Must be Reimbursed

Photo of the building housing the court that decided a case about reimbursing personal cell phone use by employees

California Court of Appeal for the Second District (Los Angeles)

This post discusses a 2014 case (Cochran v. Schwan’s Home Service, Inc.) which held that California employers must reimburse employees who use a personal cell phone for work.

Plaintiff Colin Cochran, as class representative, brought a class action lawsuit against Schwan’s Home Service (“Home Service”) on behalf of 1,500 service managers employed by Home Service. The suit sought, among other things, reimbursement of the managers’ work-related personal cell phone expenses. (more…)

“Happy Birthday” May Be in the Public Domain, After All

Photo of lit candles on a cake that spell "Happy Birthday"You probably have sung Happy Birthday [to You]” countless times. This post is about a company that has been collecting royalties from that song and the possibility that those royalties soon may stop.

In 1893, sisters Mildred Jane Hill and Patty Smith Hill published a collection of children’s songs. One of the songs – with the tune that we now know for “Happy Birthday to You” – was “Good Morning to All”.

Good morning to you,
Good morning to you,
Good morning, dear children,
Good morning to all.

While no one knows for sure who wrote the “Happy Birthday” lyrics, their first known publication was in 1912. (more…)

FTC Endorsement Guides FAQ Updated

Seal of the Federal Trade Commission, this post being about the FAQ for the FTC Endorsement GuidesSeveral years ago, I wrote about the FTC Endorsement Guides. (These are known more formally as the Federal Trade Commission Guides Concerning the Use of Endorsements and Testimonials in Advertising.) This post discusses a recent update to the FAQ for the FTC Endorsement Guides.

Scope of the FTC Enforcement Guides

The following excerpts from the Introduction to the FAQ provide a succinct overview of the scope of the FTC Endorsement Guides. (more…)

What is an Operating Agreement?

The first page of an operating agreementI have used the term “operating agreement” in quite a few of this blog’s posts. However none of those posts explains in detail what a limited liability company (LLC) operating agreement must contain. This post provides that information.

The required contents of an operating agreement depend on the state in which the LLC is formed.

Operating Agreement – California

In California, where I practice, the definition of an operating agreement is set forth in Corporations Code Section 17701.02(s). (more…)

What is the Origin of the Copyright Symbol (©)?

Logo for Quora, where Dana Shultz answered a question about the copyright symbol "©"This post about the origin of the copyright symbol (©) is based on my answer to a Quora question. See Why are the symbols of “©” and “®” used to identify copyrights and registered trademarks?

Copyright Symbol as Part of Copyright Notice

The copyright symbol “©” can be part of a copyright notice under current copyright law. See 17 USC Section 401(b). (For more information about copyright notices, see Copyright Protection in Once Easy Lesson .) (more…)

May a Minor Form an LLC?

Photo of cheering children, symbolizing "May a minor form an LLC?This post – asking “May a minor form an LLC?” – is a companion to May a Minor Form a Corporation?

I have been wanting to write this post for more than two years, ever  since writing the corporation post referenced above. However, as  explained further below, I felt uncomfortable doing so because I was  somewhat unsure of the answer. (more…)

Fraudulent Takedown Notice Leads to $25,000 Judgment

Logo for WordPress, which won a lawsuit about a fraudulent takedown noticeEarlier this month, the U.S. District Court for the Northern District of California ordered the author of a fraudulent takedown notice under the Digital Millennium Copyright Act to pay more than $25,000.

U.K. Student Journalist Oliver Hotham has a blog on WordPress.com, which is operated by San Francisco-based Automattic Inc. (more…)

Why do legal documents use Shall rather than Will?

Logo for Quora, where Dana Shultz answered a question about using Shall rather than WillThis post, about why many legal documents use Shall rather than Will, is based on a Quora answer that I wrote. See Why was “should” substituted for “would” in the 1800s? For example, why did people say, “I should like to have some pie” rather than “I would like to have some pie”?

Future Tense – Shall vs. Will

Although few people other than linguists are aware of the following, proper use of shall or will in the future tense depends on whether the subject is the first, second or third person. For example: (more…)

Telling Facebook Friends Means Telling the World

Facebook logo for post about disclosing information to Facebook friendsThis post explains something that we all should know intuitively. If you disclose information to your Facebook friends, you potentially have disclosed it to the entire world.

Matthew Richard Palmieri was a contractor for the United States. He lost his industrial security clearance after the government investigated certain of his activities.

Palmieri brought suit (without a lawyer) against various government agencies and officials in the United States District Court for the District of Columbia. The suit identified 30 ways in which the defendants allegedly violated his rights. (more…)

Je Suis Charlie

"Je Suis Charlie" at top of Charlie Hebdo homepage

Charlie Hebdo homepage, announcing that the next issue will be published on Tuesday, January 14

Je suis Charlie (French for “I am Charlie”).

This post supports freedom of expression, generally, and more particularly Parisian satirical weekly Charlie Hebdo, which was the victim of a massacre by Islamist radicals on January 7, 2015.

Being a bit of a francophone and francophile (see Paris: What a Difference a Decade Makes), and having relatives in Paris, I feel it is especially important to join millions of people throughout the world proclaiming that we value freedom of speech and that we will not be intimidated by thugs. (more…)

Should I Form Separate Legal Entities for Different Lines of Business?

Sign for a forked road, symbolizing separate legal entitiesThis post discusses whether one should form separate legal entities (corporations or limited liability companies) for different lines of business.

I am writing this post because I have seen this type of question online many times. The most recent occurrence was on Avvo. See Should I set up a subdivision or have a LLC or corporation own another LLC? (more…)

How to Dissolve a Delaware Corporation or LLC

Seal of the Delaware Division of Corporations, symbolizing this post by Dana Shultz about how to dissolve a Delaware corporation or LLCThis post discusses how to dissolve a Delaware corporation or LLC (limited liability company) – i.e., how to terminate the entity’s existence.

For information about dissolving California entities, see How to Kill Your Company when that’s the Only Choice. (more…)

What are Repeated and Successive Transactions?

Seal of the California Secretary of State, with which a foreign entity must register once it enters into repeated and successive transactions within the stateIn Doing Business in CA? Be Sure to Register, I discussed when a foreign entity must register to do business in California. The test is whether the entity has transacted intrastate business, i.e., has engaged in repeated and successive transactions of business within the state. This post explores the meaning of “repeated and successive transactions“.

Repeated and Successive Transactions” Not Defined

The term “repeated and successive transactions” appears in Corporations Code Subsection 191(a). Unfortunately, that term is not defined. However, another portion of Section 191 provides a bit of help. (more…)

Who Is Bound by a Pre-incorporation Contract?

Logo for Avvo, where Dana Shultz answered a pre-incorporation contract questionThis post about entering into a pre-incorporation contract is based on a question I answered on Avvo. See Can I legally speak as my company in things like terms & conditions if I have not officially registered the company yet?

The term “pre-incorporation contract” properly should apply only to corporations, because that is the only type of business entity that is incorporated. Other types of business entities, such as limited liability companies (LLCs), are formed, rather than incorporated. However, as is discussed below, a pre-formation contract (in California, at least) is treated like a pre-incorporation contract. See 02 Development, LLC v. 607 South Park, LLC . (more…)

Fraudulent Email Prohibitions Supplement CAN-SPAM

Cover of the California Business and Professions Code, which has a section about fraudulent emailIn Commercial E-mail and CAN-SPAM: What You Need to Know, I discussed how the federal CAN-SPAM Act makes commercial email more truthful, more transparent and more avoidable. This post addresses how California law concerning fraudulent email supplements CAN-SPAM.

In particular, this post discusses preemption, by which, under certain circumstances, U.S. federal laws can invalidate state laws that address a given subject matter. (more…)

Can Parties Enter Into a Perpetual Contract?

Logo for Quora, where Dana Shultz answered a question about entering into a perpetual contractThis post is about whether parties may enter into a perpetual contract (one that never ends).

It is adapted from my answer to a question on Quora. See Is it possible to structure a contract with no end date?

It turns out the the answer depends, to some extent, on which state’s law applies. (more…)

Directors’ Voting Rights Can Be Limited

Logo for Quora, where Dana Shultz answered a question about limiting directors' voting rightsThis post about limiting directors’ voting rights is based on my answer to a Quora question. (See Can a business owner draw up bylaws/articles of an organization that limit voting rights of directors?)

The incorporator or shareholders may approve a certificate of incorporation or bylaws that limit directors’ voting rights. (more…)

How Much Does It Cost to Obtain an EIN?

Internal Revenue Service logo, symbolizing the cost to obtain an EINThis post about the cost to obtain an EIN (Employer Identification Number) in the United States is an Advertisement under Rule of Professional Conduct 1-400, Standard 5 (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).

Recently I have received many inquiries from foreign owners of new companies in the U.S. They want to know how much it will cost to obtain an EIN from the Internal Revenue Service. This post provides that information. (more…)

Trade Dress Protection for Look and Feel

Logo of Ingrid & isabel, plaintiff in a case about trade dress protection of website look and feelIn How Can I Protect the Look and Feel of My Website?, I explained that the “look and feel” of a website – or a smartphone – can be protected as trade dress or by a design patent.

This post examines a recent case that discusses the elements of trade dress protection in detail. That case is Ingrid & Isabel, LLC v. Baby Be Mine, LLC, decided by the United States District Court for the Northern District of California. (more…)

What is Successor Liability and Why Should I Care?

Logo for Quora, which was the inspiration for this post about successor liabilityThis post about successor liability is prompted by a question that I answered recently on Quora. (See Can I dissolve my corporation and transfer its website to my personal ownership?)

The following is oriented somewhat toward California law, but similar considerations likely apply in other states. (more…)

Good Faith and Fair Dealing – Part of Every California Contract

Logo of Baskin-Robbins, party to case about implied covenant of good faith and fair dealingThis post discusses and explains the covenant of good faith and fair dealing.

For decades, courts have held that this covenant is implied in every California contract.

Purpose of Good Faith and Fair Dealing

In 1942, the California Supreme Court stated that “in every contract there exists an implied covenant of good faith and fair dealing.” The intent of this covenant is that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract“. (Universal Sales Corporation v. California Press Manufacturing – emphasis added.) (more…)

Under RULLCA Operating Agreements Have Limits

California State Flag, symbolizing this post about RULLCA operating agreementsAt the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.

RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons. (more…)

How to Perfect an Intellectual Property Security Interest

COpyright Office Document Cover Sheet - can be used to record an intellectual property security interest

Copyright Office Document Cover Sheet

Last week I explained what a security interest is and how it can be perfected, i.e., made effective against third parties. (See What is a Security Interest, and Why Should I Care?) This post discusses how to perfect an intellectual property security interest.

To recap, a security interest is an interest in an asset (the “collateral”) intended to secure performance of an obligation. Typically, that obligation is payment of a debt. Perfection typically consists of filing, with one of more secretaries of state, documents that identify the debtor, the creditor and the collateral. (more…)

What is a Security Interest, and Why Should I Care?

Form UCC-1, which is used to perfect a security interest

Form UCC-1

This post explains what a security interest is, how it is used, and why it is significant.

A security interest is an interest in an asset that is intended to secure performance of an obligation. Typically, the obligation that is secured is payment of a debt.

Terminology: The person who owes money is called the debtor. The person to whom money is owed is the creditor.

Many of us grant a security interest when we buy a house. In exchange for providing money for the purchase, the lender receives a mortgage (or, in California, a deed of trust). This is a type of security interest. (more…)

Consumer Non-disparagement Clauses Nixed in California

Yelp logo, symbolizing prohibition of consumer non-disparagement clauses under California lawEarlier this month, Governor Brown approved California Assembly Bill No. 2365. This bill added Civil Code Section 1670.8, which prohibits non-disparagement clauses in consumer contracts.

Statute Prohibits Non-disparagement Clauses

Core protections are set forth in Subsection (a) of that statute. (more…)

URS – ICANN Offers Uniform Rapid Suspension against Cybersquatters

Logo for ICANN, which developed URS - Uniform Rapid SuspensionI have written several times about ICANN’s longstanding Uniform Domain Name Dispute Resolution Policy (UDRP). This post discusses a more recent way to thwart some cybersquatters, namely, URS – Uniform Rapid Suspension.

According to ICANN explains, URS exists to “provide rapid relief to trademark holders for the most clear-cut cases of infringement“. Furthermore, URS is cheaper and faster than UDRP. (more…)

LLCs: Why an Operating Agreement is Important

Logo for Quora, where Dana Shultz discussed why an operating agreement is importantThis post discusses why an operating agreement is important for every limited liability company (LLC). It expands upon an answer I provided on Quora several months ago. (See In simple terms, why are operating agreements important?)

An operating agreement is an agreement among the members of an LLC. It addresses relations among the members and how the LLC will conduct its affairs. (more…)

A DBA is not a Legal Entity

Logo for Avvo, where Dana Shultz answered a question, noting that a DBA is not a legal entityThis post is based on a question that I answered on Avvo. The question illustrates a common misunderstanding concerning DBAs. (DBA is an abbreviation for “doing business as” – i.e., in California terminology a fictitious business name or FBN.) The questioner did not realize that a DBA is not a legal entity!

Q. Can someone sue a DBA for breach of contract by the parent corporation? (more…)

Can I Walk Away from My Suspended LLC?

Photo of people walking, symbolizing walking away from a suspended LLCThis post addresses a question that arises frequently from founders of California limited liability companies that have been suspended: Can I walk away from my suspended LLC?

A suspended LLC is the result of a founder who has neglected to file Statements of Information with the Secretary of State, or file returns with or pay amounts due to the Franchise Tax Board, or both of the foregoing. Please see Why was My Corporation / LLC Suspended or Forfeited? (more…)

What Does Non-binding Mean and Why Should I Care?

Photo of an arm chained to a wall, symbolizing binding vs. non-binding obligationsThis post discusses the meaning of non-binding with respect to a letter of intent (LOI) or a memorandum of understanding (MOU). (Non-binding has a similar meaning in other legal contexts, such as legislation or arbitration, but I will not discuss those contexts here.)

Although I will refer to solely an LOI in the remainder of this post, the following pertains to an MOU, as well.

Please note that whereas “memorandum of understanding” and “letter of intent” are the terms typically used in the U.S., the corresponding term in the U.K. is “heads of terms“. (more…)

Entity Conversion Can Be Easy – If You Know What You Are Doing

Logo for Quora, where Dana Shultz answered a question about entity conversionThis post about entity conversion is an expanded version of an answer that I provided on Quora yesterday. (How do I convert a Delaware LLC to a California LLC?)

In my experience, entity conversion typically occurs for either, or both, of the following reasons.

  1. The need to convert a limited liability company (LLC) to a corporation to accept an investment from an institutional investor, such as a venture capitalist.
  2. The need to move an entity from one state to another. This typically occurs because the founder relocates, or because an investor prefers to invest in a Delaware corporation.

(more…)

How Do We Issue Corporate Shares?

Share certificate, symbolizing how to issue corporate sharesSeveral weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.

To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized. (more…)

Meaningful Privacy Policy Statements – the California Perspective

Seal aof the California Attorney General, who published guidelines for a meaningful privacy policyLast month, California’s Attorney General published her latest privacy-protection guidelines.  The title of the publication is Making your Privacy Practices Public – Recommendations on Developing a Meaningful Privacy Policy.

Executive Summary – Meaningful Privacy Policy Statements

Quoting from the beginning of the publication’s Executive Summary [emphasis added]: (more…)

Negotiating Software Licenses – What Really Counts

Photo of shaking hands, which symbolizes negotiating software license agreementsThis post addresses the most important issues that are raised in negotiating software licenses.

I will assume that parties have agreed on pricing. (Otherwise, there is no point negotiating license terms!) In addition, I will ignore the lengthy legal “boilerplate” that appears in most software license agreements.

Four Critical Issues in Negotiating Software Licenses

In my experience, there are four issues that must be examined closely, and often result in much discussion, when negotiating software licenses. (more…)

What is a Unanimous Written Consent?

FreeBSD Foundation Unanimous Written Consent

The FreeBSD Foundation – Unanimous Written Consent of Directors

This post explains what a Unanimous Written Consent is. (Sometimes it is called an Action by Unanimous Written Consent.)

The term Unanimous Written Consent typically is used in the context of a corporation, which is the focus of this post. However, it can pertain to limited liability companies and other types of legal entities, as well. (more…)

How Do We Issue LLC Membership Interests?

Logo for Quora where Dana Shultz answered a question about LLC membership interestsWhen one forms a limited liability company (LLC) without a lawyer, there is a high likelihood that LLC membership interests will not be issued properly. This post describes how to issue LLC membership interests. It is adapted from a Quora question about LLC membership vesting that I answered.

Properly-Issued LLC Membership Interests

If LLC membership interests are issued properly, one would expect to see several things. (more…)

Vator Splash Oakland – May 6-7 – Special Discounts Available

Logo for Vator Splash OaklandVator Splash Oakland – a two-day startup competition and educational event – will take place May 6-7, 2014 at Jack London Square.

Readers of this blog are entitled to a 35% discount on all tickets except Scrappy Observer and Afterparty, which already are greatly reduced. Use discount code Schulz5. (more…)

How Can I Move My Corporation to Another State?

Logo for Quora, where Dana Shultz answered a question about moving a corporation to another stateThis post addresses how one may move an existing corporation to another state. It is based on a question that I answered on Quora (What state is best to incorporate an S-corp if you plan on moving away?).

I find that for most entrepreneurs, it makes sense to incorporate in the state where the entrepreneur resides. As I wrote in In which State should My Startup Incorporate?

Incorporate in the state in which you are doing business, unless there is a good reason to do otherwise [in which case the other state chosen probably will be Delaware]. (more…)

RBS Posts Ridiculous Article + Disclaimer

Logo for RBS, whose ridiculous disclaimer made it the subject of this postA friend recently showed me a ridiculous article that RBS posted on its website last year. (Please see The five trends shaping Germany to 2030.)

That post isn’t ridiculous because of the article’s content. It is ridiculous because the disclaimer RBS provided following that article, at 994 words, is almost twice as long as the article, itself!

RBS Disclaimer Details

Furthermore, if one reads the mind-numbing disclaimer word-by-word, one finds some interesting content.

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Plagiarism and Copyright Infringement – Two Sides of the Same Coin

Logo for Quora, where Dana Shultz answered a question about plagiarismThis post compares plagiarism and copyright infringement. It is prompted by a Quora question that I answered several months ago. (See Have your ideas or works ever been plagiarized? What happened?)

Plagiarism Defined

Plagiarism is the wrongful appropriate on another’s work and presenting it as one’s own. One typically thinks of plagiarism occurring in academia or journalism. However, as discussed below, it can occur in other professions, too.

Copyright Infringement Defined

The holder of the copyright in a work has certain exclusive rights with respect to that work. These include (as applicable) the rights to reproduce, distribute, publicly perform, publicly display, and make derivative works of the work. Copyright infringement is use of a work, without permission of the copyright holder, that infringes on one of those exclusive rights.

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Kickstarter Limits Foreign Entrepreneurs

Kickstarter logoKickstarter is a funding platform for creative projects. Recently, I have seen a surge of interest among foreign companies wishing to set up Kickstarter projects in the US. This post discusses the challenges those companies will face.

Kickstarter Creator Requirements

Kickstarter states the following concerning Who can use Kickstarter (updated November 24, 2017): (more…)

Must a Corporation Issue All Authorized Shares?

Sample stock transfer ledger, symbolizing that a US corporation need not issue all authorized shares

Sample Stock Transfer Ledger

This post is based on a conversation I had with a foreign client recently. Q. Must a corporation issue all authorized shares?

A. No, a corporate may, but it does not need to, issue all authorized shares.

Foreign Parent Audit

This question arose because my foreign client was being audited. The auditors thought that they had uncovered a problem.

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Virtual Office Choices when You Need a Physical Address

Logo of Investopedia, which provides a definition of virtual officeMany of my startup clients begin with a virtual office, rather than a physical facility. They do this for convenience and to save money – or because the client is located outside the U.S. Sometimes, however, a physical address is required. This post discusses commonly-used physical address alternatives.

Definition of Virtual Office

The term virtual office can have different meanings in different contexts.

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Patent Licensee: Have a Track Record if You Want to Succeed

Logo for Quora where Dana Shultz answered a question from a prospective patent licenseeThis post is adapted from my answer to a Quora question from a prospective patent licensee. Q. How do I propose a licensing agreement with a patent holder?

A. In my experience, the most important thing that a prospective patent licensee needs to bring to the table is a successful track record.

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Harvard Business Services Joins Hall of Shame

Logo of Harvard Business Services, which joined this blog's Hall of ShameHarvard Business Services, Inc. has joined this blog’s Hall of Shame.

Prior to retaining me, one of my international clients used Harvard Business Services to form a Delaware corporation. During that process, HBS made two significant mistakes that I had to fix.

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Can I Save Money by Preparing a Contract for My Lawyer to Review?

Logo for Quora, where Dana Shultz answered a question about whether a client can save money by preparing a contract for lawyer reviewThis post is inspired by a Quora question that I answered. Q. Can I save money by preparing a contract for my lawyer to review?

A. No. Here is an explanation of why not.

Clients sometimes think that if they do the work to prepare the first draft of an agreement, they can save money because a lawyer will need less time to complete the agreement.

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Who Appoints the Members of a Board Committee?

Logo for Quora, where Dana Shultz answered a question about appointing members of a corporate board committeeThis post addresses a generalized version of a question that I answered on Quora concerning committees of corporate boards of directors. Q. Who appoints the members of a board committee?

A. Appointment of board committee members is governed by the corporation’s bylaws, or by applicable statutes if there are no bylaws. In my experience, bylaws (or statutes) state that a board committee is appointed by a majority of the board members. Committees are not appointed by the CEO or the Chair of the Board. (more…)

How Can I Find a Lost EIN?

Internal Revenue Service logo, symbolizing a lost EINAn Employer Identification Number, issued by the Internal Revenue Service, is the most important identifying number for US businesses, especially for tax purposes. This post addresses how you can find a lost EIN.

Find the Lost EIN Yourself

The IRS Lost or Misplaced Your EIN? page starts by recommending searches for existing records that should include the lost EIN:

  • The IRS confirmation notice that was provided when the EIN was issued.
  • Bank accounts that were opened, or governmental licenses that were issued, based on the EIN.
  • Tax return that were filed.
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Can I Form a Corporation with a Future Filing Date?

Logo for Avvo, where Dana answered a question about future filing dateThis post expands upon an Avvo answer that I provided. Q. Can I form a corporation with a future filing date?

A. Yes. The answer will vary slightly depending on the state of incorporation.

Future Filing Date in Delaware

If you want a future filing date in Delaware, Section 103(c)(4) of the General Corporation Law says, in relevant part:

(more…)

What if I Don’t File a Limited Offering Exemption Notice?

Banner for California Department of Business Oversight, where Limited Offering Exemption Notice is filedThis post is based on a question that I answered on Quora: What happens if you do not file a Limited Offering Exemption Notice in California?

Limited Offering Exemption Notice Requirement

I first addressed the Limited Offering Exemption Notice in Section 25102 (f) – Securities Law Compliance if You Incorporate in California. As that post explains, LOEN filing is required for corporate share issuances that are exempt from securities registration requirements in California.

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Nonbank Lenders Increasingly Attractive to Small Businesses – WSJ

Logo for WSJ.com, which published an article about nonbank lendersNonbank lenders are becoming increasingly attractive to small businesses, according to an article published today in the Wall Street Journal. (Alternative Lenders Peddle Pricey Commercial Loans)

The lenders cited in the article include OnDeck Capital Inc., Kabbage Inc., CAN Capital Inc. and Business Financial Services Inc.

Loans Offered by Nonbank Lenders

Nonbank lenders offer loans that typically are for less than $50,000 and have high interest rates – sometimes more than 50% per year. The article says that such loans, nevertheless, are popular for the following reasons. (more…)

RULLCA Brings New LLC Laws to California in 2014

Logo of the California Secretary of State, symbolizing RULLCA (the California Revised Uniform Limited Company Act)RULLCA is an abbreviation for the California Revised Uniform Limited Liability Company Act. That Act will bring new LLC laws to the state starting January 1, 2014.

