New York & New Jersey Business Lawyer Blog

Coca ColaThe protection of trade secrets is a critical component of building a competitive business. Companies must safeguard proprietary information against misappropriation by employees and others, typically through nondisclosure agreements. State law provides remedies through the court system, both to enjoin potential disclosures of trade secrets and to obtain damages for theft or misappropriation. Most states have enacted the Uniform Trade Secrets Act (UTSA) in some form, but the enforcement of these laws across state lines can be difficult. In May 2016, the U.S. Congress passed the Defend Trade Secrets Act (DTSA) of 2016, Pub. L. 114-153 (May 11, 2016), which gives the federal court system jurisdiction over claims of trade secret theft that affect interstate and international commerce. This gives trade secrets federal legal protection that is comparable in many ways to copyrights, trademarks, and patents.

The precise definition of a “trade secret” may vary from one jurisdiction to another, but every definition has common features. The UTSA, drafted by the National Conference of Commissioner on Uniform State Laws, and approved by the American Bar Association in 1986, ascribes two key elements to a trade secret. First, it must have “independent economic value” that derives from the fact that it is not known to others who might derive economic benefit from it, nor is it something they could easily figure out on their own. Second, reasonable efforts must have been made to keep it secret. The “secret recipe” for Coca-Cola is perhaps the most famous example of a trade secret.

Unlike other forms of intellectual property, such as copyrights, trademarks, and patents, no government agency registers or directly regulates trade secrets. This makes sense, considering that the whole point of a trade secret is to keep it out of the public eye. It also means, however, that the owners of trade secrets have the sole responsibility to protect and enforce their rights, using a patchwork of state laws. All but three states have enacted the UTSA. See, e.g., N.J. Rev. Stat. § 56:15-1 et seq. New York is one of the three states that has not enacted it, relying instead on common law trade secret protections. A bill is currently pending that would add the UTSA to the New York General Business Law.

Continue Reading

PakpongICCH444 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia CommonsOne of the key features of capitalism, as the concept is generally understood in our society, is competition. Consumers benefit from a competitive marketplace, and they suffer when businesses use anticompetitive practices. Congress began enacting laws to curb monopolistic and other anticompetitive practices, known as antitrust laws, in the late nineteenth century. Having a monopoly is not, by itself, necessarily a violation of antitrust law. Antitrust law deals with actions or practices that prevent competition. The Federal Trade Commission (FTC) brought a case against a company that was first to market with a new medical product, alleging that it used exclusive contract terms to prevent competitors from entering the market for that product. The company agreed to cease these practices in a recently announced settlement. In the Matter of Victrex plc, et al., No. 141-0042, consent order (FTC, Apr. 27, 2016).

In an ideally competitive market, consumers may choose among competing companies for a particular good or service, leading to the success of the companies that provide the “best” experience for consumers. In this context, the “best” is really just whatever consumers en masse—i.e., the “market”—want. When one company dominates a market, however, it no longer has to compete for customers, so it arguably lacks the incentive to give consumers what they want. This can result in higher prices, diminished quality, and other problems.

A single, monopolistic company might engage in anticompetitive practices that prevent other companies from entering the market, such as contracts with exclusivity clauses that prohibit a company’s customers or vendors from doing business with its competitors. Multiple companies might act together to limit competition, such as by fixing prices or by dividing geographic areas between themselves. The federal Sherman Antitrust Act of 1890, 15 U.S.C. § 1 et seq., prohibits a wide range of anticompetitive practices. The FTC Act, 15 U.S.C. § 41 et seq., prohibits “unfair methods of competition,” which can overlap with antitrust law.

Continue Reading

Boris Dzhingarov [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrTax treatment is one of the key factors a business owner must consider when choosing a business form. Business partnerships can exist in several multiple forms, differing mainly in the extent of liability protection offered to the owners. As a general rule, partnerships are not directly subject to federal income tax. Individual partners are instead liable for tax on a pro rata share of partnership income, commonly known as “pass-through taxation.” 26 U.S.C. § 701. Congress passed the Bipartisan Budget Act (BBA) of 2015, Pub. L. 114-74 (Nov. 2, 2015), 129 Stat. 584, which amends the rules for partnership tax audits and could make partnerships themselves subject to income tax. The new rules do not go into effect until 2018.

