New York & New Jersey Business Lawyer Blog

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.

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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.

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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.

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By U.S. Bureau of Labor Statistics, Division of Information and Marketing Services (http://www.bls.gov/opub/ted/2006/oct/wk1/art02.htm) [Public domain], via Wikimedia CommonsNew York Governor Andrew Cuomo signed several bills into law in late October 2015 that affect employers, including amendments to the state’s equal pay law. Senate Bill 1, the Achieve Pay Equity (APE) law, amends the New York Labor Law’s provisions on pay disparities based on sex. New York business owners—both those with employees and those who might have employees some day—should be aware of how these new laws could affect them.

Federal and state laws prohibit employers from paying different wages to employees based on sex, if the requirements, qualifications, and working conditions of the jobs are otherwise the same. Both laws provide defenses for employers against claims of unlawful wage disparity based on sex if they can demonstrate that the difference in wage is actually based on a system of seniority, merit, quality of work, quantity of production, or “any other factor other than sex.” 29 U.S.C. § 206(d)(1), N.Y. Lab. L. § 194. The same legal standard generally applies to claims brought under either law. Moccio v. Cornell University, 889 F.Supp.2d 539, 570 (S.D.N.Y. 2012). The APE expands employees’ rights beyond the protections offered by federal law.

Some employers prohibit employees from inquiring about or discussing co-workers’ wages or salaries. The current version of New York’s equal pay law is silent on this type of policy, although federal law already prevents some New York employers from prohibiting employees from discussing wages with one another. Section 7 of the National Labor Relations Act (NLRA), 29 U.S.C. § 157, for example, protects employees’ rights to form unions for the purposes of collective bargaining. Discussion of wages is considered essential to such activity. Federal contractors are prohibited from enacting policies against discussing wages under Executive Order 13665.

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Photo credit: Alan Dean [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrOn November 2, 2015, President Obama signed H.R. 1314, the Bipartisan Budget Act (BBA) of 2015. Most of the news coverage of the new law dealt with its role in averting a default by the United States on its outstanding debts, and in warding off the threat of another federal government shutdown. New Jersey and New York business owners, however, should pay particular attention to the provisions of the BBA dealing with partnership taxation, since they could significantly change Internal Revenue Service (IRS) collection practices.

New Jersey law defines a “partnership” as “an association of two or more persons to carry on as co-owners a business for profit.” N.J. Rev. Stat. § 42:1A-2. When two or more people go into business together, they are typically deemed to have created a “general partnership,” in which each partner is jointly and severally liable for the partnership’s debts and obligations. N.J. Rev. Stat. § 42:1A-18. They may also set up their business using a variety of business forms allowed by New Jersey law, such as a limited partnership or a limited liability partnership. For the purposes of federal income tax, most partnerships receive similar treatment from the IRS.

Federal law defines “partnership” broadly to include various business ventures that are not, based on the definitions established elsewhere in the Tax Code, a corporation, trust, or estate. 26 U.S.C. § 761(a). Corporations must pay federal income tax directly to the IRS, and shareholders must pay tax on dividends received from the corporation. This is often known as “double taxation,” since it imposes income tax twice on the same money. Partnerships, along with corporations that elect to be taxed under Subchapter S of Chapter 1 of the Tax Code, generally avoid this tax treatment. The Tax Code expressly states that partnerships are not liable for income tax themselves, but instead the partners pay taxes for the partnership “in their separate or individual capacities.” 26 U.S.C. § 701.

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Simon Cunningham [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrCorporate directors and officers owe the corporation certain fiduciary duties, meaning they are legally obligated to act solely in the corporation’s interest. The duty of loyalty requires officers and directors to act on behalf of the corporation without economic conflict. A breach of the duty of loyalty might consist of a transaction that benefits an individual employee over the corporation, or a corporate opportunity that the employee withholds for their own benefit. Remedies for a breach of the duty of loyalty may include economic damages and an equitable remedy known as disgorgement, by which the employee must give up any personal gains obtained from their breach. The New Jersey Supreme Court recently considered whether a court could award disgorgement to a corporation that did not suffer economic loss. Kaye v. Rosefielde, No. A-93 Sept. Term 2013, 073353, slip op. (N.J., Sep. 22, 2015).