RULLCA – Up to Date and in the Mainstream

RULLCA is intended to reflect changes in LLC law during the past 20 years. Also, it will make California’s LLC law more similar to LLC law in other states.

Perhaps most interesting, the new law applies automatically to all California LLCs in existence as of the effective date. It will apply to all out-of-state LLCs that are registered in California, as of that date, as well. No new documents need be filed with the Secretary of State. The new law has neither opt-in nor opt-out procedures.

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Stock Transfer Ledger Available for Download

Stock transfer ledger templateToday I added a stock transfer ledger template to the documents available for free user downloads. Corporations can use this template to help track the issuance of shares and transfer (or repurchase) of shares after they have been issued.

At the Downloads page, click on Stock Transfer Ledger. You browser then will make the stock transfer ledger file (an Excel spreadsheet) available for download.

I was prompted to make this file available by a question on Quora (What’s the best way to establish an electronic version of a corporate share register?).

Related post: How Do We Issue Corporate Shares?

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

When Is It OK to Incorporate Online?

Ads for "incorporate online"Many entrepreneurs need to control expenses – including legal fees. One way to do that is to incorporate online rather than work with a lawyer. Occasionally I am asked, “When is it OK to incorporate online?

My greatest concern when entrepreneurs incorporate online is that they have no way to know whether the process has been completed properly. This is particularly true with respect to issuing shares – a critical task.

In answering this question, I look for activities that increase the likelihood of a dispute or a lawsuit. I ask:

Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership

Label saying "100% free", symbolizing buying an equity interest by future services rather than cashFuture services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).

Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.

However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.

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You Don’t Need an ITIN to Bring Your Company to the US

Logo of the Internal Revenue Service, which issues the ITINI recently have received several inquiries about whether a foreign company or its owners need an ITIN (Individual Taxpayer Identification Number) when they bring their business to the US. The answer is, “No.” The rest of this post explains why that is the case.

When a company wants to do business in the US, it needs an EIN (Employer Identification Number).

For a foreign or foreign-owned company, obtaining an EIN can be intimidating. This is especially true if the principal officer lacks a US social security number. (The EIN cannot be obtained quickly and easily online.)

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Pitch Coaches Teach How to Sell in the US

Logo of WSJ.com, which ran an article about pitch coachesIn a recent article (Foreign Entrepreneurs Learn Art of the American Pitch), the Wall Street Journal discussed the role of “pitch coaches” who help foreign entrepreneurs promote themselves in the US. While the article focused primarily on pitches to investors, it applies to selling one’s business to clients and colleagues, as well.

The thrust of the article is that selling in the US is different from selling in other countries. In my work with international clients, I have seen the same thing.

Here are some of the ways that pitch coaches say pitches need to be tailored to work best in the US.

What is a Corporate Seal, and Do I Need One?

Picture of a corporate sealWhen I form a corporation for a client, I purchase a customized corporate records book, which comes with share certificates and a corporate seal. This post explains what a corporate seal is and when it might be used.

A corporate seal is a hand-operated metal device that can emboss the corporation’s name and state and date of incorporation on a piece of paper. It, thus, can serve as evidence that the corporation acknowledges an agreement or other document as binding the corporation.

Picture of a sealed envelopeAs an analogy, think of an English king, centuries ago, sealing a letter with molten wax and making an impression of his ring in the wax before it hardens. Whoever received the letter would know that it came from the king.

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Can I Have a Corporation with Multiple Businesses?

Photo of a man juggling, symbolizing a corporation with multiple businessesThis post is based on a question I have seen online many times. Q. Can I have a corporation with multiple businesses?

A. Yes, you can have a corporation with multiple businesses. Furthermore, those businesses need not be similar or related. So, for example, your corporation might do both software development and per sitting.

However, there is a more important question. Should you have a corporation with multiple businesses?

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Enforcing Inspection Rights – “Absolute” Does not Mean “Absolute” in California

Picture of a magnifying glass over a page, to symbolize enforcing inspection rightsIn Directors’ Inspection Rights Include (Almost) Anything in California, I discussed corporate directors’ inspection rights. Quoting California Corporations Code Section 1602, I noted that directors have an “absolute right” to inspect corporate records and physical properties. This post explains that in enforcing inspection rights, “absolute” is not really “absolute”.

The fundamental limitation, established in case law, is that a director may not use inspection rights to harm the corporation. (more…)

Ridiculous Yelp Lawsuit Alleges Reviewers are Employees

Yelp logo - post about ridiculous Yelp lawsuit alleging reviewers and employeesDo you wonder why lawyers often have a bad reputation? If so, consider the ridiculous Yelp lawsuit alleging that Yelp’s reviewers are employees of the company.

Yelp is an online review site and local business search service. Consumers are encouraged to write reviews of, and rate their satisfaction with, various products and services.

Historically, controversies have concerned whether Yelp punishes businesses for not advertising on the site (which Yelp denies). More recently, business owners have complained about Yelp’s automated tools for removing false or inappropriate (e.g., paid) reviews based on unpublished criteria.

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How Do We Add a New LLC Member?

Photo of signing a contract, symbolizing amending an operating agreement to add a new LLC memberRecently, I have seen several limited liability company (LLC) members ask, online, how they can add a new LLC member. This post provides the answer, which is pretty simple.

Short answer: One must amend the Operating Agreement to add a new LLC member.

Slightly longer answer: An Operating Agreement (OA) can be oral or written. A written OA is better because it clearly documents the members’ agreement concerning the LLC.

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Which Open Source License Should We Choose?

Logo for the Open Source Initiative, which can help developers choose which open source license to useSoftware developers may have decided to provide open source software, but they may not know which open source license to use. This post describes three resources developers can consult to help make that decision.

First, Open Source Initiative maintains a comprehensive list of open source software licenses. Licenses are grouped into categories, starting with the most popular licenses. However, the OSI site does not provide any tools to help decide which open source license to use.

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Is a Copyright Notice with Multiple Years Legitimate?

Circle-C symbol representing a copyright notice with multiple yearsWe all have seen a typical copyright notice (e.g., “Copyright 2013 Anyhow, Inc.”) countless times. However, every once in a while, someone will see a copyright notice with multiple years (e.g., “2010-2013”) and will wonder whether it is legitimate.

As is explained in Copyright Protection in One Easy Lesson, 17 USC Section 401 states that a copyright notice must contain three elements.

  1. The symbol © (the letter C in a circle), the word “Copyright”, or the abbreviation “Copr.”
  2. The year of first publication.
  3. The name of the copyright owner.

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Privacy on the Go – California Attorney General Publishes Recommendations

Seal of the California Attorney General, which published Privacy on the GoPrivacy on the Go was published by California’s Attorney General in January 2013. It offers the AG’s privacy practice recommendations for participants at all levels of the mobile ecosystem.

Privacy on the Go begins with a message from the AG. Part of that message explains why the publication was produced (emphasis added).

The world has gone mobile. Today, 85 percent of American adults own a cell phone and over half of them use their phones to access the Internet. The mobile app marketplace is also booming with more than 1,600 new mobile apps being introduced every day. These apps allow us to do everything from streaming movies to hailing a cab to viewing our own X-ray and ultrasound images.

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Social Media and Investors – WSJ Explains How

Logo of WSJ.com, which published an article about social media and investorsIn an article published today, the Wall Street Journal discusses how social media and investors can come together for the benefit of startup entrepreneurs. (If You Look Good on Twitter, VCs May Take Notice)

According to the article, more “venture capitalists are taking social media into consideration before they decide to pour millions of dollars into a startup” [emphasis added].

The article includes the following eight tips [emphasis added] for how to bring a startup’s social media and investors together most effectively.

  1. (more…)

Online Terms of Use – What Should We Include?

Logo for Quora, where Dana Shultz answered a question about online terms of useThis post about online terms of use is based on a Quora question that I answered today. The question and my answer are reproduced with minor edits below.

Q. What things should I include in an online terms of use agreement for a new internet startup?

A. Assuming that your lawyer is experienced at drafting terms of use, s/he will be able to contribute the required knowledge of relevant legal issues.

Your input is critical with respect to the specific needs of your business:

  • Identify the various classes of users of your site.
  • For each class, describe the business relationship between users and your site / business. Include risks and other issues that particularly concern you.
  • Examine the terms of use for similarly-situated existing sites to uncover additional issues that you may not have thought of on your own.

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Can I Sell a Partnership Interest in California?

Logo for Avvo, where Dana Shultz answered a question about whether one can sell a partnership interestI recently answered an Avvo question about whether one can sell a partnership interest. The question and answer are paraphrased below (with emphasis added).

Q. In California, is a general partnership terminated upon the sale of one partner’s interest to a third party? How would the remaining partner and new partner continue business? Would a new entity need to be formed? There is no written partnership agreement.

A. Corporations Code Section 16201 states that “A partnership is an entity distinct from its partners.” Therefore, a membership change does not, by itself, create a new partnership.

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Labor Compliance Office Joins Hall of Shame

Labor Compliance Office notice to a corporationLabor Compliance Office is one of many companies that use fear of the law and subterfuge to extract money from naive owners of small businesses. What is interesting about LCO, however, is that it focuses on compliance with labor laws rather than corporate laws.

One of my clients brought Labor Compliance Office to my attention. (As agent for service of process for several other clients, I had already received copies of LCO’s pink-accented NOTICE.) Fortunately, even though the notice looks like it came from a governmental entity (the disclaimer is not readily apparent), my client was not taken in by the threat of fines up to $17,000.

Labor Compliance Office proposes to help the reader’s business avoid such fines by providing for $275 a poster that includes all notices required by California and federal labor laws. In addition, the business receives:

Required Officers – California Corporations are Unique

Cover of the California Corporations Code, which has a statute about required officers in corporationsOfficers conduct a corporation’s day-to-day business. Among the states, California law is unique in its set of required officers.

California Corporations Code Section 312(a) states that each California corporation must have:

  • A chairman of the board or a president or both;
  • A secretary; and
  • A chief financial officer.

Additional officers are optional.

That Code section also provides that the president is the chief executive officer of the corporation, unless the articles of incorporation or the bylaws state otherwise.

Other states typically take an approach similar to that specified in Delaware General Corporation Law Section 142 (emphasis added):

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Section 25102 (f) – Securities Law Compliance if You Incorporate in California

Banner for California Department of Business Oversight, where Section 25102 (f) notices are filedWhen startups incorporate, they typically want to avoid the expense, delay and effort associated with registering the sale of their shares. In California, the most common exemption from registration is found in Corporations Code Section 25102 (f).

Section 25102 (f) says that a corporation need not register the sale of its shares if all of the following requirements are met:

  • The shares are sold to no more than 35 shareholders.
  • All purchasers have a preexisting relationship with the corporation or its officers, directors or controlling persons.
  • Each purchaser is buying shares for the purchaser’s own account and not for resale.
  • The offer and sale of the shares is not accompanied by the publication of any advertisement.

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What is a Stock Assignment Separate from Certificate?

Image of a Stock Assignment Separate from Certificate

I recently introduced a client to the document called a Stock Assignment Separate from Certificate. While well-known to business lawyers, this document is not known to most business owners.

The client was implementing employee and management stock plans. To provide stock for the plans, the corporation was going to repurchase shares from the founders.

The CFO asked whether and how the founders should complete and sign the assignment provision on the back of their share certificates.

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What is an Inc. and Why Should I Want One?

Logo for Inc

Frequently, an international prospect or client will tell me that he wants to create an Inc. to run his business in the in the United States. This post explains what an “Inc.” is and where the term comes from.

History and Other Countries

For centuries, in the interest of fostering economic activity, governments have recognized certain types of businesses as separate legal entities. Investors’ liability is limited to the amount invested (“limited personal liability”). Investors’ other assets, beyond the amount invested, may not be taken to satisfy the business’s debts or other obligations.

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How Should I Use a Fictitious Business Name?

Logo for Quora, the source for a question about fictitious business names

This post is adapted from my answer to a Quora question about use of a fictitious business name (FBN): Q. Must an LLC with a fictitious business name display the LLC name on its website?

A. In my opinion, an entity’s proper name and complete identification should be provided in every agreement. Agreements include website terms of service. Example showing how to include both the entity name and the FBN:

[Company Name], LLC, a California limited liability company doing business as [Fictitious Business Name], with a place of business at [address]

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California Secretary of State Reduces Turnaround Times!

California Secretary of State logo

California Secretary of State turnaround times for corporate and LLC formation – which stretched to their longest ever early this year – now have been reduced significantly.

The reason: In April, the state Legislature passed a bill authorizing $1.6 million for overtime and temporary personnel to resolve a backlog of 122,000 business filings! (more…)

Independent Contractor Misclassification Can Be Expensive

Picture of several gold bars, symbolizing the cost of misclassifying an independent contractor

I have written several times about potential undesirable consequences of misclassifying an employee as an independent contractor. It’s time for an update.

In 2012, California Labor Code Section 226.8 took effect. That statute is directed toward willful (i.e., voluntary and knowing) misclassification of employees as independent contractors. Consequences can include the following. (more…)

Terminology: Joint Venture vs. Strategic Alliance

Logo for Quora, the source for a question about terminology - joint venture vs strategic alliance

This post is based on a Quora question about legal / business terminology that I answered recently. ? Q. What is the difference between a joint venture and a strategic alliance.

A. A joint venture involves creating a new entity in which the equity is shared by the participants.

A strategic alliance is an agreement by which the participants pursue an objective while remaining independent organizations.

The difference is whether a new legal entity is created. This makes it essential that correct terminology be used when describing a relationship between businesses.

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A. T. Kearney: US Seen as Best for Foreign Direct Investment

Logo for AT Kearney, which publisheds study about foreign direct investment

Last week, global management consulting firm A.T. Kearney released its 2013 Foreign Direct Investment Confidence Index. The major surprise: For the first time in more than a decade, senior executives in large companies chose the US as the most favorable place to make foreign direct investment (FDI).

According to Kearney, the US rose to the top for the following reasons:

  • After downturn-induced cutbacks, companies are investing in productivity-enhancing tools and equipment.
  • The dollar has weakened, while wages in developing countries have risen.
  • Most notably, China slipped to second place because increasing labor costs raise questions about the long-term attractiveness of China’s development model.

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The First Sale Doctrine: If I Own It, I Can Sell It

Green traffic light - symbol of first sale doctrine providing go-ahead, defense against IP infringement claim

Copyright and trademark owners typically like to exercise their legal rights as broadly as possible. There is however, a well-known limit to those rights called the “first sale doctrine“.

Actually, they are two separate but similar doctrines. One pertains to copyrights, the other to trademarks:

  • Copyrights17 USC Section 109(a) states, with certain exceptions, that the owner of a lawfully-made copy of a work may sell or dispose of the work. Consent of the copyright owner is not required. So, for example, if you legitimately possess a book or a CD, you may sell it or give it to someone else or throw it into a trash bin.
  • Trademarks – The trademark first sale doctrine is a product of case law rather than statute. In Sebastian International, Inc. v. Longs Drug Stores Corporation, the United States Court of Appeals for the Ninth Circuit wrote: “[W]ith certain well-defined exceptions, the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product. Resale by the first purchaser of the original article under the producer’s trademark is neither trademark infringement nor unfair competition.” The exceptions include, for example, stolen or counterfeit goods or goods that have avoided the producer’s quality control systems.

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Do Corporate Directors’ Voting Rights Depend on the Number of Shares They Own?

Logo for Quora, the source for a question about corporate directors' voting rights

This post about corporate directors’ voting rights is based on a question that I answered recently both for a client and on Quora. Q. Do corporate directors’ voting rights depend on the number of shares they own?

A. No. Board members typically have equal voting rights. However, some states allow directors to have unequal voting rights. See, e.g., Delaware General Corporation Law Section 141(d).

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Corporate Business Filings Joins Hall of Shame

First page from Corporate Business Filings letter

A couple of weeks ago a client emailed me with great concern. He received a letter that looked like a government demand for $225, lest a penalty of $250 be imposed by the state. It turns out that the letter was not from the state, but from Corporate Business Filings, the latest addition to my Hall of Shame.

Most of the way down the second page, the letter does have an oddly-worded disclaimer that there is no obligation to pay the amount requested. However, even though the disclaimer is upper-case, it is not nearly so prominent as the fear-inducing language in the rest of the letter – and it does not comply with a disclaimer that has been required by law since January 1, 2012.

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Directors’ Inspection Rights Include (Almost) Anything in California

Picture of a fox hunt, symbolizing corporate directors' inspection rights

I have written about shareholders’ rights to inspect corporate financial records and shareholder lists. This post discusses directors’ inspection rights, which are far greater.

California Corporations Code Section 1602 states:

Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. This section applies to a director of any foreign corporation having its principal executive office in this state or customarily holding meetings of its board in this state. (more…)

Who Gets to See the Shareholder List?

Photo of page from ship's log book representing this post's discussion of the right to inspect a corporation's shareholder list

The founder of a closely-held corporate client, knowing that some employees soon would be shareholders, recently asked whether those employee-shareholders would have the right to find out how many shares he owns. Here is the information I provided concerning who gets to see the shareholder list.

Because the client is a California corporation, Corporations Code Section 1600(a) governs who gets to see the shareholder list. That Section states, in relevant part (emphasis added):

A shareholder or shareholders holding at least 5 percent in the aggregate of the outstanding voting shares of a corporation…shall have an absolute right to…inspect and copy the record of shareholders’ names and addresses and shareholdings during usual business hours upon five business days’ prior written demand upon the corporation….

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The Definition of Director May Depend on the Context

California Secretary of State logo

While working with one of my international clients several months ago, I re-learned a lesson that I already knew: The meaning of a word (in this case, the definition of Director) may depend on the context.

The client is located in Vietnam and wanted to open a branch office in the Bay Area. It would be “doing business” in California, so it needed to qualify as a foreign corporation.

I duly prepared a Statement and Designation by Foreign Corporation and had it signed by the client’s most senior officer. That officer’s title, translated as “Director,” was entered onto the form.

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Incorporation is for Corporations, not for LLCs

Logo for Quora, where Dana Shultz wrote an answer about the term "incorporation"

This post about incorporation discusses legal terminology. I have adapted it from a Quora answer that I wrote almost two years ago. Q. Why do you “incorporate” corporations but “form” LLCs? Why the differing terminology?

A. Corporations have existed for much longer than LLCs. “Incorporation” is the single word that denotes “forming a corporation”. The obvious tie between the words “corporation” and “incorporation” is why the latter applies only to corporations. (more…)

Which is Best – “Inc.”, “Corp.” or Something Else?

Logo for Quora, the source for a question about Inc. and Corp.

This post is based on and expands upon an answer I provided on Quora. Q. Which company suffix to choose: “Inc.”, “Corp.”, etc? What are the criteria?

Many states – notably including Delaware (General Corporation Law Section 102(a)(1)) but, under most circumstances, excluding California – require that the name of a corporation include a word or abbreviation designating corporate status. Those that are used commonly include Corporation (Corp.), Incorporated (Inc.) and Limited (Ltd.).

The choice is totally a matter of style. This is more a marketing issue than a legal issue.

In my experience, “Inc.” is most popular – typically without a preceding comma, nowadays, for a cleaner look. Indeed, most of my foreign clients say “an Inc.” when they mean “a corporation”!

Related post: What is an Inc. and Why Should I Want One?

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Limitation of Liability and Confidentiality Provisions in Tech Contracts

Logo for Quora, where Dana Shultz abswered a question about limitation of liability

This post is based on a question about limitation of liability that I answered on Quora.

Q. Why do technology contracts often carve breach of confidentiality out of the limitation of liability?

A. I’m going to start by broadening the discussion, a bit.

First, the carve-outs typically modify both limitation of liability and limitation of damages. So, whereas an agreement might include provisions both limiting? the total (dollar) amount of liability and liability for consequential damages, such limitations will not apply to the carved-out subject matter.

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When a Handshake Deal Isn’t Really a Handshake Deal

Logo for Y Combinator, which announced The Handshake Deal Protocol

Last week Y Combinator announced The Handshake Deal Protocol [no longer available online – apparently because of the Protocol’s shortcomings discussed below]. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. This sometimes is considered necessary in Silicon Valley because, in the world of startups, one must move quickly.

As Y Combinator notes, however, a handshake deal can create problems:

Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.

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Chubby Checker Files Ridiculous Trademark Infringement Suit

Photo of Chubby Checker

Chubby Checker (real name Ernest Evans) – the singer famous for The Twist dance craze in the 1960s – and certain corporations that he controls have filed a lawsuit against Hewlett-Packard Company and Palm, Inc. The suit concerns a no-longer-available app named “The Chubby Checker”.

The app purported to allow women to calculate the size of a man’s penis based on his shoe size. According to webOS Nation, the app was downloaded only 84 times before it was removed in September 2012. Yet press reports state that the plaintiffs are seeking damages of $500 million for trademark infringement and unfair competition!

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Class F Shares: A Good Idea?

Logo of the Founder Institute, which invented Class F shares

A client told me that she wants to include Class F shares in the Certificate of Incorporation for her Delaware corporation. This post describes how we concluded that – for this client, at any rate – this was not a good idea.

Class F Shares – History

Class F shares were invented by the Founder Institute several years ago to protect founders largely against investors, especially VCs. (See If You Accept Venture Capital, You will Lose Control of Your Company.) Class F shares provide 2:1 board votes per founder versus normal board members, and 10:1 share votes as compared to normal common shares. (more…)

How Can We Add a Co-founder to Our Corporation?

Logo for Avvo, where Dana Shultz answered a quesiton about how to add a co-founder to a corporation

This post is based on a question about how to add a co-founder to a corporation that I answered recently on Avvo. The question and answer are paraphrased below.

Q. I would like to add a co-founder to an existing corporation. Does the Founder Agreement need to be changed? How can I make a co-founder designation?

A. The term “add a co-founder” has little or no significance in this context.

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Do LLC Officers Have a Fiduciary Duty?

Picture of a meerkat on duty, symbolizing whether LLC officers have fiduciary duties

Officers of a corporation have a fiduciary duty to both the corporation and its shareholders. (See California Officers Need to Be More Careful than Directors.) I recently had to consider, for a limited liability company in California, whether LLC officers have a similar duty.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

I was preparing the operating agreement for a client’s LLC. The client was to be the sole member (equity owner) and manager. (more…)

WSJ: VCs Reducing Appetite for Risk

WSJ.com logo

In an article published today (Venture Capital to Suppress Its Appetite for Risk in 2013), the Wall Street Journal reports that venture capitalists have dramatically lowered their appetite for risk, reducing the power of Internet entrepreneurs who are seeking funding.

The article notes that:

  • In light of disappointing stock-market performance of Facebook, Zynga and Groupon, VCs are investing less in consumer Internet companies.
  • During the past year, valuations have gone down significantly.
  • On a quarter-over-quarter basis, the number of deals, the amount invested and the percentage of “up” rounds all have declined.

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Can a Partnership Have Just One Partner?

Picture of courthouse

This post’s title question about a one-partner partnership might seem silly: The common-sense answer is “No”, because one cannot be one’s own partner. As I learned recently working with a client who wants to dissolve a partnership, this is one situation where the law (in California, at least) and common sense agree.

To start, Corporations Code Section 16101(9) states that a partnership requires two or more partners.

Last year, in Corrales v. Corrales, the Court of Appeal for the Fourth District, Division 3 (courthouse pictured) answered an interesting question: What happens to a two-person partnership when one partner withdraws?

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If You Want Personal Info from CA Residents, You Need a Privacy Policy

Seal of the California Attorney General, who addressed privacy policy requirements

Any Website provider or online service – including any mobile app – that collects personally identifiable information from users residing in California needs to have a privacy policy. And that privacy policy must be posted conspicuously. The details are set forth in Business and Professions Code Sections 22575 through 22579.

Personally identifiable information includes, but is not necessarily limited to:

  • First and last name
  • Physical address, including street name and name of a city or town
  • Email address
  • Telephone number
  • Social security number
  • Any other identifier that permits the physical or online contacting of a specific individual

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What is a Board of Directors?

