Viruses.jpgBusinesses must maintain constant vigilance against the threat of hackers, who can compromise not only a business' own sensitive information, but that of its customers. Several high-profile cybersecurity breaches, such as the incidents at Target and eBay that gave hackers access to millions of consumers' personal data, have brought significant attention to this issue. Business owners and entrepreneurs must take care to protect their own sensitive information, such as financial data and trade secrets, for the sake of their business' survival. They must also have measures in place to safeguard customers' personal information. Here are three principles business owners should consider.

1. Avoid Unfamiliar E-Mail Attachments (and Almost Anything Else Unfamiliar on the Internet)

Benjamin Franklin once wrote that "a small leak will sink a great ship." He did not have cybersecurity in mind, but his words are relevant to how businesses should organize and manage their computer networks. Hackers are adept at exploiting weaknesses, and they are finding ever-more obscure ways to access business networks. According to the New York Times, the hackers who breached Target's payment systems, allowing them to obtain millions of credit card numbers, got in through the heating and cooling system. Almost any networked system, including printers and vending machines, can be a point of entry for hackers who are clever enough.

Many hackers, though, still prefer to use relatively old-fashioned methods, such as email attachments and spyware. Unfamiliar email attachments may carry malicious computer code that can spread from one computer, or even a smartphone, to an entire network. Unfamiliar websites can infect computers with spyware. Companies should train employees about cybersecurity and, when practical, restrict access to unnecessary or unfamiliar parts of the internet.

Continue reading " Three Steps New York and New Jersey Businesses Can Take to Protect Themselves from Cybersecurity Breaches" »

US_Corporateation_Income_Tax_Return_2011_form_1120.jpgThe minority shareholder of an S corporation appealed a ruling of the Internal Revenue Service (IRS), which held him liable for tax on his pro rata share of the corporation's income, to the U.S. Tax Court. He argued that he was not the "beneficial owner" of the shares and therefore should not be liable for the tax because he had been shut out of management and received no distributions from the corporation. Kumar v. Commissioner of Internal Revenue, T.C. Memo 2013-184 (2013). The Tax Court rejected his argument, finding that the liability of an S corporation shareholder for federal income tax on the corporation's earnings is not dependent on factors like management authority or actual receipt of distributions or other income. This should serve as a reminder for all S corporations to maintain shareholder agreements that provide for distribution of income in minimum amounts sufficient to cover taxes.

A subchapter S corporation avoids the "double taxation" found in corporations covered by subchapter C of the Internal Revenue Code, in which the corporation first pays tax on its income, and the shareholders then pay tax on dividends they receive. S corporations do not pay federal income tax. 26 U.S.C. § 1363(a). Instead, income and losses "pass through" directly to the shareholders, who pay taxes on income and deduct losses in proportion to their number of shares on their personal tax returns.

The petitioner in Kumar owned 40 percent of Port St. Lucie Ventures, Inc. (PSLV), a Florida medical practice organized as an S corporation. A dispute arose between him and his business partners in 2004. Around the same time, the majority shareholder of PSLV allegedly shut the petitioner out of the management of the company. The petitioner did not receive any wages or distributions from PSLV for 2005 or any subsequent year. He did, however, receive a Schedule K-1 from the corporation for the 2005 tax year, which reported his share of the corporation's taxable income as $215,920 and his share of interest income as $2,344.

Continue reading "S Corporation Shareholder Excluded from Management and Salary Still Faces Tax Liability" »

Theft-p1000763.jpgCybersecurity is a major concern for any business that uses computers and the internet, which refers to nearly every business these days. Businesses routinely come into possession of customers' personally identifiable information (PII), such as names, dates of birth, addresses, or credit card numbers. This information can be used in identity theft, which can be ruinous for victims. In certain industries, such as health care, businesses have to comply with strict requirements regarding the security of PII. Businesses in general should take steps to safeguard PII in their possession, both as a good business practice and in order to avoid possible liability, to customers and potentially to the state, for data breaches.

Recent Cybersecurity Breaches

The most recent case to make national news involved the internet auction site eBay. Hackers reportedly accessed personal data from 145 million user accounts, prompting the company to advise all of its users to change their passwords. The retail chain Target made two separate announcements in late 2013 regarding security breaches that compromised the PII of as many as 110 million customers. In both cases, the companies are accused of missing warning signs prior to the breaches, and of mishandling their responses.