A general partnership consists of any two or more people engaged in business together. It does not offer its owners, known as partners, any protection against personal liability for business debts. State laws allow the formation of partnerships that offer liability protection, including limited liability partnerships and limited partnerships. See, e.g. N.J. Rev. Stat. §§ 42:1A-47, 42:2A-1 et seq. The business form known as the limited liability company, see N.J. Rev. Stat. § 42:2C-1 et seq., is normally subject to pass-through taxation like a partnership, but it gives owners the option to elect taxation as a corporation. 26 C.F.R. § 301.7701-3(a).

The current rules regarding partnership tax audits originated with the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, Pub. L. 97-248 (Sep. 3, 1982), 96 Stat. 324. TEFRA created a process for partnership-level audits, instead of audits of each individual partner. Partnerships that are subject to these audit rules are known as TEFRA partnerships. A “small partnership exception” applies to many partnerships with 10 or fewer partners. 26 U.S.C. § 6231(a)(1)(B). Partnerships with 100 or more partners may make a “large partnership election,” which allows for different procedures. 26 U.S.C. §§ 771 et seq., 6240 et seq.

Continue Reading

Captain Albert E. Theberge, NOAA Corps (ret.) [Public domain], via Wikimedia CommonsMaritime commerce constitutes a major part of the economies of New York City and Northern New Jersey. Any type of business transaction involves a complex web of legal obligations and risks, and transactions involving interstate and international shipping can be the most complex of all. Legal claims arising from maritime disputes can be particularly difficult. The debtor/defendant might be based in a different jurisdiction—possibly a different country—from the creditor/plaintiff, and any assets might be located in yet another jurisdiction. The Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Action (the “Supplemental Rules”), part of the Federal Rules of Civil Procedure, provide methods for asserting claims over otherwise highly mobile assets in maritime disputes. This should be a last resort, of course, since carefully drafted contracts with dispute-resolution provisions often yield more satisfactory results in a shorter span of time.

Rule B of the Supplemental Rules enables plaintiffs to attach a defendant’s assets in an ex parte proceeding, provided they cannot locate the defendant in the same jurisdiction as the asset. The plaintiff files a quasi in rem lawsuit in the jurisdiction where the asset is located. Lawsuits typically proceed in personam, against a particular person, business, or organization; or in rem, against a particular item of property. A quasi in rem lawsuit combines elements of both types of suit, with a plaintiff asserting a claim over a piece of property in connection with a claim against its owner.

In maritime transactions, parties often do business using multiple corporate shells to protect assets and other interests. As a result, the record owner of an asset that could be subject to attachment under Rule B might not be the same as the business entity against which the plaintiff has a claim. Rule B allows a plaintiff to attach an asset owned by a different business entity if they can establish that the entity functions as an “alter ego” of the defendant. A New York court recently addressed this issue in a Rule B claim in D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., et al., No. 1:09-cv-07840, order (S.D.N.Y., Jul. 30, 2015).

Continue Reading

Ken Teegardin [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrTax planning is a critical part of running a small business, or starting a new one. Some tax issues determine how a business may proceed, while others can only be addressed once the business has made a decision. Depending on the type of business entity chosen, income tax may be assessed against the business itself, the owners, or both. Businesses must also be aware of tax issues affecting their employees, including officers. The Internal Revenue Code (IRC) provides multiple options for both companies and their employees with regard to taxation of income. When a business compensates an employee, or any other “service provider,” with certain types of equity incentives, Section 83(b) of the IRC, 26 U.S.C. § 83(b), offers certain advantages that businesses—particularly small businesses and start-ups—should consider.

Businesses typically compensate employees with cash payments, either on an hourly or salaried basis, along with health insurance and various “perks.” Start-ups might compensate employees, contractors, and others with company stock or stock options during the early start-up phases. Established companies might grant shares of stock to employees as direct compensation, or as a bonus to provide incentives for performance. Two important questions arise from this sort of compensation: when does the grant of certain types of equity constitute a taxable event, and how is it valued?