Quora logo

This post is based on a Quora question that I answered: Q. What is the board of directors? What are the functions of the board of directors? What is the function of each member of the board?

A. The board of directors, which is subject to shareholder election and removal, generally is responsible for managing the corporation’s business and affairs.

Specific responsibilities typically undertaken by a board (particularly in a mature company) include, but are not necessarily limited to, the following: (more…)

Avoid Paying California $800 per Year … for 15 Days

Logo of Franchise Tax Board, which charges the California $800 annual tax

The California $800 per year minimum franchise tax applies to both corporations and limited liability companies. Many people do not realize, however, that the tax can be avoided – at least, for a short time.

As explained in Franchise Tax Board Publications 1060 (for corporations) and 3556 (for LLCs), there is a “15-day rule” or “15-day exception” stating that the minimum franchise tax need not be paid for an initial tax year if:

  • The corporation or LLC was formed (Articles filed with the Secretary of State) during the last 15 days of the entity’s tax year, and
  • The entity conducted no business during that period.

So, if an entity has a tax year ending December 31 (as most do), then it can be formed on December 17 or later, and it will not have to pay the California $800 minimum franchise tax until the following year.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What are General Partners and Limited Partners?

Logo for Quora, which was the source for a question about general partners

This post is based on a question about general partners that I answered on Quora a couple of weeks ago.

Q.: Why do general partnerships and limited partnerships both have a “general partner” position?

A.: General partners – in each type of partnership – have control over and manage the business. They are jointly and severally liable for the partnership’s obligations. (more…)

Help – I Lost My SSN!

Seal of the Social Security Administration, which gives out each social security number ( SSN )

One of my foreign clients received a social security number as a child when he and his parents lived in the US for a year. Unfortunately, he could not find his SSN – which would help him obtain an Employer Identification Number for the corporation I was forming. (See Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.)

He asked whether I could help him retrieve his SSN. Here is what I found.

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You Can’t Change Online Terms Solely by Email

Great Fun logo

In Changing Online Terms of Use? Be Sure to Give Notice First!, I discussed a case that held that merely changing a website’s online terms does not bind users to the new terms – the users must receive notice that the terms have changed and how they have changed. This post discusses a recent case (Schnabel v. Trilegiant Corp.) that comes to a consistent conclusion from a different direction: Merely sending an email that adds a provision to existing online terms does not bind users to that provision.

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Why I Like Being a Lawyer

Quora logo

This post (which, I admit, is a bit off-topic for this blog) is based on a Quora question that I answered.

Q. Attorneys: Why do you love being a lawyer? (Kindly exclude financial reasons.)

A. For me, “love” would be an overstatement. However, I consider myself quite fortunate in that:

  1. I get a great deal of satisfaction from helping my clients (for a startup, everything I do is significant).
  2. As a solo I am my own boss, so I get to do what I want when I want.
  3. My training to “spot the issue” is valuable in all aspects of my life, not just my work.
  4. The vast majority of my professional interactions are with people having greater-than-average intelligence, ambition, integrity and accomplishments.
  5. Because I need to have many clients (startups don’t have a lot of money for legal fees), I learn about many different types of businesses.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

 

California Commissioned Employees Must Have a Written Employment Contract

Cover of the California Labor Code

Effective January 1, 2013, every employee in California who is compensated, entirely or partially, by commission must have a written employment contract that states the method by which commissions will be computed and paid.

Labor Code Section 2571(a) says:

By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

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Mobile Apps: Respecting Users’ Rights

Federal Trade Commission seal

From time to time, developers inquire about best practices in marketing their mobile apps and protecting users’ privacy. Last month the Federal Trade Commission expressed its opinion on these issues (Marketing Your Mobile App: Get It Right from the Start).

On the marketing side, the FTC has two guidelines:

  • Tell the truth about what your app can do.
  • Disclose key information clearly and conspicuously (make sure that users actually notice your disclosures and are able to understand them).

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How Can I Enter a Non-US Address on the Statement of Information Form?

Avvo logo

This post is adapted from an Avvo question that I answered. The questioner was having trouble figuring out how to enter foreign addresses in the Statement of Information form that California corporations file with the Secretary of State each year.

Q. I need to file Form SI-200 for a California corporation. The officers are foreign persons living outside of the US, but the form does not have a field for country. How can I solve this Problem?

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“Doing Business” Requires More than an Employee and an Office

Cover page from commercial office lease

In Doing Business in CA? Be Sure to Register, I wrote that an out-of-state corporation that “enter[s] into repeated and successive transactions of its business in [California] other than interstate or foreign commerce” must register with the Secretary of State as a foreign corporation, and that a penalty for failing to do so is being precluded from maintaining actions in California courts. A recent case in the US District Court for the Northern District of California (Jarzab v. KM Enterprises) provides an example of what does not constitute “repeated and successive transactions”.

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IncNow Joins Hall of Shame

Logo for IncNow, the subject of this blog post

Almost two years ago, I wrote about how Delaware corporations with no-par-value stock can find themselves obligated to pay extraordinarily high franchise taxes (In Delaware, No-Par-Value Can Cost a Bundle). Yesterday, a reader of this blog pointed out that IncNow, an online incorporation service, virtually lures naive customers into this tax trap.

Here is what the reader reported to me:

  • IncNow’s default assumption is that no-par stock will be issued.
  • IncNow does not invite the user to specify a par value (in contrast to LegalZoom, for example, which does).
  • IncNow’s representative said that the reader “could assign a par value to shares, under special requests at the bottom of the checkout form” [emphasis added].

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Single-Member LLCs – What’s the Deal?

Logo for Avvo, where Dana Shultz answered a question about single-member LLCs

From time to time, I receive question from entrepreneurs about alleged deficiencies in single-member LLCs (limited liability companies).  (As is discussed below, single-member LLCs are different from multi-member LLCs.) This post is adapted from a question about single-member LLCs that I answered on Avvo.

Single-Member LLCs Provide Limited Liability Protection

Q. What is a best way to include a relative-foreigner as LLC member in CA? I formed single-member LLC in CA. Unfortunately I found later that single-member LLCs do not provide usual limited liability protection. (more…)

Consumer Reports: Legal Websites May Lead to Unintended Results

Logo for Consumer Reports, which published a report about legal websites

The September 2012 issue of Consumer Reports magazine includes an article that examines legal websites LegalZoom, Nolo and Rocket Lawyer (Legal DIY websites are no match for a pro). The article’s conclusions and recommendations:

  • “Using any of the three services is generally better than drafting the documents yourself without legal training or not having them at all. But unless your needs are simple…none of the will-writing products is likely to entirely meet your needs. And in some cases, the other documents aren?t specific enough or contain language that could lead to ‘an unintended result’….”
  • “The sites offer basic legal advice that might help save you money spent on a lawyer. If you use them for document prep, at minimum get all needed signatures to preserve your rights and prevent disputes….”
  • “But many consumers are better off consulting a lawyer. The websites let you search for one and provide such information as education, background, and licenses…. We recommend checking with your state bar association for any disciplinary actions.”

As concerns finding lawyers online, a resource not among the legal websites mentioned by Consumer Reports is Avvo, which has a comprehensive database of lawyers in all states, frequently including information about qualifications and practice areas.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What is a Branch Office?

Picture of tree branches in front of an office building, symbolizing a branch office

Generally, when a foreign client starts a new business in the U.S., we form a new corporation for both business and legal reasons. Recently, however, I had an interesting experience helping a foreign client set up a branch office without forming a new legal entity.

The client acknowledged the benefits of a new corporation. However, procedural issues for the client (located in Southeast Asia), would result in the necessary approvals taking too long. As a result, the client asked that I first provide help setting up a branch office in Silicon Valley. That branch office later would be used by a new California corporation that we would form.

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What is Preferred Stock?

Picture of a large tomato and a small tomato, symbolizing preferred stock and common stock

Preferred stock typically is issued to venture capitalists or other institutional investors. Its name is derived from the fact that it has significant “preferences” relative to common stock, which is the basic equity security that is issued when a corporation is formed.

Common stockholders’ principal right is to vote on the election of directors and on other fundamental corporate matters. In addition, common stock has the potential to increase in value if the corporation performs well financially.

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What are “Best Efforts”?

Picture of a reservoir, symbolizing a case about a contractual obligation to use "best efforts"

Contracts sometimes require that a party use its “best efforts” to carry out its obligations. (This is in contrast to, for example, “commercially reasonable efforts”.) Last month, in California Pines Property Owners Assn. v. Pedotti, the California Court of Appeal for the Third District provided a definition of “best efforts”. (more…)

WSJ: Most Accelerators Are of Doubtful Value

WSJ.com logo

Accelerators offer entrepreneurs seed funding and one-to-one mentoring in exchange for an equity stake, making a profit when some of their startups receive institutional (VC) funding. However, according to a Wall Street Journal article published yesterday (Start-Ups Crowd ‘Accelerators’), most accelerators – especially those outside Silicon Valley, Boston and New York – are of doubtful value.

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May a Minor Form a Corporation?

Logo for Quora, where Dana Shultz addressed "May a minor form a corporation?"

This post asking may a minor form a corporation is based on my answer to a Quora question. Please see Can a little kid register a company in United States?

Answer: States differ as to whether they let a minor form a corporation (i.e., whether a minor can act as an incorporator).

For example, Michigan, according to a 1981 Attorney General opinion, does not let a minor form a corporation. A footnote in that opinion lists 31 other jurisdictions whose incorporation statutes (as of that time) variously require that incorporators either be at least 18 years old or have the capacity to contract. As of the date of that opinion, those jurisdiction were:

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WSJ: How to Ask Friends and Family for Money

Logo for WSJ.com, which published an article about asking friends and family for money

Yesterday the Wall Street Journal published an informative piece about asking people you know and love (i.e., friends and family) for a loan (Do’s and Don’ts of Asking Friends for Money). Here is a recap of the tips offered by experts quoted in the article:

  • Put yourself in the lender’s shoes.
  • Borrow the money as you would from a bank.
  • Bring in a lawyer to draw up the agreement.
  • Ask for more money than you think you need.
  • Assume the worst.
  • Remember “Hamlet”. [“Neither a borrower nor a lender be….”]

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What is a Quasi-California Corporation?

California State Flag, symbolizing a quasi-California corporation

This post is the result of my research on the duties of a director of a Delaware corporation that is located, and doing much of its business, in California. Specifically, I wanted to confirm that California law governed those duties, because it is a so-called quasi-California corporation.

Quasi-California Corporation Criteria

Corporations Code Section 2115 addresses non-California corporations for which (a) most voting shares are held by shareholders in California and (b) the average of the following three factors exceeds 50%.

  • The percentage of its property that is located in California.
  • The percentage of its payroll that is paid in California.
  • The percentage of its sales that take place in California.

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How Can I Make Sure I Receive My Full Royalty?

Curled paper tape from a calculator

Intellectual property license agreements often include a provision by which the licensor is paid a royalty that is calculated as a percentage of the revenue received by the licensee from licensed products. Given that licensees have a financial incentive to reduce the amount of revenue that is reported*, the prudent licensor includes an audit provision in the license agreement.

The audit provision typically:

  • Specifies the frequency and nature of audits that may be conducted;
  • Provides that the licensee will pay any underpayment amount that is discovered plus interest; and
  • Obligates the licensor to pay for the audit unless the underpayment exceeds X% of the royalty that was due, in which case the licensee must reimburse the licensor for the cost of the audit.

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You Can’t Use “Corp” in the Name of an LLC (in CA or NY)

Logo for Quora, symbolizing Dana Shultz's answer to a question about the name of an LLC

This post is based on a question about limited liability companies that I answered on Quora. (The answer focuses on NY, because that was the questioner’s state, and CA, because that is where I practice.) Q. Can I use the word “Corp” in the name of an LLC (for example, AcmeCorp LLC or WhateverCorp LLC)?

The section reference? below has been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

A. No. NY LLC Law Section 204(e) states, inter alia, that the name of an LLC may not contain “corporation” or “incorporated” or any abbreviation or derivative thereof. This prohibition is not unique to NY. California Corporations Code Section 17701.08(e) has a similar prohibition for LLC names.

Check out all posts about LLCs.

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Why You Shouldn’t Use a Finder to Find Venture Capital

Picture of a compass (for determining direction based on magnetic North)

I recently spoke with three startup entrepreneurs who had just retained a finder to locate venture capital in exchange for an equity stake in the form of warrants (the right to purchase shares at a specified price by a specified date). They got very nervous when, after reading their agreement with the finder, I told them the business and legal reasons why retaining the finder was a bad idea: (more…)

What Happens if the Board Doesn’t Approve My Stock Options?

OnStartups logo

This post is adapted from a question I answered on OnStartups. Q. I’ve been working for a large private company, and my offer letter said I would receive X number of options as long as the board approved it. It’s been a year and I’ve been stonewalled on the option plan. I’ve sent multiple emails to HR and the controller and the CFO. HR has gotten back to me, but their hands are tied. Can I send a letter and a check to the CFO with $100 to force the issue of exercising some amount of shares and determining the strike price that way?

A. Unfortunately, “subject to board approval” is a common contingency for stock option grants. At this point, I’m not sure there is much you can do about it.

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Why Does the Other Party Want to Apply NY Law?

This post is based on a question that I answered on OnStartups. Q. I’m in the process of closing a deal with a new client, and the only sticking point is the choice of applicable law. I am located in state A, the client in state B. My contract says it will be governed by the law of state A. The client wants to change this to New York. Why? Would doing so open my company up to any unintended side effects/liabilities (e.g., taxes)?

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Equity-Based Crowd Funding: Pro and Con

Logo for WSJ.com, which published an article about equity-based crowd funding

Congress is considering legislation by which the Securities and Exchange Commission would lift limits on private equity investments, letting companies sell equity interests to investors online (“crowd funding”). Today the Wall Street Journal published a debate on this topic (Should Equity-Based Crowd Funding Be Legal?).

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Should I Send Myself Notice of Annual Meetings?

OnStartups.com logo

This post is adapted from an OnStartups.com question that I answered. The questioner wondered whether, as sole shareholder of a corporation, he needs to give himself notice of annual shareholder meetings.

Q. If I am the only shareholder in a corporation, do I have to give myself notice of annual meetings? It seems silly that I would have to notify myself, but is this required to stay legal?

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Angel Investment: California Leads in Deals and Dollars

Hslo Report logo

On March 8, The Angel Resource Institute, Silicon Valley Bank and CB Insights released the first Halo Report, which analyzes early-stage investments by angel investment groups. Of particular note: In 2011, California accounted for 21% of the deals and 29.8% of the funds invested.

Other noteworthy findings: (more…)

Who Owns My Text Messages?

Quora logo

This post is adapted from the answer that I provided to a Quora question, “Who owns our text messages?”

To start, I wondered what it means to “own” a text message. Black’s Law Dictionary provides such definitions as “have good legal title”, “hold as property” and “possess”. I don’t think the questioner had these in mind, so I think it is correct to focus on ownership of any copyright that may subsist in text messages.

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Why Should We Have an Employee Handbook?

Cover of an employee handbook

Although I’ve written quite a few posts about employee handbooks, I just realized that I never have explicitly stated why an employer should have one – thus, the topic of this post.

An employee handbook is a collection of policies, procedures and other important information that is provided to every employee. Reasons for having an employee handbook include:

  • To let every employee know what is expected of him or her on the job
  • To help ensure that employees are treated equally and appropriately
  • To reduce employee morale problems and complaints related to unstated policies or procedures
  • To reduce the risk that employees will allege unfair practices or unlawful discrimination
  • To enhance the perceived authority and appropriateness of employer decisions that are based on the handbook

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Infographics Explain What the U.S. *Really* is Like

Interstate highway system as a subway map - sample of infographics discussed by this post

Cameron Booth’s Poster: Interstate Highway System as a Subway Map

I found a recent Quora post concerning Interesting Infographics about the U.S. quite entertaining. I realized it could be a quick way for international readers of this blog learn about Americans’ perceptions of the most important issues that they face.

The infographics address topics as diverse as: (more…)

Holland in the Valley: Incorporation for International Companies

Holland in the Valley logo

Several weeks ago, the Netherlands Consulate’s Holland in the Valley staff interviewed me about incorporation for international companies.? Excerpts from our conversation recently were posted at the Holland in the Valley website.

Among the topics we discussed were:

New Feature: Ridiculous Contract Provisions

Businessman wearing a dunce cap

With this post I am inaugurating a new feature that I expect will appear from time to time: Ridiculous contract provisions that I have run across. Today’s post is based on an agreement that I recently reviewed for a client.

The agreement provides standard terms and conditions by which a large utility in the Eastern United States works with its suppliers of products and services. The sentence in question says:

No change, amendment or modification of any of the provisions of this Contract will be binding unless in writing that identifies itself as an amendment to this Contract and that is issued by Company.

In other words, the Company apparently believes that the only requirement for an amendment should be that the Company issued it – irrespective of whether the supplier agrees to the change! Enough said….

Photo credit: iStockphoto

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Corporate Officers in California Need to Be More Careful than Directors

Logo of Indymac Bank, whose corporate officers in California were not protected by the Business Judgment Rule

In California, the so-called Business Judgment Rule (“BJR“) protects corporate directors. They are not responsible for honest mistakes of business judgment. A recent case revealed that the BJR does not protect corporate officers in California.

During 2007, Indymac Bank bought more than $10 billion in risky residential loans. These loans ultimately generating losses of more than $600 million. Indymac closed. The Federal Deposit Insurance Corporation was appointed receiver.

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How Can I Have Reverse Vesting in an LLC?

Quora logo

I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.

Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement? (more…)

Gingrich Domain is Newtered – But the UDRP Probably Won’t Help

In How to Defeat a Cybersquatter, I wrote about using ICANN’s comparatively quick and inexpensive Uniform Domain Name Dispute Resolution Policy (UDRP) to defeat cybersquatters. The domain name NewtGingrich.com recently was squatted upon – but I doubt that Newt will be able to use the UDRP successfully to recover that domain.

Gingrich Communications had owned NewtGingrich.com since 2004, but apparently forgot to renew the domain name in August 2011. By December 2011, it was owned by American Bridge 21st Century, a progressive Political Action Committee. (In the interim, it was owned by entities in Chihuahua, Mexico.)

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Is there Any Reason to Form a General Partnership?

Logo for Quora, where Dana Shultz answered a question about whether to form a general partnership

A short while ago, I answered a Quora question about whether and why a startup might want to form a general partnership. The question and my answer are paraphrased, with emphasis added, below.

Q. What are some of the reasons a business might organize itself as a general partnership? Considering all the liability risk that general partners might potentially face, why not organize as a limited liability company? Was there an era when the general partnership was an attractive form and, if so, why?

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WSJ: Angel Investors are Getting Harder to Sell

WSJ.com logo

In an article published today (Chasing the New Angel Investors), the Wall Street Journal discusses why entrepreneurs must work ever-harder to persuade angel investors to invest.

According to the article, although seed and startup angel investment has increased, there are several reasons why that money is more difficult to attract:

  • Since the recession, many angels have become more demanding, looking for proof of marketplace acceptance rather than a hunch that it exists.
  • Angel groups, which syndicate deals among their members, have a more-formal review process that may involve discussions by dozens of potential investors.
  • With less venture capital available, angels are more concerned about whether a company can grow to profitability or a successful exit.

The article’s advice for entrepreneurs: Have something to show, know your business thoroughly, and polish your pitch.

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

I’m One of Several Inventors – Who Owns the Patent?

A recently-acquired client is one of three inventors of a device that received a U.S. patent. She asked me whether she can freely license to an LLC owned by two of the inventors the right to manufacture products covered by the license. I replied “yes” – here’s why.

35 U.S.C. Section 262 says:

In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.

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When the Other Side Negotiates Too Aggressively….

Picture of two elephants fighting

Several days ago, a Quora question and answer caught may attention. The question asked about things some lawyers do that break, rather than make, deals. I was intrigued by the response “[s]ending over very aggressive opening terms as a negotiating ploy”.

That is a situation I have faced only rarely – most of the time, my clients’ counterparties are pretty reasonable. When excessively unreasonable terms do appear, however, there is a simple response: I refuse to negotiate. Instead, I reply along the line of the following:

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Negotiating Successfully: The #1 Thing You Need to Know

Two playing cards: 7 of spades and 2 of hearts

Several years ago, a friend lamented that he was not very good at negotiating on behalf of his professional-services business. He felt that clients were better at “bluffing” and other negotiating techniques than he was, so he often was paid less than he should have been. I told him the single most important thing he needed to know if he wanted to negotiate successfully:

You have to be willing to walk away.

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What is a Letter of Intent?

Logo for Quora, where Dana Shultz answered a question about what a letter of intent is

Today I answered a Quora question about what a letter of intent is and what it should contain. The question and my answer (each edited slightly) are reproduced below.

Q. What is a letter of intent? What are the legal implications of a letter of intent? What is the purpose? Which elements minimally comprise a letter of intent?

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Here’s an Arbitration Provision I Like!

Second Life logo

I’m not a big fan of mandatory arbitration clauses in contracts: Although arbitration is likely to proceed more quickly than litigation (other than small-claims cases), it is not necessarily less expensive. However, I recently saw an arbitration clause that I like quite a bit.

Linden Research, Inc., developer of the Second Life multi-user online service, includes the following in its Terms of Service (emphasis added):

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Probationary Period for Employees Not Needed and May Cause Problems

Sign saying "You're Fired", symbolizing end of unsuccessful probationary period

The CEO of a client with a half-dozen employees recently asked, “We are about to start hiring again. I would like to add language regarding a 90 day probationary period. Is this a good idea?” My answer was “No.” Here’s why.

I had prepared a form of employment offer letter and an employee handbook for the client. Both of these documents state that employment is at-will. This means that either party may terminate the employment relationship at any time for any (non-discriminatory) reason or for no reason. As a result, at-will employment, by itself, allows a company to terminate the employment of an individual whose performance is inadequate during the first 90 days. A probationary period is not necessary.

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How can I Invest More Money in My Corporation?

Photo of a check with a pen on top of it

This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.

Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.

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What Makes a Contract Easy to Read?

Eyeglasses

A client had been using a form of independent contractor agreement for years and was concerned that the existing agreement did not fully meet the client’s legal needs. I said that I could adapt my form of agreement more cost-effectively than I could fix the client’s agreement. When I did so, I realized that the agreement I provided was much easier to read (aside from being legally tighter and more complete).

What makes the new agreement easier to read? First, it has about 20% fewer words, because I try to make each point once, avoiding the needlessly repetitive words and phrases that lawyers traditionally have delivered.

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WSJ: Rent a Desk, Rather than an Office

wsj.com logo

In an article yesterday (Can’t Afford an Office? Rent a Desk for $275), the Wall Street Journal observed that use of shared workspaces – renting a desk in an open space, rather than renting an office – is increasing throughout the United States.

Such resources have been used for many years by technology startups here in the San Francisco Bay Area. The article specifically cited Plug and Play Tech Center in Sunnyvale (which is exploring expansion to other cities).

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Paris: What a Difference a Decade Makes

Coat of arms of Paris, France

I have been in Paris for several days, and I am surprised by many changes that have occurred in the more than ten years since I was last here. If there is a theme that ties most of those changes together, it is that the world is a much smaller place. Between the Internet and international travel, foreign influences cannot be excluded.

I am fascinated by this topic, because for many years I have been somewhat of a Francophile and Francophone. The great attractions – the Eiffel Tower, Arc de Triomphe, Luxembourg Garden, etc. – make Paris as beautiful as ever and should not be missed. However, I have seen a number of changes in the city’s everyday life: (more…)

Can an Undocumented Immigrant Form a Corporation?

U.S. Citizenship and Immigration Services Logo

This post is based on a question that I answered on OnStartups.com. The short answer is “Yes, an undocumented immigrant can form a corporation.” The rest of this post is adapted from the full answer that I provided.

You can form a corporation – no problem. I have helped dozens of foreign clients (non-citizens, no social security number) go through that process.

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Printing Legends on Share Certificates – Why and How

Sample Share Certificate to illustrate printing legends on share certificates

Sample Share Certificate with Legend from Attorneys Corporation Service, Inc.