Regulatory Consequences of Cybersecurity Breaches

Lawmakers in Congress and in several states are now seeking information regarding these cybersecurity breaches. Regulators in Connecticut, Florida, and Illinois have reportedly begun formal investigations, while the New York Attorney General has called on eBay and other companies to offer credit monitoring and related services free of charge to customers affected by the breaches.

Continue reading "After Hackers Hit Another Major Internet Company, New York and New Jersey Businesses Need to Be Aware of Cybersecurity Risks" »

7013169701_f5a8160d67_z.jpgChoosing the right typeface, commonly known as a "font," is a critically important, if lesser-known, part of marketing a small business. Business owners and entrepreneurs have far more options available to them than the typefaces that come preinstalled with computers and software applications. The internet has allowed for a significant growth in the world of typeface design, particularly in the New York City area. An ongoing dispute between two designers, who are also former business partners, shows just how big this business has become. In addition to highlighting the world of typeface design, the lawsuit, Frere-Jones v. Hoefler, No. 650139/2014, complaint (N.Y. Sup. Ct., N.Y. Co., Jan. 16, 2014), illustrates some of the potential disputes arising from small business formation.

Businesses should carefully consider the typefaces they use in their marketing and promotional materials, as well as the documents they use in the ordinary course of business. "Typeface" refers to a set of letters, numbers, and symbols with common design features. Well-known examples include Times New Roman, Arial, and Comic Sans.

Unless a business owner creates their own typeface, they must obtain a license to use a typeface in their business. Licenses for most uses of common fonts are included with the purchase of certain software packages, but businesses can also purchase licenses for specific typefaces. Typefaces are generally protected by copyright law, but patent law may also cover the design elements of a typeface. Specific uses of a typeface, such as in a brand logo, may also be subject to trademark protection.

Continue reading "Dispute between Former New York Business Partners Highlights the Growing Importance of Typefaces" »

I_Like_a_Little_Competition.jpgA hospital system's purchase of a physician group violates state and federal antitrust law, according to a federal court's ruling in two combined cases, Saint Alphonsus Medical Center, et al v. St. Luke's Health System, Ltd., No. 1:12-cv-00560, and Federal Trade Commission, et al v. St. Luke's Health System, Ltd., et al, No. 1:13-cv-00116, findings of fact (D. Id., Jan. 24, 2014). State and federal regulators, as well as several competing medical groups, filed suit against the hospital system for alleged anticompetitive practices. The plaintiffs claimed that the acquisition of the physician group gave the hospital substantial dominance over a relatively small market, which was likely to drive up prices for consumers. The court agreed and entered a permanent injunction barring the merger.

St. Luke's, which operates a statewide system of hospitals in Idaho, began purchasing independent medical practices in order to "assemble a team committed to practicing integrated medicine." Id. at 2. The court actually praised St. Luke's for its efforts to create a model of healthcare based on patient outcomes, rather than one that focuses on increasing revenue through expensive medical procedures. St. Luke's purchased Saltzer Medical Group, a physician group located in Nampa, Idaho. After the merger, St. Luke's employed approximately eighty percent of the primary care physicians in Nampa, a town of approximately 83,000 people.

Several other medical groups, the Federal Trade Commission (FTC), and the state of Idaho filed suit against St. Luke's under federal and state antitrust law. They alleged that the market dominance enjoyed by St. Luke's after the merger would give it enough leverage to negotiate higher rates of reimbursement with health insurance plans and to set higher rates for ancillary medical services, such as x-rays. These costs would eventually be passed on to consumers, raising the cost of healthcare for everyone in the Nampa market. After a bench trial, the court agreed with the plaintiffs and ruled in their favor.

Continue reading "Acquisition of Medical Group by Hospital Violates Antitrust Law, Court Holds" »

Franklin-auto_1920-0419.jpgA family businesses is generally defined as any business in which members of a family own a majority of the shares or control the company. In some family businesses, some family members keep on running the business, while others pursue other career paths. Fairly dividing the interest in a family business between actively-involved shareholders and those non-participating family members can be tricky. Corporate law, fortunately, provides a near-infinite range of possibilities for ensuring that active family members can continue to run the business while inactive members can continue to receive income. Creating classes of preferred stock is one option, although it carries certain risks.

