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

© 2009-2021 Dana H. Shultz

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 UMG Recordings, Inc. v. Veoh Networks, Inc. (9/11/2009) – offer a recipe by which Internet-based service providers can avoid liability for user-provided content.

Update: UMG v. Veoh was affirmed by the Court of Appeals for the Ninth Circuit on December 20, 2011.

The cases are similar. Veoh operates an Internet-based service that allows users to share videos with others free of charge. Io and UMG (Universal Music Group) brought separate suits, each alleging that Veoh engaged in various forms of copyright infringement because it allowed users to upload videos that infringed the plaintiffs’ copyrights.

In each case, Veoh obtained a summary judgment in its favor based on compliance with the “safe harbor” provision of the Digital Millennium Copyright Act (DMCA), codified at 17 U.S.C. Section 512 (Limitations on liability relating to material online).

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Presenting to the Society for Technical Communication on October 14

On October 14, 2009, I will make a presentation to the Berkeley chapter of the Society for Technical Communication. The topic: Ten Legal Tips for Current and Would-be Independent Contractors.

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.

Watch Out for Asian Domain Name Scams!

Twice within the past 24 hours, a client has contacted me with concerns about trademark protection. In each instance, the concerns were caused by an e-mail that offered specified domain names in Asia. I will describe the e-mails in detail so you will know to be on guard if you receive anything similar:

  1. The subject line includes terms such as “copyright” or “intellectual property.”
  2. The text indicates that the sending company, an Internet domain registrar located in Asia, has received a request to register domain names with country codes in Asia that are similar to a “trademark” (more precisely, a domain name) that you own. For example, if you own <universalwidgets.com>, the e-mail might state that there are requests to register <universalwidgets.cn> and <universalwidgets.asia>.
  3. The e-mail then offers you an opportunity to protect your trademark by buying the Asian domain names yourself, rather than letting them be purchased by the third party. However, to take advantage of this opportunity, you must act quickly.
  4. The individual ostensibly sending the e-mail has an Americanized name, such as “John Zhou” or “Adam Hao”.

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How to Kill Your Company when That’s the Only Choice

Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of a California entity’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.

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 essence of the dissolution process for a California corporation is as follows: (more…)

Resolving Small-business Disputes: The 50-50 Deadlock

On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.

A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!

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Should I pay employees or vendors first?

I answer questions on Avvo pretty regularly. From time to time, I will reproduce (perhaps with modest editing) some of the questions and answers here on my blog.

Question: If an employer has cash flow problems, who should be paid first: employees or vendors?

Answer: I see this situation as requiring analysis from both the business and the legal perspectives.

Business: I believe that employees are more important, and are less able to do without the money to which they are entitled, than (most) vendors, so I would pay employees first.

Legal: While either employees or vendors could bring suit against the employer, employees also would have the ability to file, at no cost, a wage claim with the Division of Labor Standards Enforcement. In my opinion, DLSE investigation of a wage claim is worse than a lawsuit, so for this reason, too, I would pay employees first.

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.

Wage Claims – Nasty but (Sometimes) Necessary

Banner for California Department of Industrial Relations, which handles wage claimsRecently I have seen an increase in the number of current or former employees filing wage claims against their employers here in California. There often is a good reason for the filing. In my experience, employees typically do not spend time and effort on filing wage claims unless they have some basis for concluding they have been underpaid, such as:

  • Unpaid wages, including commissions or bonuses.
  • Accrued but unused vacation time not paid at the time of termination.
  • Unauthorized deductions from paychecks.

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Can I Form an LLC without a Lawyer?

Logo of the California Secretary of State, symbolizing filing Articles of Organization for an LLC without a lawyerRecently, several start-up entrepreneurs have asked me whether they can form a limited liability company – LLC – without a lawyer available to help. The following answer reflects practices in California.

Filing Articles of Organization for an LLC without a Lawyer is Easy

The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required. (Unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable.)

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Pre-formation Contracts: Avoiding Personal Liability

Logo for LinkedIn, where Dana Shultz answered a question about pre-formation contractsThis post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease? (more…)

Limiting Liability when You are the One Being Paid

Logo for LinkedIn, where Dana Shultz answered a question about limiting liabilityFrom time to time, I answer questions – typically about the law or about startups – on LinkedIn. Recently I answered the following question:

What is the best way [in a contract] to limit liability when you’re the party receiving payment?

I believe the answer will be helpful to any supplier of goods or services, so I am reproducing it here in slightly edited form.

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How to Avoid Corporate Guarantees

Startup and early-stage entrepreneurs often are pressured to provide personal guarantees for their companies’ obligations. Presser & Goldstein, LLC in Boca Raton, Florida has posted Avoiding Corporate Guarantees, which discusses how business owners can avoid or limit personal guarantees.

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.

Limiting Non-business E-mail: Define Precisely and Enforce Consistently

Last month, my post Court Curbs Inspection of Employee Text Messages discussed an employer that was held to have unreasonably searched employee text messages because, despite a policy stating that employer-supplied technology must be used only for the employer’s business activities, that policy was undercut when it was only selectively enforced.