Last year, I wrote about the importance of a corporation’s placing appropriate legends on share certificates (Why Do We Need a Corporate Records Book?) and likewise for limited liability company membership certificates (Should My LLC Issue Membership Certificates?). This post provides more details about why legends are required and how to print legends on share certificates. (Although I am using corporation-specific terminology, the considerations are similar for LLCs.)

When including legends on share certificates for clients, one of the most important states that the shares have not been registered under state or federal securities laws.  (I have the company that provides the certificates include it when the certificates initially are printed.) The reason: To put the shareholder on notice that, under applicable securities laws, the shares cannot be transferred unless certain circumstances are satisfied. Here is an example:

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WSJ: New Industry Hubs Drawing Entrepreneurs and Investors

WSJ.com logo

In an article yesterday (Where the Action Is), the Wall Street Journal discussed seven centers of innovation across the U.S. – other than well-known locations, such as Silicon Valley and Boston – where entrepreneurs, investors and government are working together to develop specific industries.

Those industries and their locations are:

  • Outdoor Sports Gear – Ogden, Utah
  • Cybersecurity – San Antonio, Texas
  • Information Technology? – Kansas City, Kansas / Missouri
  • Life Sciences – Indianapolis, Indiana
  • Health Care – Nashville, Tennessee
  • Beer Brewing – Asheville, North Carolina
  • Nanotechnology – Albany, New York

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Corporate Officer Can Be Personally Liable for Copyright Infringement

Blue Nile logo

In Blue Nile v. Ideal Diamond Solutions, the U.S. District Court for the Western District of Washington held that co-defendant Larry Chasin, founder and an officer of defendant IDS, was personally liable for infringement of plaintiff Blue Nile’s copyrighted images, even though Chasin claimed he had no role in putting infringing images on websites and he did not know the images were infringing.

Blue Nile is an online jewelry and diamond retailer. Chasin founded and operated IDS to create websites for brick-and-mortar jewelers to help them compete online. The websites included some of Blue Nile’s copyrighted images.

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LLC Accounting – Allocations vs. Distributions

Accountant's green and white ledger page, symbolixing LLC accounting practices

An entrepreneur who was trying to prepare a limited liability company (LLC) Operating Agreement on his own (apparently using someone else’s as a template) was puzzled by the concept of “sharing losses”. I could tell right away that he was not familiar with two fundamental concepts of LLC accounting: Allocations vs. distributions.

Before going further, I need to make two disclaimers:

  1. This post is not about taxes.
  2. The following discussion is extremely simple, addressing only the most basic considerations. One of the great things about LLCs is that the members can agree to make allocations and distributions in any way they desire to meet their business needs. As a result, LLC accounting can be far more complex than the following might suggest.

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Non-compete Enforced to Protect Trade Secrets

Cover page from Richmond Technologies v. Aumtech court decision, which saw a non-compete enforcedCalifornia is well-known for enforcing post-employment non-compete provisions only under narrowly-defined circumstances. A recent case in the United States District Court for the Northern District of California (Richmond Technologies v. Aumtech Business Solutions) saw a non-compete enforced for the protection of trade secrets.

Jennifer Polito, a former employee of plaintiff Richmond Technologies (which does business as ePayware), started working for defendant Aumtech. ePayware brought suit, alleging that Ms. Polito misappropriated ePayware’s source code, license keys and customer list to help Aumtech compete against ePayware. (more…)

Which Financial Information Must an LLC Provide to its Members?

Photo of a portion of a balance sheet, symbolizing financial information that an LLC must provide to its members

Several months ago, I wrote “Which Financial Information Must a Corporation Provide to its Shareholders? “ This post – prompted by a client’s question – discusses the financial information that a California limited liability company must provide to its members. It also explains that such information cannot be waived by any member.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014). (more…)

When is a Corporate Board not a Board?

Office chairs

This post explains the difference between a corporation’s board of directors and an advisory board – a point that may not be clearly understood by some people, especially those from other countries, where corporate governance is different from that in the U.S.

The board of directors is elected by the shareholders and is responsible for management of the company. It appoints and removes officers (who run the corporation’s day-to-day business) and makes important decisions about finances and other matters. (more…)

Attention Entrepreneur: Have You Planned Your Estate?

I frequently talk to individuals who are about to start new businesses. Sometimes, our conversation reveals that the nascent entrepreneur is:

  • Age 30-something,
  • Married, and
  • Parent of a young child, or has a first child on the way.

When I learn this, I immediately ask, “Have you done any estate planning?” The answer invariably is “No.”

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MarketWatch: Europe’s Start-ups still Drawn to the Valley

Logo for MarketWatch, which published an article about Europe's start-ups

An article, “For Europe?s start-ups, Silicon Valley still calls”, was published yesterday by MarketWatch, part of The Wall Street Journal Digital Network. It discusses why the tech entrepreneurs behind Europe’s start-ups continue to flock to the San Francisco Bay Area.

The article’s theme:

Divided by geography, language, regulation and, in some cases, just old-fashioned cultural prejudice, the region has struggled to shed fully its image as a place where men and women with ideas are born, but where they do not necessarily stay, prosper or secure funding.

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Re-incorporation Won’t Save Amazon Affiliate from Termination

LawPIVOT logo

This post is based on a question that I answered on LawPivot: Q. I have a web business that has been adversely affected by the termination of Amazon’s affiliate program in California, where I currently run the business, resulting from the state’s new sales tax law. Does each state have its own requirements as to what constitutes “doing business” in that state, and is there any way I could maintain CA as my primary place of residence, were I to incorporate in a different state?

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In which State should My Startup Incorporate?

Quora logo

This post about the state in which a startup should incorporate brings together points I have made in earlier posts (please see below) and is based on a comment I made on another Quora participant’s answer.

I admit to having a point of view that differs from that of many other lawyers. However, as explained toward the end of this post, my point of view results directly from the types of clients that I serve.

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Non-compete Snares Conspiring Employer

Document titled "Termination of Employment"

California courts are known for not enforcing non-compete provisions except under narrowly-defined circumstances (see “California doesn’t *always* prohibit non-compete provisions”). In a case last year (Silguero v. Creteguard, Inc.), the Court of Appeal for the Second District held that an employer may not terminate an employee because of another company’s unenforceable non-compete agreement.

In 2003, Rosemary Silguero began working for Floor Seal Technology, Inc. (“FST”). In 2007, FST threatened Silguero with termination if she did not sign a confidentiality agreement that included an 18-month post-employment non-compete provision. Two months later, FST fired her.

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Can a Corporation Issue More Shares than are Authorized?

Quora logo

This post is based on a question that I (and others) answered on Quora: What happens when a corporation issues more shares than are authorized under the Articles of Incorporation?

Answer: The supposedly-issued shares are void – in effect, they do not exist. For the shares to be issued, the Articles (CA) or Certificate (DE) of Incorporation must be amended to increase the authorized number of shares. Then, to be safe, the shares should be re-issued pursuant to an appropriate board resolution.

Related posts:

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What is the Difference between Termination and Expiration?

Dead End sign symbolizing termination or expiration of a contract

Many people (indeed, too many lawyers) are not aware of the difference between termination of an agreement and expiration of an agreement. This post explains that difference and discusses why it matters.

Expiration is the ending of an agreement pursuant to its terms without any action by a party to the agreement. Expiration commonly occurs at the end of a defined period of time – for example, a lease may expire at the end of one year. Expiration may be linked to other events, however. For example, a patent license agreement may expire when the underlying patent expires.

Termination is the ending of an agreement as the result of an action taken by a party to the agreement. For example, an agreement may provide that either party may terminate it upon ten days’ written notice if the other party breaches the agreement and does not cure the breach during the ten-day notice period.

Why the difference matters: A carefully drafted agreement may specify that a party’s rights after expiration differ from its rights after termination. For example, one of my clients has a license agreement under which the client incorporates pieces from a popular board game into jewelry. If the agreement expires, the client may sell off any remaining inventory during the 60-day period following expiration. In contrast, if the agreement is terminated by the licensor for breach by the licensee, there is no sell-off period.

Photo credit: Lars Sundstrom via stock.xchng [Links removed because no longer valid.]

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

WSJ: Entrepreneurs Turn to Peer-to-Peer Loans

WSJ.com logo

In an article yesterday (“Peer-to-Peer Loans Grow”), the Wall Street Journal discussed increasing use of peer-to-peer lending sites such as Prosper and Lending Club by small-business owners.

The reason such use is increasing: During and since the financial crisis, small businesses have had a difficult time obtaining bank loans, and the loans that they can obtain often have unfavorable terms. (more…)

You May Not Need a Lawyer (Yet)

U.S. Small Business Administration logo

A few days ago, a first-time entrepreneur contacted me, asking that I advise him on such issues as employees vs. independent contractors, equity compensation, and the like. As we exchanged e-mails, however, I could see that there were fundamental business issues to which he had not given sufficient consideration. (more…)

What’s the Difference between a Shareholder and a Stockholder?

Sample stock certificate

I recently learned that some people are confused by the terms “shareholder” and “stockholder” and wonder what the difference between them is. Short answer: There is no difference. Each refers to the owner of one or more shares of a corporation’s stock.

Shareholder” is the term used in the California Corporations Code, and “stockholder” is the term used in the Delaware General Corporation Law.

When referring to the law of one of those states, I use the term that appears in that state’s statutes. In general discussions, however, I tend to use the term “shareholder” because I am, and most of the corporations that I form and counsel are, located in CA.

Related post: How Most States Chose “Shareholder” as Delaware Kept “Stockholder”

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Facebook Ads can be Electronic Mail for CAN-SPAM Purposes

Facebook logo

When I wrote about the CAN-SPAM Act of 2003 and the effort to limit unsolicited commercial e-mail (Commercial E-mail and CAN-SPAM: What You Need to Know), I noted that “One of the greatest challenges in complying with CAN-SPAM is figuring out exactly which communications are covered.” Much to my surprise, the U.S. District Court for the Northern District of California recently held that that certain Facebook ads were electronic mail for the purposes of CAN-SPAM!

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Sometimes You *Shouldn’t* Assign All Rights

Screen display of HTML code

I have written, on several occasions, about the importance of assigning copyrights (and other intellectual property rights) when work is done by an independent contractor. (See, e.g., Independent Contractors: How to Assign Copyrights.) Sometimes, however – as suggested in a comment to What is a Derivative Work, and Why should I Care? – it is appropriate not to assign all rights.

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Can I Get an H-1B Visa Working for My Own Company?

Logo of U.S. Citizenship and Immigration Services, which issues the H-1B visa

I have written about opportunities for foreign entrepreneurs who wish to obtain U.S. work visas. (See Visa Basics for Foreign Entrepreneurs Coming to the U.S., Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?) This post focuses on a particularly interesting aspect of this issue. It asks whether and how a foreign entrepreneur can form a corporation in the U.S. and, then, obtain an H-1B visa to work for that corporation.

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Don’t Use Social Media if You Have Something to Hide

Groupon logo

A client sells high-quality collectibles manufactured from authentic sports-related materials (game-used balls, uniforms, arena flooring, stadium seats, etc.). The company ensures that all materials are licensed by the applicable university or professional sports organizations so it can use the organizations’ names and trademarks in promotional activities. Some competitors do not pay for the required licenses, however – and one of these recently was caught as the result of a Groupon promotion.

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I Think the Recession is Over

Fireworks against a nighttime sky

There are two reasons why I now think the recession is over. First, within the past two weeks several clients have seen a dramatic increase in investor / acquisition interest:

  • A client that has been offering secure-communication software for six years found fundraising very difficult one year ago. Now it is being chased by four VCs (and may spurn them all for a super-angel investor).
  • A client that developed a superior e-commerce solution two years ago received a mid-seven-figure acquisition offer from a well-known software company – and immediately rejected the offer, having talked to an investor who said he would give the client a substantially higher valuation.
  • A year-old life sciences company that hasn’t even completed development of its intellectual property – but which has a great underlying technology – is about to receive a low-seven-figures VC investment after putting little time and energy into fundraising.

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If You Accept Venture Capital, You will Lose Control of Your Company

Picture of two teams in a tug of war

After several years of hard work, a client has gained so much traction that venture capitalists – on their own initiative – are asking to make an investment. When the first term sheet arrived, however, the founder / CEO was disappointed – the valuation was fine, but his ability to make significant decisions would be curtailed. I pointed out: If you accept venture capital, you will lose control of your company.

The loss of control does not result from a change in voting power: The VC will own a minority of the corporation’s shares and will control a minority of the seats on the board of directors.

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Copyright Infringement Explained

Logo of the United States Copyright Office, symbolizing this post about copyright infringement

I recently realized that I have referred to copyright infringement in quite a few posts. However, I neglected to define that term. It is time to correct that oversight.

Copyright Infringement Defined

Generally, infringement occurs when a copyrighted work is reproduced, distributed, performed, publicly displayed, or made into a derivative work without the permission of the copyright owner. I.e., copyright infringement is a violation of the copyright owner’s exclusive rights. (See Copyright Protection in One Easy Lesson.) (more…)

When “Doing Business” isn’t “Doing Business”

Scrawled question mark, symbolizing questions about the different meanings of "doing business"

Significant responsibilities or liabilities can depend on whether one is “doing business” in a state. As this post explains (principally referring to California law for examples), doing business” can mean three different things in three different contexts.

Doing Business as a Foreign Entity

First, an out-of-state entity will need to register with a state as a “foreign” entity if it is doing business in the state. As explained in Doing Business in CA? Be Sure to Register”, the term used in the California Corporations Code is to “transact intrastate business”, which is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (emphasis added). (more…)

Stupid Provision Pops Up in NDAs

Dunce cap on a stool in the corner of a room

Twice during the past week clients have asked me to review (someone else’s) nondisclosure agreements (NDAs) that contain a stupid provision of a type that I had not seen for years. That provision is as follows:

RECIPIENT shall not be liable for inadvertent disclosure or use of CONFIDENTIAL INFORMATION nor for unauthorized disclosure or use by persons who are or who have been in its employ or with whom it has contracted provided that it uses the same degree of care in safeguarding such CONFIDENTIAL INFORMATION as it uses for its own CONFIDENTIAL INFORMATION of like importance.

I consider the provision stupid for the following reasons: (more…)

WSJ: Lots of Money for Social Startups

WSJ.com logo

In an article published yesterday (“Money Rushes Into Social Start-Ups”), the Wall Street Journal reported that VCs are investing in companies that are taking social networking from computers to mobile phones. The rationale, according to the article (emphasis added):

Behind the spurt of new services is also the idea that the phone, carried by people at all times, can reinvent the notion of a social network by sharing more real-time information about where people are, what they’re seeing and even who they’re around.

Other points made in the article: (more…)

How Much Information Must I Provide to an Investor?

Quora logo

This post is based on a question that I answered on Quora. Q. Which tax documents is a startup obligated to disclose to its investors? Our angel investor is asking to see the full tax return (Form 1120S plus all Forms 1099). What are his rights versus the corporation?

A. I’ll give a multi-part answer.:

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Which Party Should Prepare the Contract?

Picture of a contract with a gavel on top

In routine commercial transactions, at least one of the parties typically presents a standard-form agreement. But in other situations – perhaps a one-off business relationship, or settlement of a dispute – a new contract must be developed. A question then arises: Which party should prepare the contract?

This is what I tell my clients: (more…)

ICANN to Help Trademark Owners Prevent Cybersquatting

ICANN logo

In an interview in today’s San Francisco Chronicle (“Rod Beckstrom, CEO of ICANN, talks about new domain names“), the CEO of the Internet Corporation for Assigned Names and Numbers stated that ICANN will create a global marks database to help protect trademark owners against cybersquatting.

The database will be developed in conjunction with ICANN’s forthcoming implementation new generic top-level domains (gTLDs). ICANN CEO Rod Beckstrom is quoted in the Chron article as saying (emphasis added): (more…)

WSJ: Web Start-Ups Get Upper Hand Over Investors

WSJ.com logo

In an article published today (“Web Start-Ups Get Upper Hand Over Investors”), the Wall Street Journal reported (emphasis added) that “As venture capitalists scramble to get a piece of Silicon Valley’s new Web boom, entrepreneurs … are finding they have the upper hand.

Here are some of the points the article makes about the latest Web boom:

  • As VCs search for the next Facebook or Twitter, some entrepreneurs are positioned to have a greater say about how much they raise and deal terms.
  • Bidding among VCs is driving up the price of many deals.
  • Angel investors are driving up the prices of the tiniest early-stage companies.
  • Some entrepreneurs are taking advantage of the situation by seeking the best advisors rather than the greatest amount of money.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

How I Sent my Client Weird E-mails

Gmail logo

This post is somewhat off-topic for my blog, being less about business and more about technology. However, it is being written in the context of my forming a corporation for a new client, and it discusses an issue that I find interesting, so here it is. When I noted that the client and I were having trouble communicating effectively online, he commented that some of my e-mails were “weird”.

I had never encountered these sorts of problems before. The client sent screen shots and a description of his actions. I then saw the source of the problem: I use Outlook, while my client uses Gmail.

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Employee Right to Wage Claim Hearing Trumps Arbitration Clause

Photo of the justices of the California Supreme Court

A recent court decision held that an employee in California has the right to file a wage claim and to have a hearing on that claim before the Labor Commissioner, even if the employee has signed an arbitration agreement.

In California, employees who are not paid what they are owed can file wage claims (see Wage Claims – Nasty but [Sometimes] Necessary). Because the employee need not retain legal counsel, and because the Labor Commissioner may help the employee, a wage-claim hearing provides to the employee benefits and leverage that are not available in other venues, such as litigation or arbitration.

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“Giant Cock” Excluded from Apple’s App Store

Logo for Apple, which did not let Giant Cock into its App Store

Yesterday, in San Francisco, I talked to one of the many foreign attendees at the Game Developers Conference. He told me about a game he had developed, which featured a giant rooster.

In the developer’s native language, the word for “rooster” is similar to the English word “cock”, so he called the game “Giant Cock” and submitted it to Apple’s App Store. Apple rejected the game without explanation. (more…)

Paid Online Endorsements – It Appears that Amazon.com Cares, Too

logo for Amazon.com, which may have removed book reviews because they were paid online endorsements

About a year ago, in “Educate Employees about Online Endorsements – the FTC is Watching!” I discussed the Federal Trade Commission’s Guides Concerning the Use of Endorsements and Testimonials in Advertising. It appears that at least one online site – Amazon.com – may be taking the FTC’s guidelines about paid online endorsements pretty seriously.

A prospective client called me recently. She was upset because many of the book reviews she had written on Amazon.com – which were paid for by authors – had been removed on at least two occasions. (more…)

I Think the Economy – and Business Confidence – are Improving

Spray-painted dollar sign

I think the economy – and business confidence – are improving. The reason: During the past week, two of my clients received unsolicited acquisition overtures from well-known Bay Area companies.

I’ll readily admit that this? does not represent a statistically valid sampling of local businesses. Nevertheless, I find this development meaningful because the last time a client was acquired was years ago. (more…)

What is a Derivative Work, and Why should I Care?

Picture of Leonardo's Mona Lisa with mustache and goatee added by Marcel Duchamp

Marcel Duchamp’s derivative work of Leonardo’s Mona Lisa

On occasion I am asked about the extent to which a new work can incorporate elements of a pre-existing work without infringing the pre-existing work’s copyright. To answer such a question, one must understand derivative works.

17 U.S.C. Section 101 says (emphasis added):

A “derivative work” is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a “derivative work”.

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How to Defeat a Cybersquatter, Part 2: Going to Court

Picture of columns in front of courthouse, looking up

In How the UDRP can Defeat a Cybersquatter, I wrote about ICANN’s Uniform Domain Name Dispute Resolution Policy. The UDRP provides a quick, inexpensive way to recover a domain name from a cybersquatter (someone who has obtained a domain name that is the same as, or confusingly similar to, a trademark or service mark that you own). However, if you want to recover money, you will have to go to court.

Before proceeding further, let me be clear: I think lawsuits should be avoided whenever possible. As a trial lawyer told me many years ago, “Litigation is a terrible way to run a business.” Unfortunately, litigation sometimes is necessary.

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What is the Difference between a Lawyer and an Attorney?

Cover of Black's Law Dictionary

From time to time – most recently on Quora – people ask what the difference is between a lawyer and an attorney. Here is what I was taught many years ago….

Although most people (including, it appears, most lawyers) treat the terms as synonyms, they can have different meanings:

  • “Lawyer” denotes a profession (I am a lawyer).
  • “Attorney” denotes the relationship of a lawyer to his or her client (as an attorney I represent my clients).

I recently pulled my decades-old Black’s Law Dictionary off the shelf. (Yes, sometimes there is information that is better researched in printed form rather than online.) It cites case authority stating the “lawyer” and “attorney” are synonymous.

However, the dictionary also provides the the following definition for “attorney”: “In the most general sense this term denotes an agent or substitute, or one who is appointed and authorized to act in the place or stead of another.” It then explains specific uses of the word – attorney at law, attorney in fact, etc. – and, thus, supports the distinction made above.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What If I No Longer Need My DBA?

Statement of Abandonment form

Let’s assume that you have been doing business under a fictitious business name (FBN – also known as a DBA for “doing business as”). You are about to shut the business down, so you would like to get rid of the DBA as part of you effort to minimize the likelihood of any ongoing obligations or liabilities. How can you do this?

In California, the answer is provided in the Business & Professions Code. Section 17920(c) says (emphasis added) “A fictitious business name statement expires when the registrant files a statement of abandonment of the fictitious business name described in the statement.” (more…)

How Much Does It Cost to Incorporate?

Picture of antique cash register - representative of the post's topic, the cost to incorporate a business

This post about the cost to incorporate in the U.S. is an Advertisement under Rule of Professional Conduct 1-400, Standard 5 (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).

Recently I have seen a huge increase in the number of inquiries from prospective clients – especially foreign companies – interested in forming a corporation. One of their first questions usually is, “How much does it cost to incorporate?” This post answers that question.

First, though, I need to make a couple of points:

  • The following is merely illustrative. While the services described below suffice for many clients, we can know whether they are right for you only after we discuss your specific requirements in detail.
  • The only way we can agree that I will provide incorporation services is via an engagement letter signed by both of us. (The engagement process is discussed below).

(more…)

What’s in a Name? A Lot, if You’re a Corporation

Engraved portrait of William Shakespeare

In Act II, Scene II of Shakespeare’s Romeo and Juliet, Juliet wishes that she and Romeo could simply set aside their warring families, famously asking, “What’s in a name?” I thought about this question recently as I was helping a foreign client set up a corporation here in the U.S.

The foreign client is based in the U.K. It wanted to form a U.S. subsidiary with a similar name for brand-identification purposes. To avoid revealing the identity of the client, I will refer to it as “Amalgamated Widget Solutions, Ltd.” and the desired name of its U.S. subsidiary as “Amalgamated Widget Solutions, Inc.”

(more…)

Handbook Defeats Employee Claim of Attorney-Client Confidentiality

Cover of an employee handbook

In “Inspection of Employee Text Messages ? Be Careful“, I described provisions concerning company-provided technology that every employer should include in its employee handbook. A recent California Court of Appeal case, Holmes v. Petrovich Development Co., shows that such provisions are strong enough to defeat a claim of attorney-client confidentiality!

Gina Holmes brought suit against her former employer, alleging sexual harassment, wrongful termination and other causes of action. The employer presented as evidence e-mails between Holmes and her attorney – e-mails sent from her employer’s computer – that supported the employer’s case.

(more…)

Which is the Easiest, Cheapest and Best Way to Incorporate?

Quora logo

The following is an almost-verbatim copy (emphasis added) of a Quora question posted today and my answer. Q. Which is the easiest, cheapest and best way to incorporate a California C corporation, preferably online?

A. Cheapest: Use the appropriate nolo.com book.

Best and easiest: Use a qualified lawyer.

Preferably online: None of your three criteria will be satisfied. If you are interested in the basis for this opinion, please go to my blog’s Hall of Shame. (more…)

Compliance Services Joins Hall of Shame

Top portion of Compliance Services' website

If you form a corporation, the Postal Service soon will inundate you with official-looking forms from companies offering to create or file corporate documents on your behalf. Earlier this week I rescued a client from one of these unnecessary companies, Compliance Services.