Ownership of a corporation is represented as shares of stock. A corporation's board of directors can issue shares in accordance with the corporation's governing documents and state and federal law. The default form of stock is known as "common stock," but corporations can authorize and issue other types of stock. "Preferred stock," or "preferred shares," give shareholders priority over holders of common stock regarding the corporation's earnings and assets. Preferred shareholders might be entitled to fixed dividend payments, but in exchange, preferred shareholders often give up voting rights in the corporation.

Corporate law places several important limits on classes of preferred stock. A corporation cannot elect subchapter S status, for example, if it has more than one class of shares. Courts might treat issuance of preferred shares as a form of compensation that raises questions regarding directors' fiduciary duties, as happened in New York in Lippman v. Shaffer, 15 Misc.3d 705 (N.Y. Sup. Ct., Monroe Co. 2006). The case involved a dispute between shareholders in a family-owned business over cash payments and issuance of preferred stock. The court granted summary judgment to the plaintiff on several counts and ordered the defendants to return various payments to the corporation.

Continue reading "Issuance of Preferred Stock in Family Businesses to Shareholders Who Actively Participate in the Business" »

Facebook-like-button.pngBusinesses often use social media to market their products and services, but unlike other forms of advertising, services like Facebook and Twitter enable companies to interact directly with consumers. This allows them to build relationships with existing customers and engage potential customers. A business' social media presence may acquire a value of its own as the company and its brand grows, and it acquires "fans" or "followers" that provide it with an audience. A recent decision from a Louisiana bankruptcy court noted the value of social media. In re Thundervision, LLC, No. 09-11145, mem. op. (Bankr. E.D. La., Feb. 5, 2014). The court found that an employee breached a fiduciary duty to his employer, a magazine publisher in Chapter 11 bankruptcy, by starting a competing magazine and using the company's social media accounts to promote it to the company's followers.

Thundervision, LLC published Louisiana Home & Gardens (LH&G) magazine as its principal business activity. It maintained a website to support the magazine, ourhouse.biz. The company is owned and managed by two members, one of whom, Roger Wayne Smith, was employed as its primary salesperson. Thundervision operated out of Smith's home, and employed between two and eight people at different times. It filed for Chapter 11 bankruptcy in April 2009. The bankruptcy court confirmed a reorganization plan in June 2010, but the magazine's sales began to drop in November 2010. Thundervision published the last issue of LH&G in May 2011, and Smith unilaterally decided to cease operations soon afterward.

Smith registered R W Smith Publishing, LLC with the Louisiana Secretary of State in April 2011, naming himself as the sole member. RW Smith began publishing Our Louisiana magazine after LH&G stopped publication, using the same office, telephone and fax numbers, computers, and office equipment that Thundervision had used for LH&G. The new company also used LH&G's subscriber and advertiser lists. It used LH&G's Facebook page, which had 1,533 followers, to announce a new page for Our Louisiana. It began using the ourhouse.biz website to solicit Our Louisiana subscriptions, although the site's content belonged to LH&G. It never compensated Thundervision for the use of these assets.

Continue reading "Intellectual Property Rights and Monetary Value of Business Social Media Accounts" »

Tesla_Roadster_Japanese_display.jpgNew Jersey officials are invoking a state law regulating the purchase and sale of automobiles to prevent Tesla Motors, a California-based electric car company, from operating stores in the state that effectively sell cars directly to the public. Laws in New Jersey and at least forty-seven other states prohibit auto manufacturers from selling cars themselves, instead requiring them to sell through franchised dealers. New Jersey adopted amendments to an administrative rule to make it clear that Tesla does not qualify as a dealer under state law. The rule change could be construed as good for New Jersey businesses, since it arguably benefits locally-owned or -managed car dealerships. It has also, however, incurred the anger of Tesla and other major companies.

Tesla Motors, based in Palo Alto, California, currently offers the Model S, a fully-electric luxury sedan, for sale through its website. It previously sold an electric sports car model called the Roadster. A Model S sells for around $69,000, so its retail appeal is selective. Rather than sell the cars through dealerships, Tesla operates stores around the country that reportedly act as showrooms. Consumers can learn about the cars there, but all actual purchases take place via the internet. Many states have successfully argued that the showrooms effectively serve as retail stores owned and operated by Tesla, which violate state law.