Continuing this theme, in a more recent case, Guard Publishing v. NLRB, the D.C. Circuit held that selective enforcement of a policy limiting employee e-mails constituted a violation of federal labor law.

In my opinion, Guard Publishing actually made two mistakes. First, the e-mail policy prohibited “non-job-related solicitations” (emphasis added) but did not prohibit other other non-job-related communications. So the employer gave itself the ability to limit only a fraction of all possible non-business communications.

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You May Be a Content Pirate and Not Even Know It

Last month I posted You May Be a Software Pirate and Not Even Know It. The issues raised there now apply to equally content.

The Software & Information Industry Association is pursuing unlicensed use of content as aggressively as unlicensed use of software. For example, as recently reported in InfoWorld and elsewhere, Knowledge Networks agreed to pay SIIA $300,000 to settle a complaint that it distributed news articles to its employees without permission of the copyright owners. Similarly, in a media release earlier this year, SIIA announced that it was aggressively fighting graphics content piracy by filing lawsuits against individuals and companies that copied and distributed clip art without appropriate licenses. In another media release, SIIA touted the use of paid whistleblowers to help SIIA find infringers.

The implications are clear: Whether the subject is software, content or any other works of authorship, use and distribute the products only to the extent that you are authorized to do so by the terms of the applicable licenses.

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.

International Business and Agreements: Learning about Legal Culture

Over the years I have negotiated a number of international agreements, typically representing domestic clients. My more recent work with EU-based clients, however, has given me additional insights about the U.S. and other legal systems.

These clients have established technology businesses in Europe. Each recently set up operations here in the Bay Area and asked that I adapt existing agreements for use in the U.S. As I work with these clients, two differences between the U.S. and the European Union jump out at me.

Length of Agreements

First, in the U.S. we often have longer agreements. European contracts tend to rely on, and implicitly or explicitly incorporate, detailed statutory provisions that do not exist here in the U.S. Furthermore, agreements here tend to include more business details and legal protections in case the relationship sours and ends up in litigation. For example, one client shared its existing reseller agreement. I found the document charming in its brevity and the abundance of white space on the page. By the time I added everything that is considered normal here in the U.S., the new version had four times as many words!

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Should I form an LLC or a corporation?

Drawing of question marks, illustrating the question whether to form an llc or a corporationFairly frequently, an individual will ask whether to should form an LLC (limited liability company) or a corporation for a business. Here are the factors that I typically find are most important.

First, we can pretty much dismiss basic income tax considerations. By default, an LLC is not taxed as a separate entity but a corporation is taxed separately. However, there are ways to override the default tax treatments. An LLC may elect to be taxed as a separate entity by filing IRS Form 8832. Subject to certain limitations, a corporation can avoid separate taxation (i.e., can become an “S corporation”) by filing IRS Form 2553. (Please note, however, that once a company is in business, certain types of transactions can have different consequences for LLCs than for corporations. Accordingly, every company should consult with a tax advisor both up-front and on an ongoing basis.)

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Teaming Agreements Teem with Issues

Separately, two clients asked me to review “teaming agreements” that had been presented to them. In each instance, the client was proposing to “team” with another company that had complementary expertise so they could carry out, jointly, a sophisticated technical project for a customer.

A brief aside: I prefer the term “teaming” to “partnering”, which often is used by technology companies to emphasize how closely they will work with one another. My concern about “partnering” is that the term suggests the companies may be partners rather than independent contractors, potentially sharing unlimited legal liability for their joint business activities. Fortunately, my clients avoided that trap.

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Small Claims Court: Litigation without Litigators

Picture of the Tulare County Courthouse to illustrate where small claims cases can be filed

I am not a litigator (trial attorney), so I normally do not write about litigation. Recently, however, I have discussed several matters where small claims court seems appropriate. I will share some basic information about small claims cases in California.

The CA Courts’ Small Claims Self-Help Center provide extensive, detailed information. The most important point is that small claims court judgments are limited to ordering the payment of money. You cannot, for example, ask a small claims court to order that the defendant stop infringing a patent or trademark.

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Investor Due Diligence Redux

On July 2, I posted Investor Due Diligence Should Go Both Ways. The thrust of that post: Founders should conduct due diligence on prospective investors just as investors conduct due diligence on founders.

In a similar vein, I just read Make Sure Your VC Isn’t A Jerk by Mark Peter Davis of DFJ Gotham Ventures. Well-written, succinct and worth reading.

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.

Eminent Domain: The U.S. Giveth, the U.S. Taketh

Photo of a hand grabbing money, symbolizing the US government's eminent domain powersA fundamental tenet of patent law is that the owner of a patent can preclude others from using or manufacturing inventions that the patent covers. Because of eminent domain, however, that there is a major loophole regarding the U.S. government.

Section 1498(a) of Title 28 of the U.S. Code says, in part:

“Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be action against the United States in the United States Court of Federal Claims for recovery of his reasonable and entire compensation for such use and manufacture.”