(more…)

Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?

Seal and tagline for the United States Citizenship and Immigration Services

In Visa Basics for Foreign Entrepreneurs Coming to the U.S., I discussed certain immigration statuses (visa waiver, B-1 and H-1B visas) that permit a non-resident alien to take a passive role in a business (such as forming it) but not to work for it. This post discusses the boundary between permissible passive activities and prohibited work.

(more…)

Unpaid Interns: What You Need to Know

Photo of "Employees Only", symbolizing this post about unpaid interns

Many companies – especially startups – like the idea of using unpaid interns as free labor. This post discusses whether and how a California company can use unpaid interns.

Paid or Unpaid Interns vs. Employees

If individuals are interns under California law (as discussed below), then they need not be paid. Furthermore, they are not subject to other employment protections, because they are not employees.

If, on the other hand, individuals are determined to be employees, then they must be paid at least minimum wage.

(more…)

Accelerated Vesting may Mean Little if Your Employer is Acquired

Quora logo

This post is adapted from a question that I answered on Quora. Q. How can an acquirer make an employee with single-trigger vesting commit to a “lock-up” period to receive all his shares? Say you’re an engineer at a just-acquired startup with 0.5% of the old company, and your shares fully vested upon acquisition. The acquirer’s terms were that current employees get 50% of their payout up front, and 50% if they stay on board for 5 years. How is that possible, legally?

A. It is difficult to provide a definitive answer without looking at the relevant documents. However, I suspect that this situation is possible because 50/50 pertains to shares in the acquiring company rather than the acquired company.

In my experience, acquired companies will put some effort into converting employee equity interests directly into comparable interests in the acquiring company, but there is no guarantee this will happen.

So you may (I can’t be sure, not having reviewed the documents) have a choice: Keep your 0.5% fully-vested interest in the acquired company (which is likely to have little, if any, market value in the foreseeable future), or accept the 50/50 conversion to an equity interest in the acquiring company.

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Are International Contracts Effective and Enforceable?

Flag of England

Flag of England (Yes, fellow Americans, there is an English flag separate from the UK flag – do you see the relationship?)

This post reproduces, almost verbatim, a Quora question and my answer. Q. How effective and enforceable are contracts between parties located in the United States and England?

A. Such agreements can be effective and enforced – agreements between parties in different countries are entered into routinely. (more…)

Three Ways to Protect Yourself when Developing Software Offshore

Picture of man at computer with head in hands

Many startups have software developed offshore to save money. There is good reason to be concerned, however, about loss of money or, even worse, loss of intellectual property when a developer is located half-way around the world. This post discusses ways to minimize those concerns.

I recommend the following:

  1. Ensure that the agreement with your overseas developer assigns all rights to the software (including all intellectual property rights) to you.
  2. Don’t send your “family jewels” offshore. For any portion of the development that requires disclosure of your most important trade secrets, use a local developer.
  3. Time deliverables and payments such that you never will be too severely financially exposed. If your relationship with the developer sours, you can go somewhere else without a catastrophic financial loss.

If you take care of these three points properly, everything else should be pretty routine.

Photo credit: Rajesh Sundaram via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Wikileaks and Apple – an Opinion

WikiLeaks logo

The following is taken almost verbatim from my answer to a Quora question and the comments that followed. Q. Was the WikiLeaks iPhone app really violating the Apple App Store “Terms of Service”? Apple spokesperson stated that ?Apps must comply with local laws and may not put an individual or group in harm?s way.? Is that actually the case?

A. Yes (in my opinion). Section 3.2(b) of the iPhone Developer Program License Agreement says:

You will not use the Apple Software or any services for any unlawful or illegal activity, nor to develop any Application which would commit or facilitate the commission of a crime, or other tortious, unlawful or illegal act[.]

(more…)

Which Protections Should be Included in Online Terms of Use?

Knight's armor with shield and mace

This post is based on my response to a LawPivot question from an entrepreneur who wanted to know which protective provisions should be included in his website’s terms of use.

The provisions that bear most closely on protecting website owners include those pertaining to:

  • Disclaimer of warranties made by the owner
  • Limitations on the extent of the owner’s liability
  • Users’ warranties, especially as concerns any information that they may post
  • Users’ acceptable behavior policies, which set the stage for . . .
  • The owner’s right, in its sole discretion, to terminate use privileges
  • Users’ obligation to indemnify the website owner against liabilities that result from user activities
  • A requirement that any lawsuit related to the website be brought at a venue that is convenient for the owner
  • An arbitration provision as a way to avoid litigation (though I am not a big fan of arbitration because it can be expensive and precludes small-claims court, which can be relatively quick and inexpensive)

(more…)

Which Financial Information Must a Corporation Provide to its Shareholders?

Financial balance sheet

The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.

California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”

(more…)

International Contracts: Choice of Law when the Parties Disagree

Logo for OnStartups.com, where Dana Shultz discussed choice of law for international contracts

This post concerning international contracts is based on an OnStartups.com question (edited here) that I answered a few minutes ago. Q. I am drafting a website-development agreement with a firm in India. I am in Australia. I prefer that the agreement be governed by Australian law, but the developer prefers Indian law. What is normally done in similar circumstances?

A. Several thoughts based on my experience international contracts: (more…)

Does My New Employer Now Own My Software?

Quora logo

This post is adapted (with editing) from a Quora question that I answered. Q. I developed a software application on my own, then adapted it for my new employer, where it is used enterprise-wide. What are my ownership rights in this situation?

A. It would help to know whether you signed any type of proprietary information and inventions agreement with your employer. If you did, its terms (obviously) will be of great importance. You did not mention any such agreement, so I will assume, for the purposes of the discussion below, that there is no such agreement.

(more…)

What Must We Do if We’re Going to Be Acquired?

photo of document binders standing next to one another

A successful exit by acquisition is one of the great thrills of entrepreneurship. That exit does not come easily, however. This post discusses, by category, the most important documents and information that you will need to provide during the acquirer’s due diligence process.

Corporate Documentation

  • Articles of incorporation and bylaws, as amended
  • Minutes of board and shareholder meetings and actions
  • Share transfer ledger, including name and address of each shareholder
  • Agreements pertaining to shares and shareholders’ rights (buy-sell, voting rights, etc.)
  • List of holders of option or warrants and all applicable agreements

(more…)

Changing Online Terms of Use: How Detailed Must Notice Be?

Blue change button

In “Changing Online Terms of Use? Be Sure to Give Notice First!“, I explained that if you are going to change a website’s terms of use, you first need to provide notice that the terms have been changed and explain how they have been changed. This post – based on a Quora question and my answer – discusses how detailed the notice must be.

Unfortunately, there are no definitive rules regarding the level of detail that the notice must contain. I have two guidelines that I like to follow.

(more…)

Who Can Sign a Contract for an LLC?

Photo of hand holding a pen, symbolizing who can sign a contract

Several months ago, I answered the question Who Can Sign Contracts for a Corporation? This post addresses who can sign a contract for a limited liability company (LLC).

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The LLC’s Articles of Organization may address who can sign a contract, but this rarely occurs. The subject is more likely to be addressed in the Operating Agreement.

(more…)

Present Assignment is Important for Patents, Too

Stanford University logo

In “Copyright: Why You Need Presence of Mind about Present Assignments“, I wrote about why copyright assignments should be expressed as present assignments (e.g., “I hereby assign”) rather than obligations to assign in the future (e.g., “I hereby agree to assign”). This suggestion applies to assignment of patents, too.

A researcher at Stanford University, in collaboration with Roche predecessor Cetus, developed methods for quantifying Human Immunodeficiency Virus in human blood samples, and correlating those measurements to the therapeutic effectiveness of antiretroviral drugs.

(more…)

What Must We Do Regarding Corporate Board Meetings?

Logo of the Delaware Division of Corporations, symbolizing Delaware law about board meetings

The following question (edited for length) is from Founders Space. Q. What’s the minimum two founders must do regarding board meetings for a startup Delaware corporation doing business in California?

A. You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Sections 211 and following. (more…)

Recover Your Domain Name, and Perhaps Some Money, Too

Display from defendant Nahum's website at the hijacked domain

From defendant Nahum’s website at the hijacked domain

Just over a year ago (Who is the Master of Your Domain? [or, How to Prevent Domain Name Hijacking]), I wrote about recovering a client’s domain name from a disgruntled former employee via ICANN’s Uniform Domain-Name Dispute-Resolution Policy. A recent case from the U.S. Court of Appeals for the Ninth Circuit (DSPT International v. Nahum) shows that under federal trademark law, an aggrieved domain name owner may be able to recover monetary damages, too.

Defendant Lucky Nahum worked for plaintiff DSPT International and worked with an outside supplier to set up DSPT’s website. Without telling DSPT’s owner, Nahum registered the website’s domain name in his own name.

(more…)

How Can I Revive My Suspended / Forfeited Entity?

Photo of man giving CPR to another man symbolizing post about how one can revive a suspended or forfeited corporation or LLC in California

Yesterday I wrote about how the status of a corporation or limited liability company (LLC) in California might be suspended or forfeited. Please see Why was My Corporation / LLC Suspended or Forfeited? This post explains how one may revive a suspended of forfeited entity.

Section references below reflect California’s new LLC law that took effect on January 1, 2014. See RULLCA Brings New LLC Laws to California in 2014.

The steps required to revive the entity depend on whether it was suspended or forfeited by the Secretary of State, by the Franchise Tax Board, or by both the SoS and the FTB: (more…)

Why was My Corporation / LLC Suspended or Forfeited?

California Secretary of State logo

If you do a business entity search using the California Secretary of State database, you might find that the status of a corporation or limited liability company (LLC) is “suspended” or “forfeited“. This post explains what those terms mean.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Corporations and LLCs have many “powers, rights and privileges” under California law. Those powers, rights and privileges can be taken away if the entity: (more…)

Something You Might Want to Do BEFORE You Kill Your Company

ET Brutus logo

Although failure of a company is no fun, this morning I received an e-mail on this topic that made me smile. Sent with the subject line “Sell Those Dogs!”, the e-mail discusses how ET Brutus* buys the securities of dead or dying companies so owners can recognize losses for tax purposes.

The following excerpts from the ET Brutus website summarize the company’s value proposition: (more…)

How to Resign as Agent for Service of Process (or Disclaim a Corporate Position)

California Secretary of State Form RA-100 - Resignation of Agent

In “Incorporation: Not All (States’) Agents are Created Equal“, I discussed how agents for service of process in California are less formal – in both their appointment and their responsibilities – than registered agents in other states. California agents can resign more easily, too.

Corporations Code Section 1503(a) states that an agent for service of process may resign simply by filing a signed and acknowledged written statement. The Secretary of State? has provided Form RA-100 for this purpose. (more…)

Incorporation: Not All (States’) Agents are Created Equal

"Agent for Service of Process" field from Statement of Information form

In a post last week (FreeRegisteredAgent.com Inaugurates Hall of Shame), I wrote that corporations (and other entities) formed in California do not require registered agents. After replying to a comment on that post and a separate e-mail from another reader, I realize that I should be more explicit about how an agent for service of process (in California) differs from a registered agent (in Delaware and many other states).

Here is the difference:

  • A registered agent typically is picked from a list maintained by the state and is paid for its services. (In Delaware, especially, registered agents are a major industry.) Furthermore, there generally is a requirement that the registered agent be available at its office sufficiently frequently to receive service of process, and it must forward to the corporation notice of its obligation to file an annual franchise tax report. (See, e.g., Delaware General Corporation Law Section 132.)
  • An agent for service of process can be any individual or any corporation (other than the one being formed, and subject to Corporations Code Section 1505) in California and need not necessarily be paid. So, for example, an individual forming a corporation in California can designate himself, or (presumably, with permission) his brother-in-law or his lawyer, as the corporation’s agent for service of process. Furthermore, the Corporations Code does not subject the agent obligations such as availability to receive service. California agents can resign more easily, too – see “How to Resign as Agent for Service of Process“.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

FreeRegisteredAgent.com Inaugurates Hall of Shame

Logo for FreeRegisteredAgent.com

I’ve run across another online incorporation / LLC formation service – FreeRegisteredAgent.com – with deficiencies that I must bring to readers’ attention. There now are enough of these companies that I have listed them on my new Hall of Shame page.

FreeRegisteredAgent.com’s claim to fame is that it provides registered-agent services at no charge for one year, and for $99 per year thereafter.

Their Free California Registered Agent Service page touts their service for California corporations, LLCs and other entities. The problem I have is that California does not require any entity to have a registered agent, so after the first year, companies are paying for a service that they don’t need!

(more…)

WSJ: Startup Obtains Financing via LinkedIn

Wall Street Journal website (WSJ.com) logo

Yesterday the Wall Street Journal published a fascinating article (Dear Contact: Send Cash) about a startup that obtained first-round funding of approximately $350,000 via LinkedIn.

The founder sent an appeal to his 700 contacts, offering ownership of 2% of his company in exchange for approximately $35,000. Within eight days, ten investors (the target number) were lined up

The founder must have had an impressive set of contacts. In any event, I’m impressed – this was a creative approach that saved the founder a huge amount of time.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Are LLC Memberships Securities that Must be Registered?

California Department of Corporations logo

The following are (somewhat edited) an Avvo question and my answer: Q. Is it necessary to file a Form D securities exemption when forming a California limited liability company (LLC) and only issuing an interest to the forming members?

A. The short answer is “no“. The somewhat longer answer is as follows: (more…)

Lamebook v. Facebook: Trademark Infringement or Protected Parody?

Logo for Lamebook, whose trademark dispute with Facebook is the subject of this post

Lamebook is a site that features particularly lame or funny (and sometimes vulgar) Facebook posts. That company has brought suit against Facebook, seeking a declaratory judgment that Lamebook is not infringing Facebook’s trademark.

Several months ago, Facebook asked Lamebook to change the name of its service, alleging that the company’s name both infringes and dilutes Facebook’s famous mark. A letter from Facebook’s counsel lays out the elements of these allegations. (more…)

Corporate Suspension and Personal Liability are Two Different Things

LinkedIn logo

This is an edited version of a LinkedIn question and my answer. (They no longer are available there because LinkedIn removed its Q&A feature.) Q. In California, does suspension of a corporation automatically “pierce the corporate veil” resulting in personal liability (suspension for non-payment of taxes would seem to be the ultimate in “disregard of corporate formalities”)?

A. In my opinion, mere failure to pay taxes does not constitute disregard of corporate formalities or the basis for an alter ego finding. (more…)

Why did both the President and the Secretary of the Corporation Sign that Document?

John Hancock's signature

Contracts and other documents usually are signed on behalf of a party by a single representative (see Who Can Sign a Contract for a Corporation?). However, at least in California, important documents often are signed on behalf of a corporation by two officers, such as the President and the Secretary. This post explains the reason for two signatures.

Corporations Code Section 313 says, in relevant part (emphasis added) that: (more…)

No, You Can’t Marry a Corporation

Bride standing with groom kneeling

Now for something on the lighter side, a Quora question and my answer: Q. If marriage is a constitutionally protected right between people, and corporations are guaranteed the rights of a person, is it possible to marry a corporation? (Emphasis added.)

A. No. Marriage is reserved for natural persons (let’s not get into which pairs of natural persons). Corporations and other business entities are artificial persons.

Photo credit: Andrew C. via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Online Incorporation: It’s Time to Call Out Inadequate Providers

The Company Corporation's logo

I have not been a big fan of online incorporation and LLC formation services. (See, e.g., Forming an LLC Online: You Get What You Pay For.) However, the way a client recently was treated by one of these services – The Company Corporation – convinces me that it is time to expose their shortcomings and add them to the Hall of Shame page.

The client used The Company Corporation to incorporate in September 2006. Two months later, the client retained me to provide a variety of services. (more…)

How Old Can a Copyrighted Work Be?

Cover of Time Magazine published March 3, 1923

Cover of Time Magazine published March 3, 1923

Sometimes people want to know whether a work is so old that it it can be copied without any possibility of infringing anyone’s copyright. This post provides the answer (in the United States).

Before January 1, 1979 – when then-existing copyrights were automatically extended to 95 years from the end of the year in which the copyright was secured – copyrights were in effect for 28 years, with extension, if requested, for a second 28-year period (total of 56 years).

So the earliest a work could have been copyrighted (which, at that time, required publication with a copyright notice) and still received the automatic extension was 56 years before January 1, 1979, i.e., January 1, 1923. The copyright for such a work would expire on December 31, 2018 (after 95 years).

(more…)

Directors’ Fiduciary Obligations: Delaware vs. California

Logo of Walt Disney Company, whose directors' fiduciary obligations were judged by Delaware law

Delaware: Paying Ovitz $130 million was not grossly negligent.

In Why are So Many Corporations Formed in Delaware?, I stated that Delaware law minimizes directors’ responsibility for decisions that have made. This post explains my point by comparing Delaware and California law regarding directors’ fiduciary obligations. (more…)

Which Financial Information Must a Private Company Provide to Employees with Vested Stock Options?

Quora logo

This post is based on a Quora question that I answered (Q and A are somewhat edited). Q. Which financial information must a private company provide to employees with vested stock options?

A. In California, Corporations Code Sections 1500 and 1501 specifies records that must be kept by each corporation. Shareholders’ rights to inspect records are set forth in Sections 1600 and 1601.

I know of no comparable statutory provisions with respect to holders of vested options, however. Unless the stock option plan grants you such rights, the easiest way for you to gain such rights would be to exercise your option with respect to one share and, then, exercise your rights as a shareholder.

Related post: Which Financial Information Must a Corporation Provide to its Shareholders?

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

What is a Sublicense Agreement?

LinkedIn logo

This post is based on a LinkedIn question that I answered recently. (The Q&A no longer are available at LinkedIn, which has discontinued that feature.) Q. What is a sublicense agreement?

A. A license is an agreement by which the owner (the licensor) of something (in the case of the LinkedIn question, a trademark) grants, to someone else (the licensee), rights that are less that all of the rights to that thing. “Licensing 101“, and the download to which it refers, provide basic information about licensing. (more…)

In Delaware, No Par Value Can Cost a Bundle

Delaware Division of Corporations logo for post about shares without par value

In “How Many Shares Should My Corporation Authorize and Issue?“, I warned that “If you are forming a Delaware corporation with a large number of shares, be sure to specify a low par value, such as $0.0001 per share, to avoid having to pay excessive annual fees to the state.” This post gives more details about this issue.

There are two methods for calculating Delaware’s annual franchise tax. (more…)

How Can I Change the Name of My Corporation?

The word "CHANGE" on the side of a machine

Sometimes a corporation needs to change its name – perhaps its products or services have changed, or the name is similar to another company’s name, or there is a better way to suggest what makes the company special. This post explains how easy it is for California and Delaware corporations to change their names. (There are exceptions, but the following will apply under most circumstances.)

California corporations:

(more…)

Why Your Lawyer Need Not Sign an NDA

Cover page from California Business and Professions Code

Once in a while, when I send an engagement letter, the prospective client wants to add confidentiality provisions to protect its trade secrets. The following is the explanation that I provide as to why such provisions – let alone a separate nondisclosure agreement (NDA) – are not required in an attorney’s engagement letter.

California Business and Professions Code Section 6068 specifies the fundamental obligations of an attorney. Subsection (e)(1) states that each attorney must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Emphasis added.) Attorneys in other states have similar obligations.

(more…)

Copyright: Why You Need Presence of Mind about Present Assignments

One page from a calendar

In Independent Contractors: How to Assign Copyrights, I provided sample language for an independent contractor’s assignment of copyrights to a client. This post explains why the present assignment aspect of that language is critical.

Here (with emphasis added) is the relevant portion of the pivotal sentence:

Contractor hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in and to the Deliverables, including complete, unconditional and worldwide ownership of all intellectual property rights in any draft or final version of the Deliverables.

(more…)

Forming an LLC: Figuring Out What’s Really Required

LinkedIn logo

Here (slightly edited) are a LinkedIn question and my answer (which no longer are available at LinkedIn because it Q&A feature was discontinued). Q. I need to get an operating agreement for my Nevada LLC startup. I plan on selling membership in the future. There are online services that do this for cheap, but I’m unsure about doing that. This is a bootstrapped startup, so I have very little/no cash to pay for an attorney at this point in time. Plus I haven’t been able to find a good referral to a NV business attorney.

A. I’m afraid that I can’t provide a useful direct answer to your question (I don’t know how to get something – especially something good – for nothing), but I can provide some warnings because I see several red flags popping up.

(more…)

NDA Nets Plaintiff $50 Million

Dur-a-Flex Logo

Dur-a-Flex v. Laticrete International illustrates the value of a well-drafted nondisclosure agreement (NDA) – not to mention one that includes an attorneys’ fee provision.

Dur-a-Flex developed a trade-secret process for producing colored sand. Laticrete was a long-time Dur-a-Flex customer and the only customer for this product.

When Laticrete’s orders dropped significantly, Dur-a-Flex suspected that Laticrete was using the Dur-a-Flex process in violation of the NDA that Laticrete had signed.

(more…)

What Lawyers Want from Social Media

Over the weekend, I presented “Social Media for Lawyers” with colleagues Mark Ressa and Brett Burlison at the State Bar of California Annual Meeting.

I estimate that we had approximately 60 attendees. (Pretty good, considering that there were prior presentations on social media at the four-day conference!)

Attendees’ area of greatest interest was search engine optimization (SEO) – how to show up on the first page (preferably, high on the first page) of relevant Google searches.

(more…)

Presenting “Social Media for Lawyers” at State Bar Annual Meeting

On Saturday (September 25), at 2:15 pm, I will be on a panel presenting “Social Media for Lawyers” at the State Bar of California’s 2010 Annual Meeting. With 25% of my new clients during the past year coming directly from my online activities, I have been asked to help fellow lawyers understand that the law must be practiced with an eye on the future, rather than being stuck in the past.

As the sole business / transactional lawyer on the panel (Mark Ressa practices family law, and Brett Burlison is a personal injury lawyer), I have a different perspective from that of my colleagues. The topics that I will discuss include:

  • Blogging successfully
  • Using social media sites (LinkedIn, Avvo) to generate blog traffic
  • Developing an effective social media methodology (why, who, what, where, when, how)
  • Complying with ethical requirements (testimonials, confidentiality)

* * *

Follow-up: What Lawyers Want from Social Media discusses what I saw and learned at the session and provides access to our PowerPoint slides.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

How to Assign a Patent Application to Your Startup

Detail from an illustration of a machine by Leonardo da Vinci symbolizing a patent application

Detail from an illustration of a machine by Leonardo da Vinci

Your invention is so novel and non-obvious that you have submitted a patent application to the U.S. Patent and Trademark Office. Good for you!

Furthermore, you have formed a legal entity to turn the patent, once it issues, into a revenue stream. (See Should I form an LLC or a corporation?)

This post explains how you can assign the patent application to your new entity so your startup company can begin conducting business. (more…)

Make Sure that Your Release Means What It Says

Title page from the California Civil Code enacted in 1872 for a post about the potential effect of Civil Code Section 1542 on a contractual release

Title page from the California Civil Code enacted in 1872 and published in 1880

I recently prepared a Stock Redemption Agreement pursuant to which one of the founders would leave a corporation (my client). The agreement included a General Release by which the parties would release one another from all liability. The corporation’s CEO had a difficult time understanding the need for, and the significance of, a provision that cited a particular Section of the California Civil Code.

California Civil Code Section 1542 says:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor. (more…)

How Can I Switch from a Sole Proprietorship to a Corporation?

Sample Articles of Incorporation

This post is based on (and is an edited version of) a Quora question and my answer. Q. How do you switch from a sole proprietorship to a corporation? You do, of course, want to keep all your intellectual property and brand and street cred and so on. Can you treat that as equity?

A. Yes, you can treat the assets of your sole proprietorship as the consideration for which your shares are issued. You need to create an agreement by which you (as an individual) assign those assets (including the intellectual property rights therein) to the corporation. This is, of course, a friendly transaction, so the assignment agreement can be simple – no need for endless pages of legal boilerplate to protect against litigation that never will occur.