The plaintiff in Kaye hired the defendant in 2002 as Chief Operating Officer (COO) of several companies. Under a formal employment agreement, the defendant received an annual salary of $500,000, paid in equal parts by a corporation and a limited liability company (LLC) controlled by the defendant. The defendant served as COO and General Counsel of both companies, which managed and sold timeshares in properties owned by those two companies and several others.

According to the court’s ruling, the plaintiff alleged multiple acts by the defendant that breached the duty of loyalty to the companies that employed him. In one case, the defendant created a separate LLC in 2003 to manage certain timeshare interests, but he did not follow the plaintiff’s instructions regarding the allocation of ownership interests. The defendant drafted the new LLC’s operating agreement in a way that increased his own ownership interest and that of a corporation he owned and controlled. In 2005, the plaintiff learned of some of the defendant’s acts and terminated his employment.

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By Smiley.toerist (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia CommonsThe taxation of American businesses operating overseas is a controversial topic. The officers of a corporation, or the managers of a limited liability company (LLC), have a fiduciary duty to the owners of the business to maximize profits. With small businesses, the managers and owners are often the same people, but the duty remains. Minimizing a company’s tax burden is one way to do this. Some companies have developed a variety of schemes for keeping money offshore to avoid U.S. taxes. To the extent that these schemes do not violate U.S. tax laws, it is often because of loopholes in existing laws. A recent ruling from the European Commission (EC), the executive body of the European Union (EU), could have a significant impact on how American companies do business—and pay taxes—overseas.

According to some estimates, large U.S. corporations are holding over $2.1 trillion in profits in other countries, allegedly to avoid paying roughly $620 billion in income tax in the U.S. Unlike most countries, the U.S. requires both its citizens and its businesses to pay federal income tax on income derived outside U.S. territory. Why does the U.S. do this? One possible answer, albeit a rather cynical one, is that the U.S. projects its power and influence around the world, and both citizens living overseas and businesses operating abroad expect the protection of the U.S. government—and occasionally its armed forces—should they need it.

The EC is responsible for monitoring the compliance of EU member nations with EU laws and treaties. In the summer of 2014, the EC announced investigations into three companies either based in or closely tied to the United States, and their business practices in three European countries:  Apple in Ireland, Starbucks in the Netherlands, and Fiat Chrysler Automobiles in Luxembourg. In October 2014, it also announced an investigation of Luxembourg’s tax treatment of Amazon. The investigations are targeted more towards the countries than the companies, but the EC’s rulings will substantially affect the companies. The EC announced rulings in the investigations of Starbucks and Fiat in October 2015.

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By US Army Corps of Engineers from USA (Patrol Boat Hocking in Newark Bay) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsThe Third Circuit Court of Appeals recently ruled against a private marine terminal operator at the Port Authority of New York and New Jersey (PANYNJ), which had challenged its lease at the port facility in Elizabeth, New Jersey. Maher Terminals v. Port Authority of N.Y. and N.J., et al., No. 14-3626, slip op. (3rd Cir., Oct. 1, 2015). The plaintiff claimed that the rent provisions of the lease violate the Tonnage Clause of the U.S. Constitution, U.S. Const. art. I, § 10, cl. 3, as well as several federal statutes related to maritime law. The court disagreed, although it noted that the claim “is not a typical landlord-tenant dispute.” Maher, slip op. at 3. It held that, as a land-based business, the plaintiff is not “within the class of plaintiffs that the Tonnage Clause or its related federal statutes were intended to protect.” Id. Most New York and New Jersey businesses will not have to deal with lease terms like this, but the case certainly illustrates the importance of understanding potential objections to a lease contract.

The plaintiff operates a business at the PANYNJ’s primary port facility under a lease agreement that took effect in 2000. Its business activities, according to the court, primarily consist of stevedoring, or loading and unloading cargo from ships. The lease charges two types of rent:  “Basic Rental” charges consisting of a fixed fee per acre, and “Container Throughput Rental” (CTR) charges based on the volume of cargo handled by the plaintiff. Id. at 4. The plaintiff could unload up to 356,000 containers during a calendar year without incurring CTR charges. The per-container charge for containers 356,001 through 980,000 is is $19.00, and it is $14.25 after that.