(Section 1498(b) provides similarly with respect to copyright infringement by the United States.) (more…)

Third-party Patent Infringement: Let the Licensee Beware

After months of effort, you have successfully negotiated a nonexclusive license under an important patent. The license agreement allows you to make, use, sell, offer for sale, and import products that are covered by the patent. Much to your horror, your arch-competitor starts making and selling competing products that use the licensed technology, pricing its products substantially below your planned price. When you inquire, the licensor says that the competitor does not have a license. What can you do to stop this “third-party” infringement of the patent?

You examine the license agreement but see nothing about third-party infringement of the licensed technology. Can you stop your competitor from using the technology? Can you force your licensor to stop the competitor? The short answer is “no”.

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Recognizing the Right Royalty Rate

One of the challenges my clients often face is how to determine a royalty rate for licensing an invention or other intellectual property. I start by offering the following fundamental observation:

The licensor needs to know the licensee’s business model and profit margin, because the royalty must be less than the licensee’s profit.

An article in the September 2006 issues of les Nouvelles, a quarterly publication of the Licensing Executives Society International, agrees with and expands upon this observation. “Fair And Reasonable Royalty Rate Determination – When Is The 25% Rule Applicable?” was written by Ove Granstrand, Professor of Industrial Management and Economics at Chalmers University of Technology (Goteborg, Sweden). (more…)

The Top Ten Legal Mistakes of Startup and Early-stage Companies

I am pleased to make the article “The Top Ten Legal Mistakes of Startup and Early-stage Companies” available as a Free Download on the Downloads page.

Here are the ten mistakes that are discussed:

  1. Failing to comply with corporate formalities
  2. Pretending that employees are independent contractors
  3. Neglecting to provide and update an employee handbook
  4. Failing to establish or adhere to discipline or termination procedures
  5. Failing to ensure that the company owns its intellectual property
  6. Believing that “open source” means “no restrictions”
  7. Thinking that all NDAs have the same terms
  8. Believing that websites can unilaterally change their terms of use
  9. Using another company’s standard-form agreement
  10. Giving “family jewels” to an overseas supplier

Related post: Top Ten Intellectual Property Mistakes of Startup Entrepreneurs

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.

Patent Licensing for Licensors: Know Your Industry

Photo of a stack of 100 Euro notes, symbolizing revenue from patent licensingOver the past few years, several of my clients who had obtained patents wanted to license their rights to third parties. Only one client achieved patent licensing success.

The reason: The successful client was intimately familiar with the industry where his technology had its greatest value. He had worked in that industry for many years. He knew highly-placed executives in the most important companies. He was familiar with the companies’ product development plans.

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Tweet Leads to $50,000 Defamation Suit

An unhappy tenant wrote the following tweet about her landlord: “Who said sleeping in a moldy apartment was bad for you? Horizon realty thinks it’s okay.”

The landlord learned about the tweet and, in response, filed a $50,000 lawsuit stating that the tenant maliciously and wrongfully defamed the landlord.

More details on Avvo.

The moral: When using social media, be very careful about what you write about any company or person. If you would be reluctant to make the statement to its/his/her face, think twice before you post it.

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.

IP Warranties and Indemnification: How Much is Reasonable?

Knowledgeable licensees of intellectual property (IP) seek indemnification protection to ensure that the licensed IP legitimately belongs to the licensor and not to a third party. This post explores the interplay between indemnification provisions and IP warranties.

While indemnification provisions vary from contract to contract, the following is illustrative:

Licensor will defend, indemnify and hold Licensee harmless from all costs, expenses, and damages arising from any third-party claim alleging that the Licensed IP infringes any patent or copyright or misappropriates any trade secret (a “Claim”), provided that Licensee has given Licensor prompt notice of the Claim, allows Licensor sole control of the defense of the Claim and of all negotiations for its settlement or compromise, and cooperates in all reasonable ways with Licensor’s defense or settlement of the Claim. If a Claim results in an injunction precluding Licensee’s use of the Licensed IP, Licensor will, at its option and expense, either (a) procure for Licensee the right to continue the enjoined use, or (b) replace or modify the Licensed IP so it is no longer subject to the injunction. If Licensor, after all commercially reasonable efforts, is unable to perform under either option (a) or (b) above, then Licensor will refund to Licensee an amount equal to the remaining undepreciated/unamortized value of the Licensed IP carried on Licensee’s books for U. S. federal income tax purposes as of the date that use of the Licensed IP was enjoined.

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Licensing 101

I am pleased to make available as a Free Download on the Downloads page “Licensing 101,” an article that provides information about licensing in FAQ format. Here are some of the questions that are answered:

  • What is a license?
  • How much does a license cost?
  • Can license terms be negotiated?
  • Are some provisions unique to patent licenses?
  • Are there special rules where the U.S. government is the licensee?
  • What should I look out for in international license agreements?

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.

LLC Formation in Record Time

Last week, I formed a new limited liability company (LLC) for a client. The California Secretary of State turned the Form LLC-1 around in only two days rather than the standard one week! (24-hour turnaround is available for an additional fee of $350, which is hardly worth paying under these circumstances.)

Has the recession reduced the number of new businesses being formed? Datasearch, the filing service that I use in Sacramento, did not know.

Follow-up: Eighteen months later, turnaround times have deteriorated terribly – see Forming a Corporation in California? Get Ready to Wait.