Related post: How to Assign a Patent Application to Your Startup Company

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Foreign Companies: Form a Corporation when You Come to the U.S.

United States flag, symbolic of the desire to form a corporation when a foreign business comes to the US

I have seen a recent increase in the number of foreign companies inquiring about doing business in the U.S. Their most frequent question: Should they just open a branch office here, or should they form a corporation or other legal entity? They almost always form a corporation. Here’s why: (more…)

DMCA Takedown: How Soon is “Expeditiously”?

Copy of takedown notice on Dana Shultz letterhead

A client’s former employee / co-founder departed to form a competing business. Violating the client’s copyrights, he posted dozens of the client’s images on his website and blog. I sent takedown notices to the website’s and the blog’s service providers (see “Terms of Use and the Digital Millennium Copyright Act [DMCA]”). I wondered how expeditiously the service providers would respond.

17 USC Section 512(c)(1)(C) provides a “safe harbor” incentive for service providers to remove, or disable access to, infringing works expeditiously. Unfortunately, “expeditiously” is not defined (see “Defining Expeditious: Uncharted Territory of the DMCA Safe Harbor Provision“).

(more…)

Why Do We Need a Corporate Records Book?

Corporate Kit from Attorneys Corporation Service, Inc., symbolizing corporate records

Corporate Kit from Attorneys Corporation Service, Inc.

I recently answered a question on Quora. If you incorporate a company [in Delaware], should you purchase a corporate kit? My answer about corporate records books, and a follow-up exchange about providing records electronically, are reproduced, slightly edited, below.

A: When I form a corporation for a client, I include a corporate records kit in the fee (and do similarly for LLCs) because:

  • It is important – both to the company and to any shareholders or directors who may have an inspection right – that there be a single specified location where the complete, up-to-date corporate records book is kept.
  • The kit includes share certificates, which should be prepared – including applicable securities and restrictive legends – and signed to protect against allegations by third-parties that ownership interests were transferred to them.
  • The kit includes a corporate seal, which may (or may not) be helpful or necessary at some point.

(more…)

What Does the Chairman of the Board Do?

GavelEarlier today I answered the following Quora question: What does the Chairman of the Board do?

Here is the answer that I provided:

The Chairman of the Board does what the Bylaws and the Board of Directors say s/he will do. Here is some typical Bylaws language: (more…)

What Should We Put in an Employment Offer Letter?

Photo of a "Sign Here" sticker symbolizing an at-will employment offer letter

From time to time, clients ask me to review their current form of employment offer letter.

As a result, I am writing this post. It is a summary of what I believe every offer letter should convey to the prospective employee from the business and legal perspectives.

Offer Letter Business Terms

From the business perspective, the letter should lay out the most important characteristics of the position: (more…)

Need an Angel Investor? Consider AngelList

AngelList Logo

AngelList Logo

There are plenty of companies seeking seed-stage financing, and plenty of seed-stage investors. How can they find one another effectively? AngelList is one answer.

Started in February 2010, AngelList is a straightforward application of social-media principles: (more…)

Why are So Many Corporations Formed in Delaware?

Delaware Division of Corporations logo, symbolizing why so many corporations are formed in Delaware

I recently answered the question “Is it best to form an LLC in Delaware?” on Quora. In response to a user comment, I opined on why so many corporations are formed in Delaware. My opinion, slightly edited, is reproduced below.

First, I’ll point out that I have what may be a minority opinion, so others may well disagree. (more…)

Am I in Trouble if My Accountant Used His SSN to Get My Corporation’s EIN?

Internal Revenue Service logo

Late last year (see Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.), I wrote about the procedure by which a U.S. entity may obtain an Employer Identification Number (EIN) when its foreign owner lacks a social security number (SSN). I recently answered an Avvo question about what to do when the specified procedure is not followed.

The questioner’s accountant had used his (the accountant’s) SSN to obtain an EIN online for his client’s corporation because the client’s foreign owner had no SSN. The client suspected – correctly – that this was not the right thing to do (the Internal Revenue Service “does not authorize” this action).

(more…)

If You Provide a DMCA Takedown Notice, Provide It Properly

Logo of Perfect 10, a company involved in DMCA takedown notice litigation

In Terms of Use and the Digital Millennium Copyright Act (DMCA) I described the six elements that a copyright owner must include in a DMCA takedown notice sent to a service provider that is hosting infringing content. Perfect 10 v. Google shows that a DMCA takedown notice will not be effective if it lacks the required information.

Perfect 10, which creates and sells photos of nude models, brought suit against Google, alleging, among other things, copyright infringement based on caching and hosting of photos.

(more…)

WSJ: Super-Angels Fill Funding Gap

Many startup companies are betwixt and between when it comes to funding: They need too much for angel investor groups, but too little for venture capitalists. According to the Wall Street Journal (‘Super Angels’ Alight), there is a new breed of investor that fills the gap, the “super angel”.

What makes these angels “super” is their ability to attract other investors. Whether collaborating with one another informally or through recently-formed funds, they can invest $1 million or so and be satisfied with an exit a few months to a few years later.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Small-company CEOs Can Be Accused of Sexual Harassment, Too

Photo of Rita Risser

Rita Risser

I am especially pleased to welcome Rita Risser as a guest writer – not just because her post about sexual harassment is this blog’s first guest post, but because I have had the pleasure of knowing, and staying in touch with, Rita ever since we met at Boalt Hall.

As CEO of a small company, you may imagine that the recent resignation of HP’s CEO has no relevance to you and your organization. Think again.

Whenever employees or contractors are let go, they are more likely to bring claims for harassment, whistle-blowing and more. The worse the economy, the less likely they are to find other jobs and the more incentive they have to pursue alternative sources of income through lawsuits.

(more…)

Using Someone Else’s Agreement Might Be a Mistake

Paper stamped "Rejected"

Earlier this week, I was called by a professional services provider (“Chelsea”) who was interested in my services. Chelsea had presented a confidentiality agreement – which she had found somewhere – to a prospective client for a large project. The prospect marked up the agreement pretty heavily, in ways Chelsea did not understand, and she wanted to make sure that her legal interests were protected.

I asked Chelsea to forward the marked-up agreement to me so I could see how much work I would have to do to help her. Within one minute, I could see the source of the problem. I called Chelsea. An edited transcript of our conversation follows:

(more…)

Attention LLC Members: You Have the Right to Be Heard

Sample LLC Notice of Meeting of Members

I have written about annual meetings of corporations’ shareholders (Annual Meetings: The Basics). Although limited liability companies (LLCs) have no obligation to hold, and typically do not hold, annual meetings of their members, meetings of members can take place.

Section references? below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

For California LLCs,? meetings of members are governed by Corporations Code Section 17704.07.

(more…)

Open Source Developer Wins Big – But Can He Collect?

BusyBox Logo

BusyBox Logo

Erik Anderson developed certain software that he contributed to BusyBox, a compact set of embedded Linux utilities licensed under the GNU General Public License, Version 2 (the “GPL”). In October 2008, Anderson registered a copyright on the code that he contributed.

On September 2, 2009, Anderson’s counsel notified Westinghouse that it was infringing Anderson’s copyright because it was distributing BusyBox – both integrated into Westinghouse televisions and separately with other software – on terms that are more restrictive than the GPL. Westinghouse continued infringing Anderson’s copyright.

Anderson and the Software Freedom Conservancy brought suit against Westinghouse and 13 other defendants on December 14, 2009. Westinghouse initially mounted a defense, but stopped participating in the suit when it filed for bankruptcy.

(more…)

When Should We Have our First Annual Meeting of Shareholders?

Rows of empty chairs

Having read Annual Meetings: The Basics, a fan of this blog asked the following question: When must we hold our first annual shareholder meeting?

The answer is stated by implication, rather than directly, in applicable statutes (which depend on the state of incorporation).

California Corporations Code Section 600(c) says, in relevant part:

(more…)

You May Be Able to Cancel that Contract – If You’re a Consumer

California Department of Consumer Affairs Logo

One of the great legal myths in some circles is that anyone can cancel any contract within a certain number of days of entering into it. That’s just not true – though you may have cancellation rights under certain circumstances if you are a consumer (rather than a business).

In California, those rights have been summarized by the Department of Consumer Affairs’ “Consumer Transactions with Statutory Contract Cancellation Rights: Legal Guide K-6“.

Some of the more interesting points made in the Guide:

  • There is no cancellation period for automobile sales and leases.
  • There is an indefinite cancellation period for dance studio services and pre-need funeral contracts.
  • There is a 30-day cancellation period for mail or telephone sales orders that have not been filled.

The second portion of the Guide discusses general contract cancellation rights based on circumstances such as fraud, duress, undue influence, or illegality.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Another Reason Why Employees Should Not Disclose Their Passwords

Computer screen showing user name and password for login

Their are obvious security-related reasons why businesses do not want employees to give their computer passwords the third parties. With the recent decision in Multiven v. Cisco Systems, the U.S. District Court for the Northern District of California has given us a legal reason, as well.

Peter Alfred-Adekeye (“Adekeye”), a former Cisco engineer, left Cisco to form plaintiff Multiven. After his departure, Adekeye used a Cisco employee’s password, with the employee’s permission, to download certain proprietary Cisco software.

(more…)

Forming an LLC Online: You Get What You Pay For

Mannequins with "sale" signs symbolizing forming an LLC online

Update (November 17, 2010): I have decided to start identifying by name providers of corporate and LLC online formation services who, in my opinion, have delivered inadequate service to my clients. (The clients used those providers before retaining me.) The inadequate provider referenced, below, in this post is Rocket Lawyer, which has been added to the Hall of Shame page.

Update (April 27, 2011): I had a cordial conversation this afternoon with Rocket Lawyer’s VP of Sales & Business Development. He acknowledged that, last year, Rocket Lawyer was using a filing service (filing operations are outsourced) that did not meet the company’s expectations. He reported that the current filing service is performing at a much higher level and that Rocket Lawyer is paying closer attention to ongoing support of its customers.

* * *

Almost a year ago, I suggested (in Can I form an LLC without a lawyer?) that entrepreneurs seeking to save money when forming a limited liability company would be better off buying a book from Nolo than using an online LLC formation service. I now believe that more than ever.

(more…)

Can I Assign My LLC Membership?

For Sale By Owner Sign

Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:

How Can I Protect the Look and Feel of My Website?

U.S. Patent and Trademark Office Seal, symbolizing trade dress and design patent protection of website look and feel

This post discusses whether and how you can protect your website’s “look and feel.

The reason you would want such protection: Your website has particularly effective visual and interactive elements that help promote your business. You would not want another website to copy those elements, thus make your website and your business less special.

Look and Feel as Trade Dress

Look and feel falls in the category of trade dress, i.e., visual appearance that signifies the source of a product or service. You may be able to obtain a federal trademark registration for the non-functional elements of the website’s look and feel and bring suit against infringers based on that registration. (more…)

Do I Need a Separate Corporation/LLC for My New Business?

Finger Pressing Start Button

Recently I have received questions from entrepreneurs who are starting a second line of business. They want to know whether the new business should be under the same legal entity – perhaps with a separate fictitious business name (FBN – or DBA for “doing business as”) – or under a separate corporation/LLC.

This is not really a legal issue: Either approach can work just fine. The differences between the two approaches are business-oriented.

(more…)

How the UDRP can Defeat a Cybersquatter

Logo of ICANN, which promulgated the UDRP

Someone has obtained a domain name that is the same as, or confusingly similar to, a trademark or service mark that you own. How can you take the domain name from this “cybersquatter”? The UDRP (explained below) may come to the rescue!

When he registered the domain name, the cybersquatter (the Registrant) agreed to ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP).

Under the UDRP, you (the Complainant) will be required to prove all of the following:

(i) The domain name is identical or confusingly similar to a trademark or service mark in which you have rights.
(ii) The Registrant has no rights or legitimate interests in respect of the domain name.
(iii) The domain name has been registered and is being used in bad faith.

(more…)

Where Do I Get a Business License?

Reduced image of San Jose business license applicationYou’ve started a new business. Don’t forget to apply for (and next year, renew) your business license!

Most cities (in some instances, counties) require that businesses located within their borders obtain what is commonly called a business license. In reality, this is an application to pay business taxes.

Here are links to the business license applications for several of California’s largest cities:

Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Protecting Software: Keeping Trade Secrets while Registering Copyrights

Many software companies rely on a combination of copyright and trade secret protection for their products. There is a potential problem, however: The requirement to submit source code with a copyright registration is somewhat at odds with the confidentiality requirements of a trade secret.

Fortunately, the U.S Copyright Office offers some flexibility in its deposit requirements for software containing trade secrets. The applicant may deposit any of the following: (more…)

Every Partnership Needs an EIN

I recently met two individuals who formed a business partnership. They were pretty informal about the process: They had no written partnership agreement. More surprisingly, they had not obtained an employer identification number (EIN) from the Internal Revenue Service.

Failure to obtain an EIN was a legal mistake. The IRS’s Do You Need an EIN? page states that when a business is operated as a partnership, it must obtain an EIN. (more…)

Don’t Steal Your Former Employer’s Customers (Unless You’re Confident…)

Photo of a man with a finger blicking his lips, symbolizing that an employer's customers may be a trade secretMany people know that, when one leaves a job in California, the former employer typically cannot stop the former employee from working for a competitor. However, some people mistakenly believe that the right to compete includes the right to steal the former employer’s customers!

According to Civil Code Section 3426.1(d), a trade secret is “information…that [d]erives independent economic value…from not being generally known to the public…and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” For many employers, a customer list is an important trade secret.

(more…)

Trade Secret Protection of Software has Limits

Developers of proprietary software typically rely copyright and trade secret protection of their works. A recent California case (Silvaco Data Systems v. Intel Corporation) illustrates how far trade secret protection does, and does not, go.

Silvaco develops and markets electronic circuit design software. Silvaco won a suit against Circuit Semantics, Inc., claiming that CSI, with the help of two former Silvaco employees, misappropriated Silvaco trade secrets, in the form of source code, by incorporating them into CSI’s software. Silvaco obtained an injunction against continued use of the technology incorporating its trade secrets.

(more…)

Foreign Parent + U.S. Sub = Legal Firewall

I have helped dozens of foreign companies establish subsidiaries here. Sometimes, the foreign company asks, “Do we really need to form a separate company in the U.S.? Can’t we just hire some people in the U.S. to work for our existing overseas entity?”

In responding, I make the following points: (more…)

Who Can Sign Contracts for a Corporation?

Photo of hand with pen on paper, symbolizing who can sign contracts for a corporationA couple of weeks ago, I answered a question on Avvo about who can sign contracts on behalf of a corporation. This issue comes up from time to time, so I will discuss it at some length in this post.

Authorization to sign contracts is addressed in the corporation’s bylaws and / or in resolutions of the board of directors. (more…)

Professors Confirm Limits on Startup Interest in Patents

Last November, I wrote You Can Have a Successful Business Even if You Don?t Have a Patent. Many of the points that I made in that post are reiterated in an article that will be published this summer in the Berkeley Technology Law Journal.

The article, “High Technology Entrepreneurs and the Patent System”, is available as a Free Download on the Downloads page. Among the findings presented in the article:

  • Whereas life sciences companies see patents as critical, software and Internet companies rely more on copyrights and trademarks.
  • Patents are used to reduce competition and to attract capital; they do not provide strong incentives to innovate.
  • The major reason why companies do not apply for patents is that they are expensive to obtain and to enforce.
  • Many companies find it is more important to be the “first mover” than to obtain patents.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

WSJ: Startups can Pitch to Angels for Free

In an article published today (Start-Ups Get Free Chance to Pitch to Angel Investors), the Wall Street Journal discusses ways that startups can pitch to angel investors without having to pay a fee.

Thrust of the article: Some angel investment groups require that entrepreneurs who need funding pay for the right to present their businesses for consideration. Organizations fighting the “pay-to-pitch” approach include Open Angel Forum and AngelList.

Check out all posts about angel investors.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Implied Copyright License: A Life-and-Death Example

Seal of the US Court of Appeals for the First Circuit, which decided an implied copyright license caseSeveral months ago, I wrote about the circumstances under which courts will find an implied copyright license if there has not been an assignment of copyright. (If You Don’t Set the Terms of a Copyright License, a Court Will) In a recent case (Estate of Hevia v. Portrio Corp.), the U.S. Court of Appeals for the First Circuit held that there was an implied copyright license in a partnership context.

The decedent, Roberto Hevia-Acosta, was an architect. Following his death, his estate and heirs waged an intensive legal battle against his business partner over copyrights in the decedent’s architectural designs.

(more…)

Should I Initial Every Page when I Sign an Agreement?

Photo of hand holding a pen, symbolizing the decision to initial every page of an agreementWhen my European clients execute agreements, they routinely initial every page, usually at the bottom, in addition to signing at the signature blocks. Here in the U.S., I see that approach rarely; it is customary merely to sign at the signature blocks.

Several weeks ago I posted a LinkedIn question about this difference. [September 2013 update: Link to question no longer available because LinkedIn removed its Q&A feature.] Here are some of the insights that I gained from my colleagues:

Top Ten Intellectual Property Mistakes of Startup Entrepreneurs

The document Top Ten Intellectual Property Mistakes of Startup Entrepreneurs is available as a Free Download on the Downloads page.

Here are the ten mistakes that are discussed:

  1. Failing to use employee invention agreements
  2. Assuming that the company owns contractors’ work product
  3. Using another company’s license agreement
  4. Thinking that patents are the only IP that matters
  5. Filing a for provisional patent before the scope of the invention is clear
  6. Treating the federal government like non-governmental infringers
  7. Neglecting to identify and protect trade secrets
  8. Believing that “open source” means “no restrictions”
  9. Giving the “family jewels” to an overseas supplier
  10. Registering the wrong entity as the owner of IP

Related post: The Top Ten Legal Mistakes of Startup and Early-stage Companies

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Angels and Convertible Notes: Whether, When and Why

Don Dodge, a Developer Advocate at Google, wrote an informative post about the pros and cons of convertible notes for angel investments (What you should know about Angel Investors and Convertible Notes).

A convertible note is a debt instrument that can be converted into equity. The pros of convertible notes are well-known:

  • The hassle of valuing an early-stage company is avoided – the angel can convert to equity when the Series A venture financing takes place.
  • The terms of the note are straightforward – the principal amount and accrued interest can be converted into shares at a discount from (or with warrants applicable to) the Series A share price.
  • As a result, legal fees for a convertible note tend to be far lower than those for a Series A financing.

The con is that the angel might not receive an adequate return if the Series A is delayed or never takes place (for example, if the company is acquired). Dodge suggests that these scenarios can be addressed by building into the note a specified valuation that will apply (or will establish a minimum) if one of these events occurs.

The bottom line: Angels, like other investors, should think about how to protect their investments if events to not proceed as initially anticipated.

Related post: Realistic Financing Options for Startup Companies

Photo credit: Marina Garcia vis stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

If You See a Contract Like This, DON’T SIGN IT!

An acquaintance recently showed be one of the worst contracts I have ever seen – one of the worst in the sense of unfair and unbalanced, and perhaps even unconscionable.

The company in question provides contract personnel for IT projects. Here is the agreement that candidates have to sign to be proposed for a client’s project [emphasis added]: (more…)

Can Personal Creditors Threaten My LLC?

I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)

Why does our Operating Agreement have a Spousal Consent?

I recently received questions about whether and why Spousal Consents are necessary with respect to certain business-ownership agreements. Here is a summary of the most important points that you need to know.

California is a community property state. If, during marriage, an individual acquires an interest in a business, the individual’s spouse has a community-property interest in that business.

(more…)

Fair Use, Trash Talk, and the DMCA

Over the weekend, I answered a LinkedIn question [no longer available there because LinkedIn ended its Q&A feature] about whether posting a copyrighted photo of another company’s product with disparaging comments about that product might be protected by the “fair use” defense to copyright infringement. I am reproducing the question and answer, in edited form, below.

Q. My website is copyrighted and the newest product is trademark and patent pending. The image was “clipped/copied” by an individual and placed on a website without my permission to do so. Am I right that this is not “fair use” of my work?

A. The “Fair Use” Defense: One Term, Two Different Meanings discusses the four elements of copyright fair use. The analysis always is highly fact-specific, so it is difficult to say whether use on cpaptalk.com qualifies for that defense, but I think there is a reasonable argument that it does.

(more…)

Funding Your LLC: Avoiding Mistakes

I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.

Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan? (more…)

Where to File Your Patent Case? Probably NOT Where You Think

Stanford Law School Professor Mark A. Lemley has published a draft paper, Where to File Your Patent Case.

Lemley started with the assumption that plaintiffs frequently look for forums that favor patentees, where cases go to trial (summary judgments strongly tending to favor defendants), and that move cases along quickly. Defendants are likely to want the opposite, a forum that is unlikely to send cases to jury trial, that regularly rules for defendants, and that takes a long time to do both.

(more…)

Doing Business in CA? Be Sure to Register

Seal of the California Secretary of State, which provides a registration form for a foerign entity doing business in CaliforniaSometimes California-based entrepreneurs think that they can avoid CA registration fees and taxes by forming their business entities in another state. Usually, that belief is incorrect. If the entity is doing business in CA, then it must register with the CA Secretary of State, even if the entity was formed elsewhere.

Section references and content below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014). (more…)

Should We Issue LLC Membership Certificates?

Picture of LLC membership certificatesA friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.

The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Here are the points that I made in my response. (more…)

SBIR: Federal Money for Small Technology Companies

SBIR logo

If your small technology company provides products or processes that might interest the U.S. government, you should know about the Small Business Innovation Research (SBIR) program.

The objective of SBIR is to provide qualified small businesses with opportunities to propose innovative ideas that meet the specific research and development needs of the federal government. (more…)

Why (not) form an S corporation?

Some companies are formed as S corporations to avoid “double taxation”: The corporation does not pay federal income tax. Instead, income flows through to the shareholders, who pay income taxes (as in a partnership).

This potential tax benefit is available, however, only if stringent requirements are met. Most notably:

  • There must not be more than 100 shareholders.
  • Permissible shareholders are limited to individuals (other than non-resident aliens), estates, tax-exempt organizations, and certain qualified trusts.
  • Only one class of stock is permitted.

Failure to meet a requirement, even if inadvertent, results in loss of S corporation status.

Entrepreneurs should think carefully about whether S corporation status is appropriate for the long term. Here’s why.

(more…)

Legal Fees: Avoiding Sticker Shock

I just got off the phone with the founder of a website that caters to small businesses. He commented that small-business owners routinely suffer sticker shock when they receive invoices from their attorneys. I responded that lawyers can do three things to reduce the likelihood that the amounts of their fees will be a surprise. (more…)

How Many Shares Should My Corporation Authorize and Issue?

Sample certificate showing number of shares owned by a corporation's shareholderThis post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.

On a couple of occasions, I have worked with founders whose corporations (prior to retaining me) issued a small number of their authorized shares.

In one instance, four founders formed a corporation that was authorized to issue 50,000 shares, but had issued (to themselves) fewer than 400. They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.

(more…)

IP Indemnification: Who Will Be There to Satisfy the Obligation?

Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?

A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.

What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.

Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.

Lesson: An indemnification obligation is only as valuable as the party takes it on.

Photo credit: Anna H-G via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Watch Out for “You Don’t Own It until You Pay”

A start-up entrepreneur recently told me about the agreement he signed with the developer of his website. The agreement has what I consider, from the entrepreneur’s perspective, a most pernicious provision: Ownership of the website, and its intellectual property rights, does not pass from the developer to his client until the fee is paid in full.

I understand why developers like this type of provision: It gives them extra leverage to ensure that they are paid. (more…)

WSJ: Specialty Lenders are Lending

In an article published today (Entrepreneurs Find Success With Specialty Lenders), the Wall Street Journal reported that some entrepreneurs who otherwise cannot obtain loans have been able to borrow from banks that specialize in niche industries.