New Jersey law requires a dealer's license in order to sell motor vehicles to the public. NJ Rev. Stat. § 39:10-19. All motor vehicle sales must take place through dealerships that have a franchise agreement with a manufacturer, NJ Rev. Stat. § 56:10-27, and manufacturers are expressly barred from owning or operating their own dealerships. NJ Rev. Stat. § 56:10-28. The state has argued that Tesla cannot, under state law, operate retail stores or dealerships directly, nor may the company operate them through a subsidiary.

Continue reading "New Jersey Administrative Rule Will Ban Direct Sales of Tesla Automobiles to Consumers" »

US_Wireline_Broadband_31Dec2012.tiff.jpgThe proposal by Comcast, generally considered to be one of the world's largest mass-media companies, to purchase Time Warner Cable has generated a considerable amount of controversy. The offer is, on the most basic level, not that different from any other proposed merger or acquisition, but given the size and influence of the two companies, the deal involves far more issues and far more complications. Comcast must show that the deal will not hurt competition in the market and will be in the public's interest. While most small businesses will probably never have to contend with this many issues, the Comcast/Time Warner deal demonstrates that combining two or more businesses can involve much more than just buying up stock and assuming leases.

Comcast provides residential and commercial cable television and internet service in at least forty U.S. states, while Time Warner is in twenty-nine U.S. states. Both companies provide service in New York and New Jersey. Comcast announced in mid-February 2014 that it had reached an agreement to purchase Time Warner for $45.2 billion in stock, with Time Warner's shareholders receiving 2.875 Comcast shares for each Time Warner share. Comcast previously purchased the media company NBCUniversal, which owns the NBC television networks, the Universal Pictures film studio, and other properties, in 2011, so it has recent experience with the regulatory processes involved in a large acquisition. The deal with Time Warner would make it, beyond a doubt, the largest media company in the world.

The federal government must approve the deal before it can move forward under federal antitrust laws, which prevent monopolies and anti-competitive practices, and communications regulations that protect the public's interest in public airwaves and other infrastructure. The Department of Justice (DOJ) has jurisdiction over antitrust issues, and has quite recently pursued Comcast for alleged anti-competitive practices. It filed suit against the company during the merger with NBCUniversal, accusing it of using unlawful practices to limit competition by online video providers like Netflix and Hulu. The company entered into an agreement with the DOJ requiring it to provide services that allow other companies to compete in the online video market. The DOJ may conduct a similar review regarding the impact of the proposed Time Warner deal.

Continue reading "Proposed Comcast/Time Warner Merger Involves Far More than a Typical Small Business Merger" »

Civilrightsact1964.jpgUnder a 2012 amendment to the New Jersey Equal Pay Act, businesses employing fifty or more people within the state must provide an official notice to their employees of their rights under federal and state law regarding gender equity. The New Jersey Department of Labor and Workforce (NJDOL) published the final forms for these notices on January 6, 2014. The 2012 legislation required employers to provide the notice to their employees within thirty days of publication, making the deadline February 5. The NJDOL has not specified any penalty for failing to comply with the deadline, nor did the legislation itself provide for penalties. While the notice requirement does not apply to businesses with a small number of employees, the guidance it offers to federal and state employment law is nevertheless useful.

The New Jersey Assembly passed A2647 in June 2012, and it became law on September 19 of that year. The law amends the New Jersey Equal Pay Act, NJ Rev. Stat. §§ 34:11-56.1 et seq., to require notices to employees in a form prescribed by the NJDOL regarding their rights against gender inequity and discrimination under state and federal law. It does not expand workers' rights in any substantive way, but simply mandates specific forms of notice regarding workers' existing legal rights.

The law sets a deadline of thirty days after publication of final forms by the NJDOL. NJ Rev. Stat. § 34:11-56.12. This publication occurred on January 6, 2014. For employees hired after the February 5, 2014 deadline, covered employers must provide the notice by the next December 31. Employers must provide a written copy of the form to each employee, and obtain a signed acknowledgment of receipt and understanding. They may distribute the notice form via email; via printed materials delivered to employees with their paychecks, new hire packets, or employee manuals; via flyers delivered to individuals employees; or via a website or company intranet, provided employees receive adequate notice of how to access the site. The notice form is currently available in English and Spanish, and the NJDOL may make it available in other languages as needed.