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.

Mass E-mails and Urban Legends: Don’t Believe Everything You Read

A well-intentioned friend recently distributed – to many dozens of people – an e-mail claiming that next month all mobile phone numbers will be released to telemarketers, so it is essential to call the Federal Trade Commission’s toll-free number to opt out of receiving unwanted calls. The e-mail finished by telling recipients to forward it to all of their friends.

This e-mail is false and perpetuates an urban legend that has been circulating for years, wasting bandwidth, processing cycles and disk space!

The truth is that mobile phones are protected from telemarketing; the toll-free opt-out number should be used for landline phones.

For more details, check out Snopes.com and the FTC website.

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.

A Practical Guide to GPL Compliance

I am pleased to make available on this blog’s Downloads page “A Practical Guide to GPL Compliance”, published by the Software Freedom Law Center.

In my opinion, this is a must read for anyone who is preparing or distributing software that is governed by the GPL.

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.

Intellectual Property Essentials for Start-ups

Intellectual Property Essentials for Start-ups” now is available as a Free Download on the Downloads page.

Here are some of the questions that the document addresses:

  1. Which types of intellectual property (IP) should a start-up be aware of?
  2. How can we be sure to own IP created by independent contractors?
  3. Are there special considerations if the contractor is located overseas?
  4. It is pretty easy to register a trademark online; where might I go wrong?
  5. A provisional patent application is inexpensive and can be filed quickly; are there any risks I should keep in mind?
  6. Money is tight; can we use another company’s form of agreement rather than paying to develop one of our own?
  7. Open source software is hot; does it bring along any special dangers?

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.

Securing IP Requires More than an NDA

Logo for Quora, where Dana Shultz answered a question about needing more than an NDA to secure intellectual propertyWhen it comes to protecting intellectual property (IP), non-disclosure agreements (NDAs) are ubiquitous. What many entrepreneurs fail to realize, however, is that securing IP requires more than an NDA. For an NDA to do its job, the company must actually own the IP in the first place!

The most serious ownership problems arise when there is no written agreement between the company and the individual developing the IP. Depending on the nature of the IP (for example, whether copyright or patent protection applies) and whether the developer is an employee of the company or an independent contractor, the developer may own the IP.  If this is the case, the company has, at most, a non-exclusive license.

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Alice Doesn’t Work Here Any More

A software company (“Client”) had to dismiss one of its developers (let’s call her “Alice”). The problem was Alice’s incompetence.

But there was a complication: Alice was pregnant. Adding to Client’s frustration, Alice, without permission or advance notice, was taking more time off than she was entitled to. Client wanted to be rid of Alice but did not want to be charged with discrimination based on sex or pregnancy.

Focusing on the Issue

I worked with Client’s CEO and Alice’s manager. We agreed right away to ignore the unauthorized time off. The amount of money at stake was relatively small, and we were concerned that raising time off as an issue could entangle us in Alice’s pregnancy-related medical needs.

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Termination Tips

Employment terminations are difficult for both managers and employees. Because of the sensitivities involved and the desire to avoid litigation, managers should take special care in drafting the severance agreement and release and in conducting the termination meeting.

For California employers, one of the most important contract provisions is to require that the employee waive all rights under Section 1542 of the California Civil Code. This Section, which is well-known to attorneys but not necessarily to business managers, states: “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.”

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Multiple Founders: Avoiding Landmines

Many clients ask me to help them form new businesses. On several occasions, however, when there were two or more founders, the business never got off the ground. The common thread running through these situations is that while the founders thought that they had agreed on business terms, each party had unstated assumptions that came out only when legal documents were prepared.

If you find yourself talking about a new business with one or more other founders, here are some issues you should think about: (more…)

Negotiation: When What You Hold Can Make the Other Guy Fold

A couple of years ago I had one of my greatest thrills as an attorney.

My client owns several patents covering ways to improve the efficiency of certain types of lasers. We had succeeded in licensing a large company for one field of use. We were trying to sign up another company for a second field of use.

All business and legal issues had been resolved when, at the last minute, the licensee’s General Counsel demanded that my client convey, in addition to the patent license, certain broadly-defined rights to my client’s know-how. We refused, explaining that know-how never was part of the discussion, and if my client ever was interested in conveying know-how, it would come at a price. The parties then reached final agreement without the know-how provision.

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Copyright Registration: Whether, When and Why

Circle-C symbol for copyright registrationIn the U.S., copyright protection subsists in a work of original authorship as soon as it is fixed in a tangible medium of expression. 17 U.S.C. Section 102 There is no requirement that the work be registered with the Copyright Office or that a copyright notice be affixed. As discussed below, however, there are circumstances when copyright registration and affixing a notice are advisable.

Copyright Registration Required to Bring Suit

17 U.S.C. Section 411(a) says that, generally, a copyright registration is required before the owner can bring suit for copyright infringement. Furthermore, Section 412 says that, generally, awards of statutory damages (Section 504(c)) and attorney’s fees (Section 505) are available only if the copyright has been registered within three months of publication or within one month of learning of infringement, whichever is earlier.

