Articles Posted in Business Law

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Different states have different rules regarding the validity of non-compete agreements. In California, non-compete agreements are heavily disfavored and will usually only be upheld in a limited number of circumstances. When drafting a non-compete agreement, it is important to keep in mind where the employment will be taking place, so that you can know what types of non-compete agreements are allowable in that location.

Background

California, in general, finds that non-compete agreements after the termination of the employment agreement are not valid and will not be upheld by the courts except in specific circumstances. The California Business and Professions Code Section 16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  The courts have strictly applied Section 16600 and used this provision to invalidate employment agreements that would have prevented the employee from working for a competitor after the completion of employment.

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Among the rights people have, many are unknown or unsung until there is a dispute and the courts get involved in the process. Rarely recognized is the right to reverse engineer under the Fair Use Doctrine and Digital Millennium Copyright Act.  However, this is not an absolute right.  Rather, it can be waived under certain circumstances. So, how can the right to reverse engineer be used? How might an individual hope to reverse engineer anything? Can you prevent others from reverse engineering your products?

What does the reverse engineering law apply to?

Reverse engineering is a method of taking a device or program and taking it apart to determine how it works, occasionally in attempts to duplicate or improve it. Generally, this would be applied to devices or physical products that are protected by patents. However, in the realm of copyright, reverse engineering is allowed in some situations. Specifically, this applies to computer programs to allow interoperability of devices or systems.  Since computer programs may be designed to only work with a few devices or systems, to allow a consumer to use them on another operating system, reverse engineering would be a necessity.  This would allow individuals to ensure programs operate without interference or to add integration features.

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In today’s globalized world, with international markets becoming a stage for events to take place, how would you enforce a judgment in a foreign jurisdiction? After going through a lengthy process, it may seem unfair to go through the same procedure again without a guaranteed result.  So, simply because you obtained a judgment in your favor, if the court decision isn’t enforceable in a foreign jurisdiction, then how can you ensure you can collect? How can you ensure that things will end in your favor, and that the other side will not get away because he/she retreated to another country?

What needs to be in place to enforce my judgment?

You need the following items to enforce your judgment in a foreign jurisdiction: (1) a treaty with the foreign country agreeing to enforce the judgment; and (2) a domestic judgment in your favor that was issued within the United States. What makes this difficult is how the United States does not have treaties with other countries regarding the enforcement of judgments. While there is a treaty in place through the Hague Conventions on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, only a few select countries are part of it, including, but not limited to, Kuwait and the Netherlands. Unfortunately, beyond that there is little else you could do to enforce a judgment. While we will discuss this in the next blog, arbitration agreements can bind those in other countries, and there is an effective convention that applies in those cases.

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For entrepreneurs who seek to engage in international business, it is important to keep abreast of developments in other countries. Political problems, exchange rates, and legislation may affect the business climate when engaged in international business.  The most recent shake up in international legal requirements seems to have risen from “Brexit” and what it means for those doing business with the United Kingdom, European Union, and United States. Brexit (which comes from the merger of “Britain” and “Exit”) is the UK’s vote to leave the European Union.  While this decision has had repercussions on the value of the British Pound, Euro, and U.S. Dollar, it also serves to show that the UK will no longer be bound by the European Union’s rules or regulations.  So, what law applies now? How soon will the United Kingdom be unbound from the European Union’s rules or regulations? What should American businesses take out of this referendum?

What does “Brexit” do?

The UK has voted to leave the European Union as part of a referendum voted on by its citizens. The EU is an economic and political partnership between various member states, sharing a common currency, with the exception of the United Kingdom, which uses the British Pound. The EU imposes certain restrictions when working with member states (e.g., Privacy Shield, Digital Single Market initiative). It serves to allow the free movement of people between member states. However, Brexit does not mean that right now, the UK has officially separated from the European Union.  Brexit has set in motion the process to fully remove the United Kingdom from the European Union.  It needs to invoke “Article 50 of the Lisbon Treaty,” to initiate the process, which grants both sides two years to negotiate the terms and conditions.  Essentially, the referendum will start the process, but does not remove the United Kingdom from the European Union immediately.

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So, you’ve worked on your crowdfunding and you’ve registered a trademark. What’s next? Well, ideally you’d have decided on this before, but every entrepreneur needs to decide what kind of entity he/she best fits the business structure. Now, there are different kinds of entities: sole proprietorships, LLCs, LLPs, S-corporations, C-corporations, and LPs. This alphabet soup of entities each stands for a different type of organization that changes the liability, and tax benefits or burdens that can be available. What is there to choose from? What are the benefits and burdens with each choice? How would someone choose which entity to form?

What kinds of entities are there to choose from?

Entities are best divided up into three major groups: (i) sole proprietorships; (ii) partnerships; and (iii) corporations. The major differences tend to be in terms of liability and how they are taxed. Sole proprietorships and partnerships tend to be taxed to the individual, with liability being imposed on those individuals who are directly responsible for the business operations. However, this can be changed in part through types of partnerships like LPs, LLP, and LLLPs. These are “Limited Partnerships,” “Limited Liability Partnerships,” and “Limited Liability Limited Partnerships.” These partnerships are formed according to state law, with LLLPs currently not allowed under California law, but if formed in another state, they must be registered with the California Secretary of State prior to doing business in the state. Among the three, they generally function by having general and limited partners. In Limited Partnerships, there are at least two general partners with unlimited liability, and a limited partner who is only liable for what he/she had put into the company.  Limited Liability Partnerships are similar, but unlike a general partnership, or a limited partnership, one would be isolated from the wrongdoings of their partners. LLCs can be used as a sort of partnership, as well, but can elect to be taxed as a corporation instead, with a tax through the company, and then to the owners.