Continue reading "New Jersey Businesses Required to Provide Gender Equity Notice to Employees" »

TheNorthFace2.JPGOnline counterfeiting is fast surpassing physical markets in terms of losses sustained by trademark owners. Counterfeiters often register websites whose domain names bear deceptive similarities to the actual brands, a practice known as cybersquatting. Federal law has prohibited cybersquatting since the 1990's, but enforcement can be difficult. A New York federal court case gave trademark owners additional means to fight cybersquatting and counterfeiting in 2010 by holding that the federal Lanham Act allows not only monetary and injunctive relief against cybersquatters, but also injunctive relief against internet registries and internet service providers (ISPs).

The internet has enabled piracy and counterfeiting, once limited to street vendors and marketplaces, to expand globally. The Office of the U.S. Trade Representative (USTR) which monitors other countries' enforcement of intellectual property rights laws and treaties, estimates that counterfeiting and piracy cost the American economy $48 billion in 2011. It periodically publishes a report on "Notorious Markets," internet sites and other markets believed to be "engaged in substantial piracy and counterfeiting, " such as websites and hosting services based in China that sell counterfeit products to other businesses and to the public.

A major breakthrough for trademark owners' rights came in September 2010, in a default judgment granted in The North Face Apparel Corp., et al v. Fujian Sharing Import & Export Ltd. Co., et al, No. 1:10-cv-01630 (S.D.N.Y.) The plaintiffs, owners of the North Face and Polo Ralph Lauren brands, filed suit against a group of defendants who operated a network of more than a hundred websites in China that shipped counterfeit goods directly to U.S. consumers. The defendants owned thousands of websites using the plaintiffs' marks, such as ilovethenorthface.com and poloshirtssale.com.

Continue reading "Protecting Your New York Company's Brand from Online Counterfeiters" »

Haiti_Earthquake_building_damage.jpgA New York federal jury awarded the maximum amount of statutory damages to a photographer alleging copyright infringement against several media companies that used pictures he posted to the social media service Twitter. Agence France Presse v. Morel, No. 1:10-cv-02730, amended judgment (S.D.N.Y., Dec. 11, 2013). The decision could have important implications for any New York business that maintains a social media presence. Copyright protections still apply to pictures posted publicly on the internet. The cost of getting caught infringing someone's copyright, if this case is any indication, vastly exceeds the cost of purchasing the rights to a stock photo.

Daniel Morel, a freelance photographer, was in Port au Prince, Haiti on January 10, 2010, when a devastating earthquake struck the city, and took photographs of the aftermath. He posted thirteen photos that day to the social networking website Twitter through Twitpic, an affiliated service that lets users attach pictures to tweets. The images did not contain any copyright notices, but his Twitpic page attributed the pictures to him under the name "Morel" and his Twitter username "photomorel." His pictures were reportedly among the first to reach the outside world from Haiti.

He quickly received multiple requests from news agencies to purchase rights to his photographs. A photo editor at Agence France Presse (AFP) allegedly corresponded with Morel about the photographs, but then downloaded them and posted them to AFP's own online image database. The editor also sent them to Getty Images, an image licensing company with the exclusive right to market AFP's images in North America. The photos appeared in multiple news media, including the CBS Evening News and CNN, with AFP/Getty identified as the source.

Continue reading "Maximum Damage Award to Photographer Shows the High Cost of Using Pictures Posted to Social Media Without Permission" »

Collaboration_logo_V2.svg.pngA new year often provides an opportunity for business owners to review their goals and their progress towards those goals, to consider whether those goals remain the same, and to make adjustments to the business based on changed circumstances in the market or in their own lives. Small businesses, especially closely-held and family companies, often depend on the hard work and dedication of their owners. It can be difficult for owners to step back from the business, even when necessary. Succession planning, which allows a business to continue operations in the event that the owner or owners cannot continue in their previous role for whatever reason, is a critical responsibility of a business owner. The arrival of a new year may be the perfect time, if an owner has not thought about succession planning yet, to start thinking about it. Here are four steps in succession planning to help small business owners on their way.