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Annual Meetings: The Basics

Sometimes, in an effort to reduce legal fees, clients conduct corporate annual meetings, and prepare minutes, on their own. Regrettably, if they do not know what they are doing, they can make a mess. Here is a quick overview of how to do things right.

Both California (Corporations Code Section 600(b)) and Delaware (General Corporation Law Section 211(b)) require that every corporation hold an annual meeting of its shareholders to elect directors for the coming year. (In the case of a Delaware corporation, however, the directors may be elected by written consent without calling a meeting.) Any other proper business may be transacted at the shareholder meeting.

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Inspection of Employee Text Messages – Be Careful

“Texting” is booming in popularity, especially among younger workers. Are your personnel sending text messages on company-provided devices? If so, you should know about the Ninth Circuit’s decision in Quon v. Arch Wireless Operating Co., Inc., 529 F.3d 892 (2008).

Update: On June 17, 2010, the U.S. Supreme Court, in City of Ontario v. Quon, overturned the Ninth Circuit decision, ruling that the search of employee text messages did not violate the Fourth Amendment prohibition against unreasonable search and seizure because (a) it was motivated by a legitimate work-related purpose and (b) it was not excessive in scope. However, the Court expressly sidestepped the issue of whether employees have a reasonable expectation of privacy in their text messages, so the precautions listed at the end of this post still are relevant.

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Corporate Housekeeping: Keeping Documents in Order

From time to time, clients with established businesses have asked me to bring order to their legal affairs. I refer to this as ” corporate housekeeping “.

Usually, the request results from an extraordinary, but desirable, event. This might be an acquisition offer, a prospective new investor, or a restructuring for tax purposes. In each instance, the client quickly realizes that it has not been paying close enough attention to legal documentation.

Although the clients are in different industries, their stories are similar. In essence, they limit their legal activities and expenditures to those required to bring business in the door, satisfy customers’ needs, and pay employees. This approach works on a day-to-day basis. Yet when the extraordinary event comes up, the company suddenly needs to devote scarce resources to legal clean-up. (more…)

Investor Due Diligence Should Go Both Ways

"Due Diligence" sign for blog post about investor due diligenceDue diligence is a routine part of an investor’s decision whether to invest in a company. The company also should conduct its own investor due diligence.

A couple of years ago, I worked with a company (“Client”) that provided e-mail security products. Previously, Client’s founder (“Founder”) had arranged for an equity investment by a company controlled by an individual in Southern California (“Investor”).

First Mistake: No Legal Counsel

One of Founder’s huge mistakes was not seeking legal counsel to review the terms of the investment. Two of those terms were disastrous for Founder. (more…)

You May Be a Software Pirate and Not Even Know It

I was retained by a small company that had received a letter from one of its most important software vendors. The letter said the company “may have installed on its computers more copies of… software than it is licensed to use.” It then pointed out that unauthorized duplication of proprietary software violates federal copyright law and the applicable license agreement and that “potential remedies… are significant.” [emphasis added] The letter ended by requesting that my client:

  • Audit all of its computers for copies of the vendor’s software and provide the audit results within three weeks
  • Not destroy any installed software
  • Not purchase any more of the vendor’s software until the matter is resolved

The client’s owner was concerned. She did not know of any illegally installed software; even worse, she was suspicious and uneasy about how the vendor could have such information.

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How detailed should a legal document be?

This topic was suggested by Tim Greene at FizzTalk based on a comment posted at the LinkedIn Legal Blogging group.

In my experience, a document’s level of detail should be driven by the nature of the business transaction and the parties’ relationship. I will give some examples both from in-house work and from my private practice that pertain to agreements with independent contractors.

Long and Detailed

When I was VP and Legal Counsel at Visa, I negotiated hundreds of contracts. Given that most were for IT products or services, a lot of money often was at stake, especially if a relationship was to continue for a period of years.

Accordingly, I prepared a series of detailed standard-form agreements – typically 15-20 pages – that served as a starting point. To minimize the amount of negotiation that would be required, the agreements were reasonably balanced, yet they, nevertheless, protected my client’s essential business and legal interests.

The agreements were long, but the length was justified by (a) the size of the deals and (b) the fact that each standard-form agreement would be used many times in the future, with minor revisions as required.

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Beware the Unintended Partnership

Photo of two teddy bears, symbolizing an unintended partnershipThis post uses a real-life example to explain how an unintended partnership is created and why it can be a problem.

Client was one of two founders of a website. She provided content; Co-founder developed, maintained and promoted the site.

Client and Co-founder had been working together for three months when Co-founder presented a business agreement that had been prepared by his paralegal friend. Client asked that I review the agreement on her behalf.

I saw right away a problem that frequently arises in this situation: The parties were characterized as participating in a joint venture under which they would split earnings from the site. The problem arises because under California Corporations Code Section 16202(c)(3), subject to certain exceptions (see discussion below), “[a] person who receives a share of the profits of a business is presumed to be a partner in the business”. This is true even if the parties did not intend to form a partnership (Section 16202[a]), in which case they have created an unintended partnership.