Section 83(b) deals specifically with equity incentives that are subject to vesting. For example, a grant of 10,000 shares of stock subject to a four-year vesting schedule would mean that one-fourth of the total shares, or 2,500 shares, become available to the employee at the end of each year. For a person who elects Section 83(b) taxation, the taxable event is the initial grant of the unvested stocks, meaning that the taxable income is based on the fair market value of the stocks at that point in time. Otherwise, the taxable event might occur when the stocks vest. Presumably, the stocks are worth less when the initial grant occurs, and more when they vest. Section 83(b) therefore reduces the overall taxable amount.
Continue Reading

United Nations [Public domain], via Wikimedia CommonsDoing business across international borders involves a careful review of numerous potential legal hurdles. In a few cases, doing business with a particular country may be restricted, or even outright prohibited, under U.S. foreign policy. New York and New Jersey businesses considering international opportunities should carefully assess whether any federal regulations will affect their plans. Even small businesses can find themselves in violation of international trade restrictions if they are not careful. The U.S. Department of the Treasury, through its Office of Foreign Assets Control (OFAC), enforces various restrictions associated with U.S. sanctions. Last summer, it found a U.S. company with overseas subsidiaries in violation of trade sanctions against Iran. It later issued a document clarifying the rule, known as “General License H,” permitting U.S. companies to do business with that country.

The relationship between the U.S. and Iran has been strained since 1979, shortly after a revolution overthrew Iran’s U.S.-backed leader. A group of Iranians seized control of the U.S. Embassy in the capital, Tehran, and held a group of Americans hostage inside for 444 days. President Jimmy Carter issued the first set of sanctions against Iran, Executive Order 12170, on November 14, 1979, freezing billions of dollars of Iranian assets. The U.S., the United Nations, and other countries have imposed additional sanctions against Iran since then. These include a wide variety of restrictions on trade. The greater New York City area is home to a large number of Iranian immigrants and people of Iranian descent, so these regulations could have a particularly significant impact on this region.

The current sanctions regime is largely based on the Iran and Libya Sanctions Act of 1996. OFAC regulations prohibit the importation of various goods and services from Iran, investment in Iranian businesses, and other transactions. 31 C.F.R. § 560.101 et seq. While U.S. businesses remain subject to a total ban on transactions with Iran, see 31 C.F.R. §§ 560.204, 560.206, General License H allows foreign companies owned or controlled by a U.S. business to engage in limited transactions with the country. Exactly how they can do that remains unclear, but the license states that they may establish “operating policies and procedures” for transacting business with Iran, and they may set up “globally integrated…business support system[s]” for the purpose of such activities.

Continue Reading

By Guest2625 (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsMany small corporations elect subchapter “S” status because of the many tax benefits it offers. It can work well for corporations that make this election soon after their formation, but a corporation that begins its existence as a “C” corporation faces a distinct challenge, in the form of the “built-in gains tax.” 26 U.S.C. § 1374. This tax specifically applies to S corporations that used to be C corporations, and it taxes certain transactions at the highest possible corporate rate, which is currently 35 percent. Id. at §§ 11(b)(1)(D), 1374(b)(1). It only applies, however, for a specified period of time, known as the “recognition period,” after a corporation switches from C to S status. After several amendments shortening the recognition period, which was originally 10 years, Congress permanently shortened it to five years in the Protecting Americans From Tax Hikes (PATH) Act of 2015, Pub. L. 114-113, Div. Q (Dec. 18, 2015).

The laws governing corporate taxation are found in Subtitle A, Chapter 1, Subchapter C of the Internal Revenue Code (IRC), 26 U.S.C. § 301 et seq. In general, corporations pay income tax on profits, and shareholders pay taxes on dividends. Since this is essentially the same money subject to income tax twice, once in a corporate tax return and again in an individual shareholder’s return, it is often known as “double taxation.”

A corporation can avoid double taxation by electing S status, named for Subchapter S of the same chapter of the IRC, 26 U.S.C. § 1361 et seq. This subchapter uses “pass-thru” taxation, by which corporate profits are taxed directly to shareholders on a pro rata basis. Id. at § 1366. Not all corporations are eligible for S status, however. It is only available to “small business corporations” with only one class of stock, and with 100 or fewer shareholders, none of whom are nonresident aliens or business entities. Id. at § 1361(b)(1).