Identify the Organization's Needs. Every business is unique, obviously, so each one will have its own unique needs for a smooth transition in leadership. Some small business owners may designate someone to take over for them, but all succession plans should have clearly-defined procedures for identifying a successor and moving them into a leadership position. If running the company requires a high level of expertise in a particular field, or even professional credentials like a law or medical license, a succession plan should include a process for keeping the business in the hands of qualified individuals. If such individuals are not already part of the organization, the plan should include a way to locate and recruit someone.

Identify Personal Needs. Small businesses often depend on leaders working together, and discord is frequently the cause of a small business' failure. A succession plan must consider the personalities and relationships of the people who currently comprise the business and, to the greatest extent possible, plan for the continuation of the business with minimal feather-ruffling. It should also consider personal issues like income and estate tax.

Continue reading "Succession Planning for the New Year - 4 Tips for New York and New Jersey Small Businesses" »

_DSC7714.JPGPeople come to New York City from all over the world to pursue careers in the arts. The city is a global hub for visual arts, theater, dance, music, literature, and television, to name but a few. Not everyone can make a career out of their artistic passion, but the experience of trying can prepare one for the world of entrepreneurship and small business ownership. A recent profile of a dancer-turned-entrepreneur in Crain's New York Business highlights how the business skills she developed during years of working as a ballet and Off-Broadway dancer led to her success as an entrepreneur. Artists can gain experience and skills in many areas of the arts by focusing on the similarities between entrepreneurship and the arts as a profession.

1. Discipline

Honing one's crafting in the arts requires focus, dedication, and near-constant practice. Dancers and musicians train constantly. Writers and visual artists, such as painters and sculptors, create much of their work through trial and error. All artists must endure auditions and other forms of review, along with the accompanying and inevitable rejection. Artists become great not only by practicing, but also by not giving up.

Starting a business requires a similar sort of discipline. An entrepreneur must dedicate considerable resources to their new business, including both time and mental focus. Someone who has acquired the discipline to pursue artistic expression, as a profession or a hobby, can apply it to their new endeavor as well.

Continue reading "3 Ways that Experience in the Arts Can Prepare a New York Entrepreneur to Start a Business" »

file000848283744.jpgTwo corporate officers, who are also the sole shareholders and employees of their business, may be personally liable for alleged copyright infringement, after a federal district court in Illinois denied their motion to dismiss. Asher Worldwide Enterprises, LLC v. Housewaresonly.com Incorporated, et al, No. 1:12-cv-00568, mem. op. (N.D. Ill., Aug. 26, 2013). Courts may find corporate officers personally liable for claims made against the business, known as "piercing the corporate veil," in situations where a director willfully participates in the conduct that gives rise to the claim. The court in the present case considered the size of the defendant corporation, and found the individual defendants' direct involvement in the alleged infringement to be a reasonable inference.

The plaintiff, Asher Worldwide Enterprises (AWE), sells "discount commercial kitchen and restaurant equipment" through a website. The defendant, Housewaresonly.com, was a direct competitor. According to the court's opinion, AWE created original product descriptions and other content for its website, and registered all such content with the U.S. Copyright Office. The defendant allegedly published about one hundred and fifty of AWE's descriptions on its site from March to October 2010. Internet searches for AWE's website during that time allegedly returned pages on the defendant's site. AWE claims that after it redesigned its website in September 2010, the defendant republished at least two hundred more of its product descriptions.

AWE initially sued Housewaresonly.com in a Washington federal court, claiming copyright infringement, 17 U.S.C. §§ 501 et seq.; and false designations of origin, false description, and dilution under the Lanham Act, 15 U.S.C. § 1125(a)(1). The Washington court determined that it did not have personal jurisdiction over Housewaresonly.com and transferred the case to Chicago. After the transfer, AWE reportedly found that Housewaresonly.com's corporate officers were winding down the business and attempting to deplete any remaining assets. It further found that the address provided as the corporation's headquarters was a UPS Store, leaving it unable to obtain service of process. It amended its complaint to include the two individuals as defendants.

Continue reading "Copyright Owners Claim Personal Liability for Infringement Against Corporate Officers" »