As an example, the article cites Silicon Valley Bank, which caters to high-growth technology and life sciences firms.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Cumulative Voting: Board Representation for Minority Shareholders

Photo of a ballot, symbolizing cumulative votingCumulative voting for corporate directors is a process by which each shareholder’s voting power is multiplied by the number of directors to be elected. The objective: By allocating all of their votes to one or a small number of directors, minority shareholders can ensure that their interests are represented on the board. (I.e., a majority shareholder will not automatically control all board seats.) (more…)

A Member can Withdraw from an LLC, Despite the Operating Agreement

Photo of an exit sign, symbolizing the right of a member to withdraw from an LLCFrom time to time, I am asked how a member of a limited liability company (LLC) can stop being a member. In legal terms, this is referred to as a member wishing to withdraw from an LLC.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Under this new law, the term “withdraw from a limited liability company” was changed to “dissociate as a member” or “withdraw as a member”.

A well-written Operating Agreement will address this question directly. It will specify the circumstances under which members may withdraw from an LLC, and the consequences of withdrawal.

(more…)

Court Says Tech Startups Special re Works Made for Hire

In a recently-decided case (JustMed v. Byce), the U.S. Court of Appeals for the Ninth Circuit decided that a software developer was an employee, rather than an independent contractor, even though the parties had completed almost no employment-related paperwork.

Byce took over development of JustMed’s software from an employee who had moved out of state. Byce’s compensation – the same as his predecessor’s – was 15,000 shares of JustMed stock (valued at $0.50 per share) per month.

(more…)

“Tea Party” Activists Seek Government Help re Trademarks

Protesters at the Philadelphia Tea Party on April 18, 2009

This is just too delicious: One group of “Tea Party” activists – known for opposing federal government intrusiveness – has brought suit against the registered Tea Party political party in the U.S. District Court for the Southern District of Florida (South Florida Tea Party, Inc. v. Tea Party). (more…)

Back to the Future? No, Back to the Past – Ancient NDA Discovered

A client recently was given, and asked me to review, a nondisclosure agreement that made me chuckle because it looked like something left over from decades ago. I was especially surprised because this NDA came from a well-known computer-products company.

Some of the document’s more endearing qualities: (more…)

Statements of Information: Easy is Good

Logo for CA Secretary of State for post about filing Statements of Incorpation

This post discusses Statements of Information, which corporations and limited liability companies need to file with the California Secretary of State.

When you form your corporation or LLC, the Secretary of State’s welcome letter will tell you to file a Statement of Information within 90 days.

You need to update a corporation’s Statement of Information every year. For an LLC, you need to update every two years every two years.

(more…)

If You Lose a Judgment and Don’t Pay, Your Domain Names Can be Seized

Office Depot won a judgment against John Zuccarini under the Anticybersquatting Consumer Protection Act of 1999 (15 U.S.C. Section 1125(d)) based on Zuccarini’s bad-faith registration of the domain name <offic-depot.com>, which was confusingly similar to <officedepot.com>.

Office Depot was unable to collect on its monetary judgment against Zuccarini, so it assigned that judgment to DS Holdings (“DSH”). DSH sought to levy against 190 <.com> domain names owned by Zuccarini and for which VeriSign controls the registry (a receiver having been assigned to auction off the domain names). Zuccarini (representing himself!) argued that DSH should be required to levy upon the domain names where their respective registrars are located, rather than at VeriSign’s single location. (more…)

Lawyers and Social Media: Ten Tips for Online Marketing Success

This post is off-topic – nothing to do with startup or early-stage companies – but that is one of the privileges of having my own blog! (I think of this as a treat for my lawyer friends.)

Next Wednesday evening (April 14), I will participate in a panel discussion on Effective Electronic Marketing for Lawyers sponsored by the Congressman Don Edwards Inn of Court.

My two handouts for the event are available as Free Downloads on the Downloads page:

  • Lawyers and Social Media: Ten Tips for Online Marketing Success
  • Lawyers, Social Media and Disclaimers: What, Where, When and Why

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Avoiding “Alter Ego” Problems: A To-Do List

Last year, I wrote (Beware Your Alter Ego) about how entrepreneurs sometimes lose the protection against personal liability supposedly offered by their corporations (or, similarly, their LLCs). This post – adapted from Counseling California Corporations by Continuing Education of the Bar (CEB) – provides detailed recommendations about what should be done to avoid “alter ego” problems.

Recommendations:

Independent Contractors: How to Assign Copyrights

After reading If You Don’t Set the Terms of a Copyright License, a Court Will, a (non-lawyer) friend wrote: “I work with subcontractors on a regular basis in the creative area (photographers, graphic artists, website designers, etc.).? Do you know where I can find a sample [copyright assignment provision]?”

(more…)

WSJ: More Funds for Startups, but Still Hard to Get

In an article yesterday, the Wall Street Journal reported that funding for startups is more plentiful than it was a year ago, but still is hard to come by (Start-Ups Chase Cash as Funds Trickle Back).

Among the phenomena discussed:

  • Angel investment groups that want to see profitability before they invest
  • Reduced availability of funds from home-equity and retirement-account loans because of lower? asset values
  • Dedication of additional money to protect existing investments rather than to start new investments
  • Availability of venture capital only if a company has a product or customers

Related post: Realistic Financing Options for Startup Companies

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Assessing Personal Liability – Read Formation Documents Carefully!

A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.

The LLC section reference and content below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.

(more…)

No, You Can’t Just Scrape Someone Else’s Website

The following question was posed recently on LinkedIn: Let’s say that I want to scrape amazon’s and ebay’s product reviews and use on another site? I want to understand the legal fall-out that may happen in doing so.

Here, slightly edited, is the answer that I provided:

  1. You would be committing copyright infringement.
  2. You would be breaching Amazon’s Conditions of Use, which expressly prohibit “any use of data mining, robots, or similar data gathering and extraction tools”.
  3. Similarly, you would be breaching ebay’s User Agreement, which says that “You agree that you will not use any robot, spider, scraper, or other automated means to access the sites for any purpose without our express handwritten permission.”
  4. Other companies’ sites with well-thought-out terms of use have similar prohibitions.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Postal Service Stamp Infringes Copyright – Not Fair Use

Korean War Veterans Memorial - use of photo on postage stamp not fair use

Korean War Veterans Memorial

Several months ago, I wrote that the fair use” defense to copyright infringement often is poorly understood. The U.S. Postal Service illustrates this point. A recent court decision held that a postage stamp infringed the copyrights in certain sculptures and was not fair use thereof.

Frank Gaylord created, and registered the copyrights for, soldier sculptures in formation constituting part of the Korean War Veterans Memorial.Stamp with photo of Korean War Veterans memorial dtermined not fair use

John Alli took a photo of the Memorial. The Postal Service paid Alli $1,500 for the right to use that photo for a 37-cent stamp commemorating the 50th anniversary of the armistice of the Korean War. Alli told the Postal Service that it would need permission from the owner of the copyright in the sculptures; the Postal Service did not seek such permission. (more…)

Open Source Developer Prevails in Copyright Infringement Suit

Photo of model trains, subject of open source software involved in copyright infringement litigationA federal court of appeals held in 2008 that an open source developer case sue for copyright infringement despite the breadth of the open source license. The closely-watched case recently settled, meaning that the opinion may well be cited for many years to come.

Plaintiff Robert Jacobsen holds a copyright to certain computer programming code that he makes available for public download for free pursuant to the Artistic License, an open source license.

Defendants Matthew Katzer and Kamind Associates, Inc. develop commercial software products for the model train industry and hobbyists. Defendants copied certain materials from Jacobsen’s website and incorporated them into one of their software packages without following the terms of the Artistic License. Jacobsen sued for copyright infringement and moved for a preliminary injunction.

(more…)

Do VCs care where my company is incorporated?

Several weeks ago, a first-time entrepreneur called. He had read that venture capitalists prefer investing in Delaware corporations, and he sought my input on the subject.

I replied that, in my experience, incorporation either here in California or in Delaware is fine. Then I started wondering why what the entrepreneur read differed from what I had experienced.

I did some research and conducted an informal survey of a few VCs. Here are my tentative conclusions:

  • California-based VCs are comfortable investing in corporations that are formed in either CA or DE (thus my experience, because the vast majority of the VCs whom I know are here in the Bay Area).
  • VCs outside California have a preference for investing in Delaware-based corporations, though that preference can be weak or strong, depending on the VC. Even with a strong preference, however, a Delaware-preferring VC will invest in a corporation in another state if it is the right deal

Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Should My Corporation Provide Stock Certificates to Shareholders?

Image of a stock certificate for a post about stock certificatesLet’s assume that you are one of the founders of a new corporation. Should the corporation provide stock certificates to shareholders when their shares are issued?

For most startups formed in California, the answer is “yes” – and not merely because the founders will feel good having tangible evidence of their ownership interests. (more…)

If You Don’t Set the Terms of a Copyright License, a Court Will

Picture of a pen sitting on a contract sighature line, symbolizing an implied copyright licenseAlmost a year ago, I wrote about why independent contractors (as contrasted to employees) own the copyrights in works that they create. As a result, a prudent customer will ensure that the contractor assigns its copyrights to the customer (Work Made for Hire – a Term Made for Confusion). This post discusses the implied copyright license that is granted in the absence of an assignment.

If there is no assignment provision, a court will determine that there is an implied license under the copyright. The rationale is that it would be unfair to deprive the customer of all rights in a work for which the customer has paid. The issue, then, will be the terms of the implied license. (more…)

Can I compete with my own LLC?

I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.

Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?

(more…)

SaaS Use of Open-source Software is not Distribution (Who GNU?)

GNU logo

I recently answered a LinkedIn question about whether providing Software as a Service (SaaS) is considered a “distribution” under the open-source GNU General Public License. The question and answer (no longer available on LinkedIn) are reproduced, in slightly edited form, below.

Q. Is hosting a software as a SaaS offering considered as “distribution” under GPL / LGPL open source licenses?

A. I believe that SaaS hosting is not intended to be considered distribution.

(more…)

Forming a Corporation in California? Get Ready to Wait

California Secretary of State logo

July 2013 update: California Secretary of State Reduces Turnaround Times!

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California’s budget crisis is affecting how quickly entrepreneurs can form their business entities: Standard turnaround time for hand-delivered Articles of Incorporation now is close to four weeks. (The situation for limited liability companies [LLCs] is better at two weeks, though still much longer than it was just half a year ago – see LLC Formation in Record Time.)

Update as of February 6, 2013: LLC filing time now is approximately six weeks, and corporation filing time is more than seven weeks!

(more…)

Online Terms can be Binding, even if You don’t have to Click!

This past December, a Missouri Court of Appeals held that a user was bound by a website’s terms and conditions, even though she was not obligated to click to signify assent to those terms (Major v. ServiceMagic, Inc.).

The court noted that where a user is obligated to click to signify agreement to terms, such “clickwrap” agreements are routinely enforced. Where clicking is not required, a site’s “browsewrap” agreement usually will be upheld if the user has actual or constructive knowledge of the terms and conditions before using the site.

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When should I apply for a DBA?

Form used in San Francisco to apply for a DBAThis post continues the last post’s discussion of the fictitious business name (FBN – or, colloquially, the DBA for “doing business as”). I am writing this because of a client’s question as to when his company should apply for a DBA / fictitious business name.

California Business & Professions Code Section 17910(a) states that a Fictitious Business Name Statement must be filed within 40 days of the time when the registrant first used the FBN to conduct business in the state. (more…)

Can I assign a DBA to my new LLC?

Articles of Organization for an LLC, to which the founder wished to assign a DBAThis post is based on an answer that I provided on Avvo. The user wanted to know whether he could assign a fictitious business name (FBN) – or, colloquially, assign a DBA, short for “doing business as” – from his sole-proprietor business to a limited liability company (LLC) that he was about to form.

He probably would assign all of the sole-proprietor assets (and liabilities) to the new LLC. However, there are special considerations if one wants to assign a DBA / FBN. (more…)

California doesn’t *always* prohibit non-compete provisions

Photo pf a bike race symbolizing this blog post about non-compete provisionsCalifornia is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo. (more…)

Contractors as a Tax Dodge – NYT Reports U.S. to Crack Down

Logo for New York Times, which published an article about independent contractors as a tax dodgeFour months ago, I wrote about a Wall Street Journal report. According to that report, the Internal Revenue Service planned to audit 6,000 randomly-selected U.S. companies to determine the extent to which companies misclassify employees as independent contractors. (See The “Independent Contractor” Trap Becomes More Dangerous.) Today The New York Times reported that both federal and state officials are cracking down on misclassification (U.S. Cracks Down on Contractors as a Tax Dodge). The incentive: To reduce record budget deficits.

By misclassifying personnel, companies avoid paying Social Security, Medicare and unemployment insurance taxes. The article goes on to say that, on average, misclassified personnel do not report 30% of their income. The 2010 federal budget projects that the crackdown will net at least $7 billion over ten years.

Implication of contractors as a tax dodge for companies of all sizes:

If you have been lax in classifying workers, now would be a good time to start doing things correctly. Avoiding the “Independent Contractor” Trap may help you determine how to improve your classification procedures.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

So how important is this legal stuff, anyway?

Two recently-acquired clients had similar situations that brought up the importance of complying with legal requirements.

Each company is a multi-founder startup where one founder became non-productive, and even somewhat detrimental to the business. The other founders wanted to move the problem founder off to the side, where he could cause no more trouble, in a manner that would be fair to everyone involved.

Unfortunately, each company had failed to comply with some of the most basic legal requirements: Holding annual shareholder meetings to elect directors, annual board of director meetings to appoint officers, etc. As a result, in each instance we had to spend time and money taking corporate actions, and recording those actions appropriately in meeting minutes, before the real problem could be solved.

(more…)

Failure to Encrypt Passwords Leads to Class Action Lawsuit

On December 28, 2009, RockYou, Inc., a developer of applications for Facebook and other social networks, was sued in the U.S. District Court for the Northern District of California. The class action complaint alleges failure to encrypt users’ e-mail addresses and passwords and was filed shortly after a hacker copied that information for 32 million RockYou users. (more…)

Which state’s law matters for employment contract questions?

I recently learned that one of my LinkedIn answers in Employment and Labor Law [no longer available at LinkedIn because this feature was discontinued] was selected as the Best Answer. The question and my answer are reproduced below.

Question: Which state law matters for employment contract questions (for the CEO of a firm), the law of the state of incorporation or the law of the state where the headquarters are located? (more…)

Beware the Unintended Franchise

We all are familiar with well-known? franchises, such as McDonald’s restaurants. What many people do not realize, however, is that a trademark license agreement, if it has certain characteristics, can be considered a franchise agreement under state or federal law, creating huge potential liabilities for the unwary licensor.

In California, Corporations Code Section 31005(a) says that a franchise exists if three elements are satisfied:

  1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
  2. The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
  3. The franchisee is required to pay, directly or indirectly, a franchise fee.

(more…)

Can I Abandon a Copyright?

Copyright protects works of authorship and, in the U.S., subsists from the time the work is created in fixed form (see Copyright Protection in One Easy Lesson).

Demonstration in Sweden in support of file sharing, 2006

Demonstration in Sweden in support of file sharing, 2006

In certain circles, however, there is fervent opposition to copyright (see the Wikipedia entry for Anti-copyright).

Suppose that an anti-copyright author wants to abandon the copyrights in his works. (Sometimes this also is called dedicating work to the public domain.) Can he do so under U.S. law?

Although there is no statutory basis for abandonment, there is widely-accepted case law stating that a copyright owner may abandon his copyright by an overt act that manifests a purpose to surrender his rights to the work and let the public copy it.

(more…)

Asset-Based Lending on the Rise according to WSJ

Logo for WSJ.com, which published an article about asset-based lendingIn an article yesterday (Asset-Based Lending Grows in Popularity), the Wall Street Journal reported that asset-based lending – loans secured by the borrower’s assets as collateral – surged during 2008 and 2009.

The reason: Businesses that lack the credit rating, track record, or patience to seek traditional sources of capital can get loans by pledging their equipment, inventory, accounts receivable, or other liquid assets as collateral.

Downsides: Asset-based lending comes with a relatively high interest rate. If a payment is missed, the collateral may be seized by the lender.

Related post: Realistic Financing Options for Startup Companies

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Copyright: If You’re Going to Register, Register Right Away

Several months ago (Copyright Registration: Whether, When and Why), I wrote about the benefits of registering a copyright. A recent case in the U.S. District Court for the Northern District of California (Dongxiao Yue, et al., v. Chordiant Software, Inc., et al.) shows that if you are going to register a copyright, you should register it right away.

Plaintiffs accused defendants of copyright infringement with respect to two pieces of software that were covered by registered copyrights. The defendants moved for a summary judgment that plaintiffs were not entitled to statutory damages and attorney fees because the alleged infringement began before the plaintiffs registered their copyrights.

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How High an Interest Rate Can I Charge?

I recently had a conversation with an attorney in Louisiana, who mentioned that in that state, the annual interest rate on a promissory note was limited to 12%. I told him that in California story is much different.

Article 15 (Usury) of the California Constitution states (simplifying a bit) that the annual interest rate on a loan or forbearance (refraining from requiring payment for a period of time) is limited as follows:

  • If arising from money or goods supplied for personal, family or household purposes, the maximum interest rate is 10%.
  • If arising from money or goods supplied other than for personal, family or household purposes, the maximum interest rate is the greater of (a) 10% or (b) 5% plus the rate charged by the Federal Reserve Bank of San Francisco on advances to its member banks.
  • If the agreement between the parties does not specify an interest rate, it will be 7%.

(more…)

“Finding Rin Tin Tin” Sniffs Out Trademark Fair Use Defense

Cover of the DVD "Finding Rin Tin Tin", a movie in a lawsuit won based on the trademark fair use defense

Cover from “Finding Rin Tin Tin” DVD

Those of a certain age will recall watching “Rin Tin Tin” on TV as kids. The venerable canine recently was the subject of a trademark infringement suit (Rin Tin Tin, Inc., et al. v. First Look Studios, Inc., et al.). The defendants prevailed because of the trademark fair use defense.

Rin Tin Tin was a German Shepherd dog found in France during World War I. He became famous through movies and remains well-known to this day.

Plaintiffs breed German Shepherds descended from the original Rin Tin Tin and manage related business endeavors. Rin Tin Tin, Inc. obtained federal trademark registrations for “Rin Tin Tin” pertaining to puppies and dogs of the Rin Tin Tin lineage. (more…)

Top Ten Legal Tips for Independent Contractors (Presentation)

This evening I will present “Top Ten Legal Tips for Current and Would-be Independent Independent Contractors” at The Society for Technical Communication Silicon Valley Chapter.

If you are interested in the topics that I will be covering, please check out “Top Ten Legal Tips for Independent Contractors” by signing up for this blog’s Downloads page using the drop-down list in the sidebar.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Can we kick one of the members out of our LLC?

I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.

The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)

Gay Marriage Fight Leads to Trademark Smackdown

ProtectMarriage.com (left) and Courage Campaign Logos

It appears that at least some gay marriage foes need to learn a thing or two about trademark law.

On January 12, ProtectMarriage.com sent Courage Campaign a cease and desist letter, alleging that Courage Campaign’s Prop 8 Trial Tracker logo infringes ProjectMarriage.com’s trademark and copyright in its logo.

(more…)

Educate Employees about Online Endorsements – the FTC is Watching!

A few months ago, I posted Does your Employee Handbook address social media? This post discusses a specific social-media issue that is of great importance to every employer: Online endorsements of products or services by employees.

The Federal Trade Commission has published Guides Concerning the Use of Endorsements and Testimonials in Advertising. Actions that are inconsistent with the Guides may result in an FTC enforcement action.

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Licensing Trademarks? Think about Domain Names, Too

The December 2009 issue of les Nouvelles, a publication of Licensing Executives Society International, has an interesting article about the interplay between domain name disputes and trademark licensing.

“WIPO Domain Name Cases Offer Trademark Licensing Lessons,” by Hee-Eun Kim, an LLM student in Munich, Germany, starts by describing the Uniform Domain Name Dispute Resolution Policy (UDRP) and the role of the World Intellectual Property Organization (WIPO) in resolving disputes under the UDRP. (more…)

Rewarding Key Personnel: Restricted Stock or Options?

Sotck price graph, symbolizing restricted stockAs I write this post, I am in the process of helping an early-stage client develop a stock-based compensation plan for a key officer. The principal choice was between a stock option and restricted stock.

A stock option is the right to purchase a specified number of shares at a specified price at some point in the future. The option typically “vests” over a period of years. The longer the individual stays with the company, the greater the portion of the option s/he has the right to exercise. At the end of the vesting period, the individual has the right to purchase all of the shares specified in the option. (more…)

Sramana Mitra: Bootstrapping – Weapon of Mass Reconstruction

Photo of Sramana MitraLast evening I attended a meeting of eBig’s Startups / VCs SIG. Sramana Mitra presented “Bootstrapping – Weapon of Mass Reconstruction.” It was highly informative for the entrepreneurs in attendance.

Her first comment was one with which I agree completely: There is too much emphasis on on venture capital funding – few businesses qualify, and other forms of financing allow the entrepreneur to retain greater control and a larger share of the business. (See Realistic Financing Options for Startup Companies.)

Sramana then proceeded to expose a large number of myths about entrepreneurship, and she finished by answering attendees’ questions.

The Entrepreneur Journeys page of Sramana’s blog provides a large number of informative interviews with entrepreneurs from around the world.

Photo credit: Blog Business World

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Contracts with Minors can Lead to Major Problems

Photo of a child pringing "A", symbolizing contracts with minorsI recently was consulted concerning contracts with minors. In the first case, a teenager wanted to start a business. In the second, a father wanted his child to become a member of his limited liability company (LLC).

Here is an overview of California law concerning contracts with minors.

A minor is an individual who is under 18 years of age. An adult is an individual who is 18 years of age or older. Family Code Sections 6500-6501

Subject to certain exceptions (some of which are far-reaching, such as those precluding contracts related to real property or personal property not in the minor’s immediate possession or control), minors may enter into agreements. Family Code Sections 6700-6701

However, the minor generally may disaffirm (reject) the agreement before reaching majority, or during a reasonable time thereafter. Family Code Sections 6710-6713

(more…)

Copyright Infringement Twofer: Website Designer and Customer Jointly Liable

Nick Starr, doing business as Master Maintenance, hired West Central Ohio Internet Link, Ltd. to redesign and host the website for Master Maintenance’s janitorial services.

The redesigned website included four photos owned by, but not properly licensed from, Corbis Corporation.

In Fall 2006, Corbis discovered Master Maintenance’s unauthorized use of its pictures. On November 17, 2006, Corbis sent Master Maintenance a letter informing it of the infringement. Master Maintenance directed West Central to remove the pictures, which West Central did. On December 7, 2007, Corbis filed suit for copyright infringement against Master Maintenance and West Central (Corbis Corporation v. Nick Starr).

(more…)

WSJ: Startups Will Keep Struggling in 2010

In an article published yesterday (Start-Ups Will Keep Struggling in 2010), the Wall Street Journal reported that startup funding will remain tough to find in 2010.

The major problems:

  • Most entrepreneurs use personal savings or contributions from friends and family, but personal wealth – often tied to the value of homes or stock portfolios – has not bounced back from the economic downturn.
  • For both conventional bank loans and those insured by the Small Business Administration, entrepreneurs most show (a) that they have invested a significant amount of their own money and (b) solid cash-flow projections.
  • During the first half of 2009, the total value of angel investments fell 30% compared to 2008; 2010 is expected to continue at the 2009 level.
  • While venture capitalists are continuing to invest, they typically have been protecting later-stage companies already in their portfolios rather than funding startups.

The minor bits of good news:

  • While angels are investing less per deal, the total number of deals increased during the first half of 2009 over 2008.
  • Stimulus-related measures may increase SBA loans from 1% of all small-business lending to between 5% and 10%.

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Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

What You Need to Know about Angel Investment Groups

Burton Lee, Director and Engineering Lecturer at Stanford University, recently posted informative slides from a presentation by Laurie Lumenti Garty of SVB Capital and Marianne Hudson of the Angel Capital Association.

The subject: Angel investment groups in the U.S.