Continue Reading

Blue Diamond Gallery [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0/)]Trademark law enables businesses to protect brand names, logos, and other “marks” used to identify, or that are strongly associated with, their products and services. The owner of a registered trademark can use the courts to prevent another business or individual from using a name or logo that is the same as, or substantially similar to, the registered mark. Since a trademark registration confers such a great deal of authority, federal law allows objections to pending trademark registrations, as well as petitions to cancel existing registrations, on various grounds. The Trademark Trial and Appeal Board (TTAB) recently dismissed a cancellation petition alleging fraud during the registration process. Embarcadero Tech., Inc. v. Delphix Corp., Opposition No. 91197762, Cancellation No. 92055153, opinion (TTAB, Jan. 21, 2016).

The term “trademark” generally refers to “any word, name, symbol, or device” used by someone in commerce “to identify and distinguish his or her goods…from those manufactured or sold by others…” 15 U.S.C. § 1127. The term “service mark” has the same meaning applied to services, rather than goods, but the term “trademark” may often refer as a shorthand to both trademarks and service marks.

A person can oppose the registration of a mark by the U.S. Patent and Trademark Office (USPTO) on the ground that they “would be damaged by the registration of a mark.” 15 U.S.C. § 1063(a). This might include harm to the person’s own registered trademark, such as by causing confusion among consumers or by diminishing the value of the existing mark. These are known, respectively, as “dilution by blurring or dilution by tarnishment.” Id. After the USPTO has registered a mark, a person can petition for cancellation of the mark on the same grounds. 15 U.S.C. § 1064. In most cases, this must occur within five years of the registration date.

Continue Reading

geralt [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayStarting and operating a business requires many substantial investments. In addition to money and time, business owners invest the ideas and plans that they bring into their new venture and that they create once it is underway. The term “intellectual property” covers numerous rights and interests that a business must protect in order to succeed. Federal law protects many types of intellectual property, and state law offers additional protections. Business owners and entrepreneurs can make use of federal and state laws to protect their important business assets.

Defining “Property”

Before discussing intellectual property, it might be helpful to consider how we define “property” in a legal sense. In short, “property” is anything that someone—a person, business, or other organization—can own, but that is not very helpful.

Owning property implies a set of rights, such as the right to use or dispose of the property. Perhaps the most important aspect of ownership, and therefore of property, is the right to exclude others from using the property. In the case of a motion picture, an owner might have exclusive rights to display or distribute the film, to modify it, to create works derived from it, or to use it for any other commercial purpose.

Continue Reading

By Larges111 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia CommonsBusinesses in New Jersey, New York, and around the country depend on computers, computer networks, and the internet to conduct their operations. Whether a company is engaged in e-commerce or other internet-based business activities, or it merely uses computer software to assist with inventory or payroll, that company is potentially vulnerable to cybersecurity breaches. Numerous resources are available to help business owners protect their data from threats, including both hackers and insiders. The federal government is also working to enhance its ability to investigate and prosecute cybercrime. Proposals from the White House and the U.S. Department of Justice (DOJ) in the past year have called on Congress to amend the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, to address the misuse of company data by insiders. Critics of these proposals claim that they go too far and could result in criminalizing ordinary business internet activity.

The CFAA applies to unauthorized access to a computer, or use of a computer that exceeds one’s authority. The term “computer” includes machines commonly known as “computers” and any related “data storage…or communications facility.” 18 U.S.C. § 1030(e)(1). A “protected computer” may be one “used in or affecting interstate or foreign commerce or communication.” Id. at § 1030(e)(2)(B).

A provision of the CFAA relevant to small businesses prohibits knowingly accessing a protected computer without, or in excess of, authorization, “with intent to defraud,” and obtaining information worth at least $5,000. Id. at § 1030(a)(4). It also prohibits knowingly sending information, such as malicious computer code, that causes unauthorized damage to a protected computer. Id. at § 1030(a)(5). The CFAA defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information.” Id. at 1030(e)(8). These provisions have enabled prosecutions of hackers and others outside of a company, but prosecutors claim that they have been less useful for going after insiders.

Continue Reading