The lease also establishes minimum amounts of cargo the plaintiff must unload annually in order to keep the lease in effect. When the plaintiff first filed its complaint, the minimum number was 420,000 containers. This would effectively guarantee annual payment of CTR charges for 64,000 containers, but the lease sets an even higher minimum amount of guaranteed CTR payments, according to the court, which is equivalent to a total annual volume of 775,000 containers.

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Tax Credits [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrPrivate equity, the process by which companies can raise funding from investors, comes with numerous rules and regulations enforced by the Securities and Exchange Commission (SEC). One of the most important rules that small businesses must understand is Regulation D, or “Reg D,” 17 C.F.R. § 230.500 et seq., which sets forth the procedures for offering securities for sale without going through the full process of registering with the SEC under the Securities Act of 1933, 15 U.S.C. § 77a et seq. Reg D prohibits advertising any sale of securities to the general public, and it states that a business may only issue securities to “accredited investors.” In August 2015, the SEC approved a venture capital firm’s plan to use an online platform to match investors with businesses, finding that it does not conflict with Reg D’s ban on public advertising. This could be good news for other businesses hoping to leverage the internet and social media to raise private equity funds.

Under Reg D, securities may only be issued to “accredited investors,” defined to include banks, nonprofit business trusts, directors, or officers of the issuing company, and individuals with a net worth of more than $1 million or annual income in excess of $200,000. 17 C.F.R. § 230.501(a). With some exceptions, an issuer under Reg D cannot advertise the sale of securities or solicit purchasers from the general public. 17 C.F.R. § 230.502(c). Issuers must file Form D with the SEC to indicate compliance with Reg D.

Rule 506 of Reg D, codified at 17 C.F.R. § 230.506, establishes procedures for communicating with potential investors. Most Reg D offerings follow Rule 506(b), which provides that issuers can approach potential investors if they have a pre-existing relationship, but they cannot advertise or solicit investors from the general public. Offerings under Rule 506(b) may also include up to 35 non-accredited, sophisticated investors who are “capable of evaluating the merits and risks of the prospective investment.” Id. at § 230.506(b)(2)(ii).

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geralt [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayCybersecurity is a critically important part of nearly every business operating today. Data breaches that compromise customers’ personal information, such as names, addresses, and credit card numbers, can result in huge losses due to identity theft and other types of fraud. If the Federal Trade Commission (FTC) concludes that a business failed to take adequate measures to protect its data, it can bring an enforcement action for “unfair or deceptive acts or practices in or affecting commerce” under Section 5 of the FTC Act, 15 U.S.C. § 45. The Third Circuit Court of Appeals recently ruled in the FTC’s favor in a case involving the theft of more than 619,000 customers’ credit card information by hackers. FTC v. Wyndham Worldwide Corp., No. 14-3514, slip op. (3rd Cir., Aug. 24, 2015). The court did not rule on the merits of the FTC’s claim. It merely found that the FTC has authority to pursue the claim under Section 5.

According to the court’s ruling, the FTC began enforcing Section 5 “against companies with allegedly deficient cybersecurity that failed to protect consumer data against hackers” in 2005. Id. at 6. The defendant, which manages hotels directly and franchises its brand to independent hotels, experienced three cybersecurity breaches in 2008 and 2009. The theft of customer financial data resulted in fraudulent credit card charges exceeding $10.6 million. The defendant uses a “property management system” to process customer information, including names, addresses, and credit card information. Id. at 7. It requires franchisees to use the same system, configured to certain specifications.

The FTC’s lawsuit alleged numerous deficiencies in the defendant’s cybersecurity measures, including inadequate supervision of franchisees’ use of the property management system; use of “easily guessed passwords [by franchisees] to access the property management systems,” id. at 8; lack of firewalls and other common cybersecurity tools; failure to restrict access to its network by third-party vendors; the ability of franchisees to connect their networks to its central network without security; and failure to monitor its networks for intrusions, even after the first and second breaches. These acts and omissions, the FTC claimed, constituted “unfair” practices under the FTC Act. 15 U.S.C. § 45(a)(1).

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