Here is some of the most important information presented in the slides:

  • There are more than 300 angel investment groups in the U.S.
  • They tend to invest in companies that are in product development or are already shipping product.
  • Major investment sectors include IT, health care, and business financial services.
  • The vast majority of the investments are $500,000 or less.
  • Groups tend to co-invest with, or look for follow-on investments from, other angel groups, individual angels, and early-stage venture capitalists.

If you are seeking angel funding, you should look at the entire slide deck.

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Related post: Realistic Financing Options for Startup Companies

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Can I prepare a website Privacy Policy without a lawyer?

Photo of shredded paper, symbolizing a website privacy policy

Startup entrepreneurs always are looking for ways to save money. A question that I receive from time to time: Is it possible to prepare a website Privacy Policy without a lawyer’s help?

Simply copying another company’s Privacy Policy is a mistake, because two companies rarely want to handle all privacy matters exactly the same way. However, there are quite a few website Privacy Policy Generators (PPGs) online. Just do a Google search for “privacy policy generator”.

The user provides answers to a series of questions. Based on the user’s answers, the PPG provides recommended text for a website Privacy Policy.

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Orphan Works: Copyright Victims that Never will Be Adopted

Logo of the US Copyright Office, symbolizing orphan works

This post is about a frustration in U.S. copyright law: orphan works.

Suppose that you are willing to pay for a license to reproduce a copyrighted work, but you have no way to contact the owner of the copyright. You may not even be able to identify who the owner is. (See Copyright Office Circular 22, How to Investigate the Copyright Status of a Work.) (more…)

Stock is Great – but Don’t Give It Away Too Quickly!

Most startups and early-stage companies have limited cash. As a result, they often are eager to use stock as a major component of? compensation. They need to make sure, however, that personnel stick around long enough to make the contributions for which they are being compensated.

In some instances, the corporation creates a tax-qualified incentive stock option plan. Employees are granted options to purchase stock, and they do not have to pay any tax on the stock (actually, on profits from their sale of the stock) until they exercise the option (purchase the stock, presumably, at a low price) and, later, sell the stock. (Tax law is less favorable to independent contractors.)

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Visa Basics for Foreign Entrepreneurs Coming to the U.S.

Seal of the US Citizenship and Immigration Services, from wich a work visa may be obtained

Non-immigrant foreign entrepreneurs who want to start businesses in the U.S. often – and rightly – have visa-related concerns. A typical question: “What kind of visa do I need to start my business?”

This post provides a brief answer to that question.

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WSJ: VCs to Resume Funding Startups in 2010

In an article published today (After Dry Year, Start-Ups Are Poised to Get Cash), the Wall Street Journal reported that venture capitalists will resume funding startups in 2010.

The major reasons for this development:

  • During much of 2009, VCs were hoarding cash to protect their existing companies. With the economy and the stock market stabilizing, VCs are returning to investment mode.
  • Whereas initial public offerings were almost nonexistent this year, investment bankers see IPOs returning in 2010.

Some additional points made in the article:

  • During 2009, the vast majority of the (modest) VC investment that did occur was in information technology or health care.
  • For 2010, VCs are looking for opportunities in social networking, mobile technology, health-care technology, and clean technology.

Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

“High-touch Legal Services” Receives Federal Service Mark Registration

Last week, the U.S. Patent and Trademark Office confirmed that the service mark “High-touch Legal Services” has received Registration No. 3,726,914. The registration pertains both to legal services and to blogs that feature the law and legal matters.

The mark is on the Supplemental Register, rather than the Principal Register, because “high-touch” is descriptive of the services that I provide but has not yet acquired secondary meaning. With this registration, I have the right to use the ? symbol and to bar use of confusingly similar marks. (more…)

Season’s Greetings to All of My Clients, Colleagues and Friends

Wishing You Joy this Holiday Season & Success in the New Year

Wishing You Joy this Holiday Season & Success in the New Year

Copyright Infringement: Public Announcement was Barking up the Wrong Tree

In Bridgeport Music v. UMG Recordings, the United States Court of Appeals for the Sixth Circuit held that the song “D.O.G in Me” by Public Announcement willfully infringed Bridgeport’s copyright in the 1982 song “Atomic Dog” by George Clinton.

What intrigues me is that the finding of infringement was based the substantial similarity of only a limited amount of the lyrics: Use of the phrase ?Bow wow wow, yippie yo, yippie yea?, repetition of the word ?dog? in a low tone of voice at regular intervals, and the sound of rhythmic panting.

The court rejected UMG’s assertion of a fair use defense, noting, in particular, that although the substantial similarity pertained to relatively small elements of ?Atomic Dog?, they were the most distinctive and recognizable elements of the song.

What this case teaches us: Using even a small portion of someone’s copyrighted work can constitute infringement if that portion is sufficiently distinctive and recognizable.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Need Funding? WSJ Offers Tips to Gain Credibility

In a November 30 article (“Trust Me”), the Wall Street Journal offers tips to entrepreneurs who want to gain credibility in the eyes of potential funding sources.

Based on a study of key individuals at 28 entrepreneurial ventures, the article asserts that “the most successful founders were masters at making symbolic gestures that signaled stability and credibility” in four vital areas:

  1. Personal CredibilityExample: Revealing personal details that strike a chord with listeners
  2. The Company’s ProfessionalismExample: Thoughtfully prepared web page and business cards
  3. The Track RecordExample: Showing a prototype or a controlled product demonstration
  4. Emphasizing and Building Ties Example: Being associated with prestigious stakeholders

Takeaway: In a tough, competitive economic environment – especially if you are an entrepreneur without a track record – sending a message of credibility is just as important as having a great? product, a large market, and the right management team.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.

Logo of the Internal Revenue Service, which issues EIN (Employer Identification Number)Although Dana Shultz has retired as a lawyer, he still obtains EINs for international clients because such activity does not constitute the practice of law.

When a foreign company wants to start up in the U.S., it usually creates a separate corporation here so U.S. obligations and liabilities will not flow back to the overseas parent. The U.S. corporation needs a federal Employer Identification Number (EIN) – at the very least, to open a bank account, even if the corporation will have no employees in the U.S. In a recent post on its website (Responsible Parties and Nominees), the Internal Revenue Service recently made it more difficult for foreign companies to obtain an EIN.

To obtain an EIN, the corporation typically provides the social security number (SSN) of a “principal officer”. In the past, the IRS was rather vague as to what this term meant, stating that it referred to a “president, vice president, or other principal officer”. So, for example, if the corporation’s overseas president did not have an SSN because s/he never worked in the U.S., the corporation could temporarily appoint as vice president an individual who has an SSN, which the corporation then would use to apply for an EIN.

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Can a Corporation Enter into a Business Transaction with One of its Directors?

From time to time, a client corporation wants to enter into a business transaction with one of its directors. An astute CEO, recognizing the potential for a conflict of interest, will ask whether and how such a transaction can take place without violating any laws or any fiduciary obligations to the corporation.

California Corporations Code Section 310 provides that, generally, a transaction between a corporation and one of its directors is permitted if, following disclosure of all material facts and the director’s interest in the transaction, it is approved either by a disinterested majority of the board of directors (usually the easier approach) or by the shareholders. (more…)

Can I Create my Standard-form Contract by Starting with Someone Else’s?

Logo of LinkedIn, where Dana Shultz answered a question about creating a standard-form contractThis question was asked a few days ago (in different form) on LinkedIn. [Please note that the question is no longer available online because LinkedIn removed its Q&A feature.] The question was whether one can create a standard-form contract by starting with someone else’s standard-form contract.

The following is an edited version of the answer that I provided:

Case Outcome Depends on Facts

As is always the case with alleged copyright infringement, the outcome of the case will depend on the facts.

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You Can Have a Successful Business Even if You Don’t Have a Patent

I recently met a software developer who wants to start a business. He immediately started talking to me about obtaining a patent. Condensed a bit, our conversation went roughly as follows:

  • Dana: Without giving away information that would jeopardize your ability to obtain a patent, what would the software do?
  • Developer: It is enterprise customer relationship management (CRM) software.
  • Dana: What is novel and non-obvious about it?
  • Developer: It will be based on a unique algorithm.
  • Dana: You cannot patent an algorithm.
  • Developer: I can get a patent on software that implements an algorithm.
  • Dana: Perhaps. But there are other means, such as trade secrets, that might adequately protect the software [cut off in mid-sentence]….
  • Developer: VCs want to invest in companies that have patents.

Leaving aside the singular focus on VC funding – something that few entrepreneurs obtain (see Realistic Financing Options for Startup Companies) – the would-be entrepreneur was similarly myopic in focusing on a patent as the only type of intellectual property that matters.

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Ninth Circuit Protects Consumers against Text-Message Spam

In Satterfield v. Simon & Schuster, the U.S. Court of Appeals for the Ninth Circuit held that the Telephone Consumer Protection Act (TCPA), 47 U.S.C. Section 227, protects consumers against unsolicited text messages to their mobile phones.

Subject to certain exceptions, the TCPA makes it unlawful “to make a call…using any any automatic telephone dialing system…to any telephone number assigned to a…cellular telephone service…” unless the called party has expressly consented to the call before it was placed.

Plaintiff Laci Sattefield had received an unsolicited text message from defendant Simon & Schuster, which (via a co-defendant marketing company) had obtained Satterfield’s mobile phone number from a provider of ringtones. Satterfield had agreed to terms that allowed the ringtone company and its affiliates to send text messages to her. Simon & Schuster was not an affiliate of that company.

The court’s most important holding was that although the TCPA was enacted before text messages existed, it is reasonable to interpret “call” under the TCPA to include both voice calls and text messages. The Ninth Circuit reversed the trial court’s summary judgment in defendants’ favor and remanded the case to the trial court for further proceedings.

The significance of this case: If your company wants to promote its goods or services via mobile text messages, be sure to obtain recipients’ permission to send those messages before they are sent.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Who is the Master of Your Domain? (or, How to Prevent Domain Name Hijacking)

ICANN logo

Earlier this year, I helped a client recover an Internet domain name that a disgruntled former employee had hijacked shortly after his employment had been terminated.

I prepared a complaint under ICANN‘s Uniform Domain-Name Dispute-Resolution Policy (the “UDRP”) and filed it with an ICANN-approved dispute-resolution provider.

Seven weeks later, the provider ruled in the client’s favor, and the domain name was returned. We were pleased, of course, but my client had to invest a lot of time, anxiety and money to achieve a successful resolution.

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I Fell into the “Unintended Partnership” Trap – How do I Climb Out?

Earlier this year, I wrote about how business founders who agree to split earnings from their venture can find that they have unintentionally created a general partnership (Beware the Unintended Partnership). The problem: Any partner can subject all of the partners to unlimited personal liability for partnership obligations!

This post provides an overview of how an unintended, or otherwise undesirable, California general partnership can be terminated.

Half or more of the partners can decide to wind up the business of the partnership and dissolve it (California Corporations Code Section 16801(1)).

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Autodesk Wins: Software License Restrictions Trump “First Sale” Doctrine

AutoCAD logo on software packaging

Update: On September 10, 2010, the Court of Appeals for the Ninth Circuit (in Vernor v. Autodesk) reversed the District Count decision discussed below. Supporting software licensors’ reasonable business expectations, the Court held “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.” [Emphasis added.] Accordingly, Vernor, as a licensee, was not protected by the first sale doctrine when he sold copies of Autodesk’s software.

* * *

In Vernor v. Autodesk, the U.S. District Court for the Western District of Washington told Autodesk that despite the restrictions in its license agreement, Autodesk could not preclude its customer from selling AutoCAD software to a third party.

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Should I Deposit a Check Marked “Payment in Full”?

A customer owes you money but is disputing the amount that should be paid. To your surprise, you receive a check for half of the amount in question. On the back, the customer has written “Payment in Full”. If you deposit the check, will you give up the right to ask for the other half of the disputed amount?

The answer depends on which state’s law governs the transaction. I will provide an answer based on California law.

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Sometimes You Just Get Lucky (or, What to Do if Your Customer Files for Bankruptcy)

Although the recession officially may have ended, bankruptcy filings – a lagging indicator – continue to rise. Consequently, companies need to be extra vigilant when they decide how far to extend credit to their customers. A recent development for one of my clients (“Client”) illustrates this point.

Client sells its products exclusively through resellers. Over the course of 18 months, one of them (“Reseller”) had become Client’s largest customer based on the volume of goods purchased. Throughout that period, Reseller had paid every bill on time.

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Entrepreneurs Take Care: Raiding Employee Withholdings May Send You to Jail

Last month, I posted Your Business is Dead ? Are You Liable for its Obligations?, which stated that, generally, once a business is dissolved, the owners will be personally liable for the business’s obligations only to the extent that the owners received distributions at the time of dissolution.

A significant exception to the foregoing rule, however, concerns company personnel who are responsible for making, but fail to make, withholding payments to the Internal Revenue Service.

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Hotels.com Loses Major Trademark Battle

On July 23, 2009 the United States Court of Appeals for the Federal Circuit decided, in In re Hotels.com, L.P., that Hotels.com was not entitled to a federal registration for its service mark HOTELS.COM. (For a brief overview of trademarks and service marks, see Trademark Protection in One Easy Lesson.)

Background: Hotels.com sought to register its mark for the services of ?providing information for others about temporary lodging; travel agency services, namely, making reservations and bookings for temporary lodging for others by means of telephone and the global computer network.? The Trademark Trial and Appeal Board (TTAB) refused the registration on the ground that the mark is a generic term for these services (generic terms, by definition, are incapable of indicating the source of goods or services). (more…)

Do I really need a lawyer to review this contract?

I have wanted to write this post for several months, but until now I have held off because of concern that it would come across as a lawyer saying “buy my services”. Today, though, a conversation with a client drove home how important this topic is.

On several occasions, clients have asked me to dig them out of trouble that occurred because they had entered into agreements without the advice of legal counsel. Some examples:

Basketball Star Rescues 800 Domain Names from Cybersquatter

Photo of Chris Bosh

Chris Bosh

Cybersquatting is registering, trafficking in, or using a domain name with bad-faith intent to profit from a trademark belonging to someone else. NBA superstar Chris Bosh recently won a major victory against a serial cybersquatter.

On September 24, the U.S. District Court for the Central District of California granted an order requiring that Luis Zavala transfer all of his domain name holdings to Bosh. (A list of those holdings is available on this blog’s Downloads page as “Chris Bosh – Domain Names Awarded”.) This award is particularly significant because it is, to the best of my knowledge, the first time that a party has been awarded domain names that profit from third parties’ trademarks. (more…)

Does your Employee Handbook address social media?

Prudent employers have known, for many years, the importance of Employee Handbooks in setting forth a company’s policies and operational procedures. However, the recent increase in the popularity of social media – Facebook, Twitter, blogs and the like – has taken many employers, and their Handbooks, by surprise.

Policies governing mobile phones, computers, Internet access and e-mail no longer suffice. With social media, every employee – for better or for worse, intentionally or unintentionally – can become a spokesperson for the company.

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The “Independent Contractor” Trap Becomes More Dangerous

Earlier this year, I wrote Avoiding the “Independent Contractor” Trap about the dangers that companies face if they misclassify employees as independent contractors. The Wall Street Journal recently reported (Employers and Workers Clash in Court Over ‘Contractor’ Label) that those dangers have increased.

According to the WSJ article, the Internal Revenue Service will audit 6,000 randomly-selected U.S. companies in its first attempt since 1984 to quantify the extent of employee misclassification. The IRS is not taking this step merely to help the individuals involved receive the pay and benefits to which they are entitled – state and federal governments stand to gain billions of dollars every year from withholding taxes, unemployment insurance and workers’ compensation if workers are classified properly.

Even greater than the risk of a government audit is the risk that a disgruntled “independent contractor” will file a wage claim (see Wage Claims – Nasty but [Sometimes] Necessary).

Avoiding the “Independent Contractor” Trap lists factors that can help you determine how to classify workers properly.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Louis Vuitton Wins $10.8 Million from ISPs

Louis Vuitton Logo

On August 28, a federal court jury awarded Louis Vuitton Malletier, S.A. $32.4 million in a suit against two Internet Service Providers and their owner. The suit alleged trademark and copyright infringement.

Louis Vuitton Wins at Trial

The jury concluded that:

  • The ISPs knew, or should have known, that their customers were selling, online, counterfeit goods that infringed LV trademarks and copyrights.
  • The ISPs willful contributed to sales of the counterfeit goods.
  • The ISPs were not entitled to the “safe harbor” protections of the Digital Millennium Copyright Act (see How Websites Can Avoid Liability for User-provided Content).

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Ralph Lauren’s Abuse of DMCA Backfires

This Ralph Lauren ad Ralph Lauren ad that let to DMCA takedown noticeshas been making the rounds of the Internet and television, recently. The reason: Photo retouching to the point of absurdity, producing a supermodel (Filippa Hamilton) who looks more like a Bratz doll than a human being.

I am not raising this issue to jump into the debate about skinny models and self-esteem of girls and women, which is being addressed at length elsewhere. (Disclosure: I have a wife and two daughters.) I am more interested in a huge legal and business mistake that Ralph Lauren made.

As soon as criticisms appeared online, Ralph Lauren lawyers issued takedown notices under the Digital Millennium Copyright Act. (See Terms of Use and the Digital Millennium Copyright Act.)

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“Fair Use”: One Term, Two Different Meanings

Button labeled "OK", symbolizing fair use

Fair use” is a legal term that does not necessarily mean what people often assumes it means (a free pass to use other people’s intellectual property). Indeed, the term has two different meanings, depending on whether copyrights or trademarks are at issue.

Copyright

Copyright protects works of authorship. See Copyright Protection in One Easy Lesson. The copyright owner has the exclusive right (as applicable) to reproduce, distribute, publicly perform, publicly display, and make derivative works of the copyrighted work.

Copyright infringement is the unauthorized exercise of one of the exclusive rights by someone other than the copyright owner. Thus, for example unauthorized copying of someone else’s music or movie constitutes copyright infringement.

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Trademark Protection in One Easy Lesson

A trademark or service mark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of goods (trademark) or services (service mark).

(Throughout the remainder of this post, the term “trademark” is intended to include service mark, as well, except where specified otherwise.)

The owner of a trademark has the right to prevent others from using the mark or a confusingly similar mark. (more…)

Commercial E-mail and CAN-SPAM: What You Need to Know

Seal of the FTC Bureau of Consumer Protection, which publishes a CAN-SPAM guide for businessesUnsolicited commercial electronic mail – “spam” – is the bane of the modern electronic existence. In an effort to limit this problem, the One hundred Eighth Congress enacted the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. This legislation, usually referred to as the “CAN-SPAM Act of 2003” or “CAN-SPAM”, took effect January 1, 2004.

The CAN-SPAM Act

CAN-SPAM has four main provisions, which together aim to make commercial email (including commercial content on websites) more truthful, more transparent and more avoidable.

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Your Business is Dead – Are You Liable for its Obligations?

Last month, I wrote about how to terminate a company?s existence by dissolution (How to Kill Your Company when that’s the Only Choice). Since then, people have asked me what their personal responsibility is under California law if the corporation or LLC had outstanding obligations at the time it was dissolved.

The LLC section reference below has been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Assuming that you go through the dissolution process properly and that you do not have any “alter ego” problems, your personal liability generally will be limited to the amount of any distributions that you received at the time of dissolution.

This limitation is set forth in Corporations Code Section 2011 with respect to corporations and Section 17707.07(a)(1)(B) with respect to limited liability companies.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Attention Employers: “Retaliation” is the New “Discrimination”

According to an article in yesterday’s Wall Street Journal, the U.S. Equal Employment Opportunity Commission is seeing a surge of complaints based on retaliation – i.e., allegations that an employer retaliated against an employee who sought to protect his or her rights by complaining to the EEOC.

The article reports that eliminating retaliation is the EEOC’s top priority, because its enforcement of anti-discrimination laws will be successful only to the extent that employees free to file complaints.

So whether you are a large or small employer, here is the bottom line:

  • Do not discriminate against any employee based on age, race, sex, religion, etc.
  • If an employee files a discrimination complaint, do not retaliate against that employee.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Foreign Suppliers Beware: Five Contract “Gotchas” when Adapting Your Agreements

A couple of months ago, I posted International Business and Agreements: Learning about Legal Culture. This is a follow-up that discusses certain common problems when foreign suppliers bring their standard-form agreements to the U.S.

Filling in Gaps

During the past several years, I have helped quite a few foreign technology suppliers adapt their standard-form agreements for use in the U.S. The agreements that they use back home (translated to English, as required) are quaint by U.S. standards. There is a lot of white space, and fonts tend to be large. Furthermore, while the agreements specify business terms in detail, they address many legal provisions in a cursory fashion or not at all. (more…)

Why (not) form an LLC in Nevada (or Wyoming)?

Nevada state seal for post about forming an LLC in NevadaQuestions about forming a limited liability company (LLC) in Nevada (or, increasingly, Wyoming) come up so frequently that I feel compelled to write about this topic.

There is something approaching the status of urban legend about the wisdom of forming an LLC in Nevada or Wyoming because they do not have an income tax. The problem is that lack of an income tax will benefit you only to the extent that you do business in in that state! (more…)

Ten Tips for Success in the U.S.

Having helped more than a dozen foreign companies set up operations here during the past few years, I am pleased to offer “Ten Tips for Success in the U.S.” on the Downloads page – just Sign Up for Free Downloads using the drop-down list in the sidebar.

Here are the titles of the ten tips, which are discussed in greater detail in the document:

  1. Work with complementary businesses that are already established here
  2. Manage overseas personnel on the principle “trust but verify”
  3. Form your corporation or limited liability company properly
  4. Be ready for a legal system that is different from the one back home
  5. Identify and protect intellectual property (IP) that is used here
  6. Develop detailed employee and independent contractor agreements
  7. Choose an accountant with international tax experience
  8. Be prepared to obtain a federal employer identification number
  9. Conduct due diligence on potential investors
  10. Agree on business terms before you prepare a written agreement

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Oral Agreements – You’re Just Asking for Trouble

Photo of Samuel Goldwyn, who supposedly made a statement about the limited value of oral agreements

Samuel Goldwyn

As concerns oral agreements, the statement that “a verbal [sic] contract isn’t worth the paper it’s written on” erroneously attributed to Samuel Goldwyn actually is pretty close to the mark.

Sometimes I am asked whether oral agreements (as contrasted to those that are written) are enforceable. This post will answer that question but will explain why, even when oral agreements are enforceable, they should be put in written form, anyway.

Oral Agreements Generally Enforceable

Generally, oral agreements are enforceable in California. There are, though, many exceptions. For example, agreements for the sale of land or any agreements to the extent that they will require performance after one year must be in writing (Civil Code Section 1624), as must premarital agreements (“prenups”) (Family Code Section 1611). Also, written agreements generally may be amended only in writing and not orally (Civil Code Section1698).

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Top Ten Legal Tips for Independent Contractors

I just made available on the Downloads page (sign up using the drop-down list in the sidebar) “Top Ten Legal Tips for Independent Contractors,” a document that describes how independent contractors can avoid exposing themselves to unnecessary legal risks.

Here are the titles of the ten tips, which are discussed in greater detail in the document:

  1. Choose the right type of legal entity for your business
  2. If you choose a corporation or LLC, comply with applicable formalities
  3. Buy the right types and amounts of insurance
  4. Identify and protect your intellectual property
  5. Use your form of client agreement whenever possible
  6. Be careful when assigning or waiving intellectual property rights
  7. Be careful when collaborating or subcontracting
  8. Be careful with nondisclosure / confidentiality agreements
  9. Avoid oral agreements whenever possible
  10. Understand what distinguishes independent contractors from employees

For more information about distinguishing independent contractors from employees (tip 10), please see Avoiding the “Independent Contractor” Trap.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Cyberbully Verdict: Not Guilty

Megan Meier, the victim

Megan Meier, the victim

Lori Drew is the woman who, using Myspace in 2006, cyberbullied 13-year-old Megan Meier into committing suicide.

Drew’s actions were, without question, reprehensible. The interesting issue for this post, however, is the U.S. government’s decision to bring criminal charges under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. Section 1030.

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How Websites can Avoid Liability for User-provided Content

Two U.S. District Court cases – Io Group, Inc. v. Veoh Networks, Inc. (8/27/2008) and