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For any business entrepreneur, intellectual property is key.  How will a business build value if not through protecting its valuable assets? Thus, intellectual property is something that needs to be protected. This is the purpose of trademark law, which allows to register and protect trademarks.  So, what types of marks can be registered? What is the registration process? Why register at all? Is it really needed to protect your marks?

What’s eligible for registration?

In applying for a trademark registration, the material generally consists of a mark, some sort of drawing or another non-conventional mark. For example, the McDonald’s “Golden Arches,” the Apple logo, or even a single color, under certain circumstances can be registered.  While there used to be restrictions on the manner of the mark in regards to immoral, deceptive, or scandalous marks, it has recently been placed into question on constitutional grounds.  As such, offensive names are more likely to be approved now, although, there has not been a final decision in some cases.

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We know that the JOBS Act has been officially confirmed by the government. We have written about the JOBS Act in the past, and Title III has provided various new rules regarding equity crowdfunding, specifically on who can donate, and where the participating entities can receive funds.  Yet, even with these developments, few issues have emerged with various blind spots in the law, prompting new efforts to patch them to make crowdfunding viable for startups.  So, what are the new rules? What are the blind spots? How are they being addressed by lawmakers?

What’s Title III?

As it stands, Title III allows entities to raise money for their projects, or business in general, through an equity format. This would differentiate itself from the more prominent crowdfunding platforms, like Kickstarter, which have projects that would not give an investor any stake in the company, instead selling copies of the product, akin to an advanced order. Instead, under Title III, unaccredited investors can invest over $2,000, or 5% of their annual income or net worth—whichever is higher—if they have an income under $100,000, or 10% of an individual’s net worth or income if they make $100,000 annually.  However, this is capped at $100,000 per investor, per year, with a larger cap of $1,000,000 in fundraising for the entity.  In addition, the money must be gathered through a fundraising portal, such as Crowdfunder, and those portals are not currently exempt from liability.  Unfortunately, while this law has been a positive step towards fundraising, however, it has fallen short on certain issues.  For example, there are issues with the fundraising caps, as well as, the responsibilities and liabilities of the portals.  In capping the investments, investors are limited in the aggregate to how many projects or entities they may wish to support, while an entity may need to undertake various crowdfunding efforts for larger projects costing over one million dollars.

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In the current business world, parties may be separated by great distances and may never meet face-to-face. During the course or interactions, their communications may only be online, leading to a constant trade of contracts over e-mail.  So, when it comes time to sign the contracts, a meeting may not be feasible, and instead, an electronic signature may be needed to finalize the transaction.  Electronic signatures or “e-signatures” are those substitutes for a traditional “wet signature.” We have mentioned in passing some ways these signatures can be formed, but it leaves the question of what exactly can be an e-signature? To what extent can it be used? What are the benefits of using an electronic signature, and how might it be detrimental to your business arrangements?

What can be used as an electronic signature?

An electronic signature can be any sufficient substitution for a wet signature. This ranges from typing the individual’s name in a signature box, to signatures placed onto the electronic document through some sort of tablet device, or a checkbox in a click-wrap agreement stating: “I Agree.” There are even some cases where biometric data is being used as an electronic signature, such as fingerprint or facial image. Furthermore, while these could be used as electronic signatures, digital signatures differ, as they rely on a form of encryption to validate the authenticity of a document. These are then affixed to electronic documents, again, like a click-wrap agreement, or a contract that has been transmitted electronically. There are business services that facilitate and authenticate these signatures, e.g., DocuSign, that allows the tagging of the signature pages in the document. However, there are some limitations on what can be an electronic signature. As part of ESIGN (United States Electronic Signatures in Global and National Commerce Act), voice recordings for an oral agreement do not work as electronic signatures.

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Following from last week, there is another counterpart to clickwrap agreements, known as a browsewrap. These are ultimately agreements that are harder to enforce than a clickwrap because instead of an action to assent to the agreement, a contract is formed, in part, by the individual continuing to browse the website. This would be akin to the terms of use that a website may have listed for users.  This could be implemented to bind users, much like click-wrap, and for the same purposes. However, what are the limits to a browsewrap agreement? What is required to enforce a browsewrap agreement? What are some of the things that could ultimately dismantle a browsewrap agreement and how can you to avoid them?

What is required for a valid browsewrap agreement?

A valid browsewrap agreement requires that the agreement be available on the website, via a hyperlink, and can be clicked on for the visitor to read.  However, this is generally harder for an individual to enforce, as there’s no “affirmative statement” like in clickwrap agreements. Instead, the affirmative statement is determined by the continued use of the website as specified in the terms. Yet, the way that this is compensated for is to demonstrate that the individual is aware that the agreement exists, and generally aware of its terms. In essence, if an agreement is present, and the visitor is aware that there are terms, the browsewrap agreement is more likely to be held as valid.

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In the current times, website design is a basic step for business operations. The design must be balanced, with attractive features and easy-to-use interface.  The user interaction has to be accounted for, the visit locations, how the website flows.  And with that, various user agreements are also in place to prevent liability for certain actions, or to impose restrictions on what an individual can do on the website.  So, how might this be enforced? What if there were difficulties in the website design that would render the clickwrap agreement invalid? How might this be decided?

What is a clickwrap agreement?

Now, as we’ve discussed before, a clickwrap agreement is a virtual agreement, made when a digital product is delivered online. This could be anything from a song over iTunes, or an eBook over Nook or Kindle. The idea behind this sort of agreement, differentiating it from a similar “browsewrap” agreement, is how the individual using the page does not need to explicitly assent to the agreement. This would be like a link that takes a user to a page with the full terms or a popup with the ability to assent, by clicking “I agree” or “I accept” the terms and conditions.

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