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Arbitrating Employment Disputes: Pro and Con

I prepared a Proprietary Information and Invention Agreement (“PIIA”) to be signed by the employees of a small but established technology company in the Bay Area. The PIIA ensures that the company owns whatever employees create on the job, and it obligates employees not to disclose the company’s proprietary information to third parties.

The client pointed out, however, a conflict between the PIIA and the existing Employee Handbook: The PIIA states that any dispute will be resolved in state or federal court in San Francisco, but the Handbook states that all employment disputes will be subject to arbitration. The client asked me how this conflict should be resolved.

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Employee Proprietary Rights Agreements – Be Careful

Some companies force employees to sign proprietary rights agreements under which the employee automatically assigns to the company any patent applications that the employee files within one year following separation from the company. I have always considered these provisions unjustifiable. California law apparently has reached the same conclusion.

Applied Materials Made a Mistake

In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al., 630 F.Supp.2d 1084 (2009), the U.S. District Court for the Northern District of California held that such a provision is unlawful. (more…)

Top Ten IP Mistakes of Small to Mid-size Tech Companies

Today I made a lunchtime presentation to the East Bay MashEx in Pleasanton.

I am pleased to make the Top Ten IP Mistakes of Small to Mid-size Tech Companies handout available as a Free Download on the Downloads page.

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.

Spam Arrest: I Think I’ll Stay as Far Away as Possible

Spam Arrest logo

Today a client received an e-mail bounce-back from Spam Arrest, which provides a challenge-response system to stop automated junk mail. The first time a sender sends e-mail to a protected recipient, the sender must follow a link in the bounce-back message to a web page where, following user entry of a one-time verification code, the sender is identified as a legitimate e-mail sender.

During the past several years I have gone through the Spam Arrest verification process a few times and never thought much of it. But when I followed the link in the client’s e-mail, I saw something that, to the best of my knowledge, I had never seen before: the Sender Agreement reproduced toward the end of this post.

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Facebook URLs: The Race is On

Facebook logo

Facebook recently began allowing users to name the URLs for their pages. For example, my Facebook page is at www.facebook.com/danashultz. The option to choose a URL appears as soon as the user logs in.

(Not surprisingly, Facebook’s servers appear to be overworked at this time. The first two times I tried to reserve my URL, I was hung up on a “Loading….” message. The third time worked.)

It is easy to anticipate, however, that trademark infringement and cybersquatting will run rampant. If you believe that another Facebook user has chosen a URL that infringes upon your trademark, you can report an infringement of your rights.

Check out all posts about cybersquatting.

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.

Beware Your Alter Ego

Banner of the California Courts, which have written opinions about the alter ego doctrineThis post discusses the alter ego doctrine, particularly as it is applied by courts in California.

The section references 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).

Corporations have existed for centuries. One way they promote economic activity is by allowing stockholders to limit their personal liability for corporate debts to the amount of their individual investments in the corporation (“limited personal liability”). (more…)

What Every Business Person Needs to Know about Licensing

A couple of years ago, at the State Bar of California’s Section Education Institute, I delivered a one-hour program titled “What Every Business Lawyer Needs to Know about Licensing”. The target audience was attorneys who work with businesses but are not particularly familiar with intellectual property or licensing issues.

The program covered the following topics: (more…)

Postincorporation Matters

Have you ever wanted a list of what you need to do, once a corporation is formed, to comply with the various legal requirements that confront businesses nowadays? This post may help you.

I am pleased to offer, as a Free Download on the Downloads page, the 10-page document on Postincorporation Matters that I provide to clients once I form their corporations. It addresses such issues as maintaining the separate existence of the corporate entity; conducting annual meetings of shareholders and the board of directors; payment of taxes; personnel hiring and terminations;and intellectual property issues; and much more.

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 a Sample Confidentiality Agreement / NDA?

I am pleased to make available as Free Downloads on the Downloads page the sample Mutual and Unilateral Nondisclosure Agreements that I originally made available via Legal OnRamp.

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.

Name that Business – Avoiding Rejection by the Secretary of State

California Secretary of State logo

California law requires the Secretary of State to determine that a proposed business entity name (for a corporation, limited liability company, or limited partnership) is not the same as or too similar to a reserved name or to the name of an existing business entity (of the same entity type) and is not misleading to the public.

The Secretary of State’s office adopted regulations on May 14, 2009 that provide guidelines to assist the public in selecting a business entity name prior to reserving the name or filing documents. These regulations are helpful because The Secretary of State returns documents unfiled if proposed business entity names are unavailable under the statutory standards. There now are specific guidelines for selecting business entity names prior to filing documents with the Secretary of State and, thus, more certainty that proposed business entity names submitted for reservation and/or filing will be acceptable.

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Buy-sell Agreement Objectives and Issues

Graphic showing :buy" and "sell" signs for this post about buy-sell agreement objectives and issuesThe founder of a company asked me whether he needs a buy-sell agreement. Having granted shares to key personnel, he wanted to make sure that a departure from the team did not jeopardize the company’s operations.

A buy-sell agreement can apply to any type of closely-held business (one in which ownership and voting control are concentrated in the hands of a few investors). I will refer, below, to shareholders of a corporation. However, most of the following information applies equally to members of a limited liability company and partners in a partnership. (more…)

Risk and Reward: A Personal Mini-essay

Before starting my law practice five years ago, I provided legal services in-house as VP and Legal Counsel at Visa International Service Association (now Visa, Inc.). Visa was a great place to work, and I considered myself fortunate every day that I worked there.

But now that I am removed from that experience, I realize that Visa and I were not a perfect fit. Financial services are about minimizing risk. I’m not. Although I am not foolhardy, I am willing to weigh risk vs. reward.

That’s why my clients are small, entrepreneurial companies, typically start-up or early-stage. Entrepreneurs balance risk and reward every day, making us a good fit. And that’s why my law practice gives me the greatest professional enjoyment of any position I have ever had. I consider myself even more fortunate, now.

If You Think It Smells Bad Now, Wait until You Dig into It

More than 20 years ago, I was General Counsel of a small software company. The CEO – a successful serial entrepreneur – was always looking for opportunities to acquire, or establish strategic relationships with, other companies. The CEO was creative in identifying opportunities, yet highly attuned to potential problems. He told me, “If you think it smells bad now, wait until you dig into it. I was recently reminded of his warning.

A client (“Client”) had signed a letter of intent to acquire a much smaller company (“Target”) and asked that I represent Client in the transaction. I sent a Due Diligence Request List to Target, and with its reply I had my first clues that Target might have some problems. Target’s initial responses were superficial and incomplete. I did not know whether the company was being evasive or was merely naive. Either way, it appeared that Target lacked a lawyer’s guidance.

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Work Made for Hire – a Term Made for Confusion

Logo of the US Copyright Office, symbolizing a work made for hireAs Alexander Pope wrote in An Essay on Criticism (1711), “A little Learning is a dang’rous Thing“. That certainly pertains to the legal concept of a “work made for hire” (WMFH).

People who have some knowledge of WMFH typically believe that it means the transfer of all rights in a work from the creator to a purchaser. So, for example, if an independent contractor writes software for a company, then according to this belief, the company will own all rights to the software if the parties’ contract says the software is a work made for hire. This belief is wrong! The following is an explanation of what work made for hire really means under copyright law and how parties actually can arrange for transfer of all rights in a work.

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Best Practices in Drafting Software Contracts

Logo of the American Law Institute, which published a treatis about drafting software contractsOn May 19, the American Law Institute approved the Proposed Final Draft of the Principles of the Law of Software Contracts. The 305-page document presents best practices that should be taken into account when drafting software contracts.

Implications of the Principles for Drafting Software Contracts

Here are some implications of the Principles that I find most interesting: (more…)

Top Ten IP Mistakes of Small to Mid-Size Tech Companies

On June 18, I will make a presentation to the East Bay MashEx. The title: “The Top Ten Intellectual Property Mistakes of Small to Mid-Size Technology Companies”. (The handout is available as a Free Download on the Downloads page.)

Here are the mistakes that I will talk about:

  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 for a provisional patent before the scope of the invention is clear
  6. Treating the federal government like non-government 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

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.

Choice of Law and Non-Compete Provisions

This post describes the fascinating interaction between a contract’s choice of law and non-compete provisions in a matter that I worked on.

A longtime client received an acquisition offer from a large, publicly-held company (“Acquirer”). Once the acquisition closed, the client’s founder (“Founder”) would become a management-level employee of Acquirer.

Concern about Non-compete Provision

Although Acquirer’s proposed employment agreement generally was acceptable, Founder was concerned about its non-compete provision. That provision stated that for one year following termination of his employment, Founder would not “engage in any business activities that are competitive with the business activities of [Acquirer] or those of its subsidiary or parent companies”.

The problem was that the business of Acquirer and its affiliates was vast, and Founder’s expertise was industry-specific. In effect, Founder would not be able to work elsewhere. (more…)

Intellectual Property Blogs

Here are some intellectual property blogs that I like and some of the reasons why they impress me:

  • Patent – Patently-O – Professor who says a lot without being too wordy or abstract.
  • Copyright – Exclusive Rights – In-house attorney with a sense of humor.
  • Trademark – The Trademark Blog – Private-practice attorney who provides case documents. Been blogging since 2002!
  • Trade secret – Trade Secrets Blog – Law firm that includes an eye-catching graphic with almost every post.

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.

Negotiating Executive Employment Agreements

In the U.S., most employment is “at will”. This means that either the employer or the employee can terminate the employment at any time, for any legitimate, non-discriminatory reason, with or without cause. The typical senior executive, in contrast, has an employment agreement that runs for a number of years and allows termination only for cause. The reason: Attracting and retaining key executives is critical for any company’s success.

By the time I am called in, the parties usually are at or near agreement on salary and the amount of equity compensation (stock options or grants). In addition, the employer’s benefits program usually is well-defined. I have found that most of the negotiation effort goes into the following provisions:

Realistic Financing Options for Startup Companies

Sure, you dream of venture capital to turn your great idea into entrepreneurial success. But guess what: The vast majority of startups will never come close receiving venture funding.

There are alternatives, however. Here are approaches that my clients typically consider: (more…)

Terms of Use and the Digital Millennium Copyright Act (DMCA)

Logo of US Copyright Office, symbolizing the DMCARecently, several clients with existing websites asked me to review their online Terms of Use (“TOU”). While the TOU were respectable, there were areas where each could be improved. Interestingly, the area where all of the clients had made mistakes was with regard to the Digital Millennium Copyright Act (the “DMCA”). A summary of the DMCA is available from the U.S. Copyright Office. (more…)

Changing Online Terms of Use? Be Sure to Give Notice First!

First page from the Douglas case, which discusses changes to terms of use

Let’s assume that you have a website with great content. When users sign up, they eagerly click the “I agree” button to accept your standard terms of use. In those terms, you give yourself the right to make future changes to the terms of use via the following provision:

“We may change these terms of use at any time by revising them on our website. You agree to be bound by any such revisions. Therefore, you should review these terms periodically. If you do not agree with any revision, you must stop using our website.”

Changes to Terms of Use Require Notice

This approach is routine on the web and, until recently, was considered by many to have precisely the effect that was intended. In 2007, however, the United States Court of Appeals for the Ninth Circuit (which has jurisdiction over federal cases in the Western U.S.) stated that website owners must do more than just change terms of use online if they want the changes to take effect for existing users.

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Copyright Protection in One Easy Lesson

Circle-C symbol designating a registered copyright for this post about copyright protectionFrom time to time, clients ask me questions about copyright protection. For example: Should I put a notice on my work? What must the notice say? What about “all rights reserved”? Should I register my copyright? If so, when? Here is a brief overview of copyright formalities. This post discusses why they are not required in the U.S., but when, where and how they might help you.

Copyright Protection Basics in the U.S.

Copyright protects works of authorship and subsists from the time the work is created in fixed form. The owner has the exclusive right (as applicable) to reproduce, distribute, publicly perform, publicly display, and make derivative works of the copyrighted work.

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Will that NDA’s Residuals Clause Cost You Your Trade Secrets?

Envelope stamped Top Secret, symbolizing a residuals clause in an NDAAnyone who has worked in technology is familiar with nondisclosure agreements (NDAs). Differences among NDAs usually are small; they tend to cover the same territory in similar ways. However, NDAs from large companies often contain what I consider a most pernicious provision: A ” residuals clause “.

Residuals Clause Explained

A residuals clause excludes from confidentiality obligations information that the recipient’s personnel retain in their memories. Here is a typical provision, from the Microsoft Confidentiality Agreement for Licensing Discussions [document no longer available online]: (more…)

Why (not) Incorporate Online?

There are countless online services – including LegalZoom, MyCorporation and The Company Corporation – that will help you form a corporation. The benefits are clear: A minimal investment of time and money.

But, based on the experiences of some of my clients before I began representing them, those benefits may come at a cost: Corporate documents that do not properly meet the entrepreneur’s needs, plus a lack of information about legal requirements to maintain the corporation on an ongoing basis. (Please see this blog’s Hall of Shame page.)

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Why (not) Incorporate in Delaware?

Delaware Division of Corporations logo symbolizing why one should (not) incorporate in Delaware

Let’s assume that you are starting a new business in the San Francisco Bay Area (where I live and work). And let’s assume, further, that you have decided to form a corporation to establish limited personal liability and to provide an easy way to accept investment capital, if and when appropriate. Should you incorporate in Delaware or in California?

Registered Agents Say Incorporate in Delaware

Registered agents cite a variety of reasons to incorporate in Delaware. Those reasons tend to fall into two categories: (more…)

Avoiding the Independent Contractor Trap

Photo of a mouse trap with money in it, symbolizing the independent contractor trapSmall companies usually need to conserve cash, so they often turn to independent contractors rather than employees. This makes perfect sense – unless the company falls into what I call the independent contractor trap.

If there is not enough work to justify a regular employee, the company can use an independent contractor when needed. That way the company avoids making unemployment and social security contributions. Also, it does not pay benefits such as health and life insurance, retirement plan contributions and personal time off.

There can be problems, however. If the individual really is doing the work of an employee – is misclassified – the Internal Revenue Service or, in California, the Employment Development Department might reclassify the individual as an employee, erasing the presumed financial benefits.

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Researching the Opposing Party: Forewarned is Forearmed

When I prepare to negotiate an agreement for a client, I start by researching the other party so I can gain insights that might help me represent my client more effectively. The obvious starting point is the website for the other party, where I can quickly understand its business and see who its executives are. But I also look for legal information that typically is available only elsewhere.

Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.

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A Law Blog for Startup and Early-stage Companies

After a number of in-house legal positions, I started my own solo law practice in 2004. Most of my clients are startup or early-stage companies, typically technology-related.

For most of the time since then, I have published a well-received monthly e-mail on various legal topics for clients, colleagues and friends.

Now, having received encouragement from a number of people, I am starting my first blog. The tag line for my practice is “High-touch Legal Services for High-tech Companies”, so I have decided to call this the “High-touch Legal Services Blog”.

I hope you will find my posts both interesting and informative.