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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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_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" »

America_minwage.svg.pngOn Election Day, voters in New Jersey overwhelmingly approved an amendment to the state constitution raising the minimum wage to $8.25. The $1 increase, which takes effect January 1, 2014, will be followed by an annual cost-of-living increase. New Jersey's minimum wage is among the highest in the country, although several states either have or are phasing in minimum wage rates of $9 per hour or more, and at least one city recently enacted a significantly higher minimum wage. Unlike many employment laws, the minimum wage applies to all businesses regardless of size. Small businesses in New Jersey with minimum-wage employees should prepare for the upcoming wage increase.

Federal law sets a baseline minimum wage, which has been $7.25 per hour since July 24, 2009. States are free to enact their own minimum wage limits. The state of Washington has the highest state-level minimum wage, at $9.19 per hour. New York and Connecticut are phasing in minimum wage increases that will eventually reach $9. The city of SeaTac, Washington approved a ballot initiative on November 5, 2013 that will raise the minimum wage for some workers to $15 per hour.

According to the U.S. Department of Labor, as of January 1, 2013 nineteen states and the District of Columbia set the minimum wage higher than the federal level. New Jersey's minimum wage, established by state law, was the same as the federal minimum wage until now. Under state minimum wage law in New Jersey, employers who pay less than the minimum amount may be subject to both administrative and criminal penalties, including fines and jail time.

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2008-03-13_Rave_crowd.jpgNew federal laws may allow entrepreneurs and small business owners to seek investors publicly without having to go through the complex and expensive process of creating an initial public offering (IPO). New businesses may soon be able to raise capital via social media and the internet, in a process known as "crowdfunding." Currently, websites like Kickstarter allow people to crowdfund creative projects, but businesses seeking equity investments have had to follow strict regulations enforced by the Securities and Exchange Commission (SEC). New rule proposals recently issued by the SEC, however, may change that.

Entrepreneurs have generally had to limit their efforts to raise capital to private sources. According to Forbes, most startup capital comes from the entrepreneurs themselves, who might invest their own savings, take out loans, or use credit cards. Family members, such as parents and spouses, account for a small percentage of startup capital. "Outsiders," including government programs, venture capitalists, angel investors, and other businesses, account for some startup financing. Venture capitalists fund 0.04% of all startups, and angel investors fund 0.91%. Despite such a small percentage of businesses, venture capitalists are expected to invest $2.7 billion in New York-based startups in 2013. A startup seeking individual equity investors may only approach people who meet certain criteria as "accredited investors," such as individuals whose net worth is at least $1 million or whose annual income exceeds $200,000.

The Jumpstart Our Business Startups Act (JOBS Act) became law in April 2012. Its purpose was, in part, to help businesses that are not large enough for an IPO but have difficulty raising capital through private channels. It raises the maximum number of shareholders corporations may have, from five hundred to two thousand, before they are required to register with the SEC. The JOBS Act allows companies to raise up to $1 million per year from individual investors, and it greatly relaxes the restrictions on who may invest. Individual investors with a net worth or annual income below $100,000 may invest up to the greater of $2,000 or five percent of their annual income, while investors with a net worth or annual income above $100,000 may invest a maximum of ten percent of their annual income. Companies must still provide information to the SEC, such as names of directors and officers, but the reporting burden is far less than for fully public companies.

Continue reading "New York and New Jersey Entrepreneurs May Be Able to "Crowdfund" Their Businesses Soon Under New Federal Rules" »

file2581243266765.jpgA business owner may have violated the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 et seq., when he closed his wholly-owned corporation and began working for another company in the same field, according to a New Jersey appellate court. Del Mastro v. Grimado, et al, No. A-1433-11T4, per curiam (Sup. Ct. N.J. App. Div., Sep. 5, 2013). The plaintiff, who had obtained a judgment against the defendant in a separate matter, claimed that the defendant fraudulently transferred business assets in order to prevent her from collecting the judgment. The appellate court ruled that the client list of the defendant's corporation was an asset for the purposes of the UFTA. The ruling could be important for any New Jersey small business that seeks to reorganize, dissolve, or merge with another company while certain debts remain outstanding.

The defendant was the sole shareholder of Internal Concepts, Inc. (ICI), an S-corporation that brokered electric motors used in medical equipment for about fifty clients. According to the court, the business had gross sales of $1.3 million in 2003 and $1.7 million in 2004. In August 2005, the plaintiff obtained a judgment against the defendant in a separate suit for invasion of privacy and intentional infliction of emotional distress. The court awarded her $531,000 in compensatory and punitive damages, based on an evaluation of the defendant's assets, including ICI. The defendant closed ICI shortly before the 2005 trial began. He testified that the closure of the business was completed in July 2005. The defendant went to work for Precisions Devices Associates, Inc. (PDA), a company that had worked alongside ICI, and which began to perform many of the services ICI had performed once he joined as an employee.

The plaintiff filed suit against the defendant, as well as ICI, PDA, and PDA's owner in July 2009, claiming that the closure of ICI and transfer of the client list to PDA hindered her efforts to collect on her judgment, and therefore violated the UFTA. The trial court dismissed the complaint in October 2011, finding in part that the plaintiff had not provided clear and convincing evidence of fraud.

Continue reading "New Jersey Appellate Court Rules That Client List Is an Asset in Suit Alleging Fraudulent Transfer" »

file531278556409.jpgA New York court recently addressed the fiduciary duties owed among managers of businesses involved in a venture together. A group of real estate investors sought to hold an individual liable for multiple business torts, all of which were allegedly committed by his son. Halpern, et al v. Kuskin, 2013 NY Slip Op. 32005(U) (N.Y. Sup. Ct., Aug. 26, 2013). The father took over the operation of several business entities from his son, and the plaintiffs argued that the father was liable either for the allegedly tortious acts themselves, for aiding and abetting said acts, or for attempting to shield his son from liability. The court held that the plaintiffs failed to plead any facts directly alleging the father's liability. It also addressed the question of the father's fiduciary duty to his son, as part of a family business, versus any fiduciary duty he might have owed to the plaintiffs.

Two plaintiffs signed an operating agreement with Brad Kuskin, according to the court, in March 2008 for a limited liability company (LLC) intended to purchase investment property in Crested Butte, Colorado. The two plaintiffs, along with a third plaintiff, signed another operating agreement with Kuskin for an LLC whose purpose was to purchase property in Crystal Springs, New Jersey. The plaintiffs invested substantial funds, including about $1.1 million by the lead plaintiff, in the two LLCs. The plaintiffs alleged that Kuskin used the invested funds to purchase the Colorado property in another company's name, and otherwise mismanaged the funds.

Gary Kuskin, Brad Kuskin's father, took over operations of various businesses from his son, including the company or companies involved in the deals with the plaintiffs. In their lawsuit, the plaintiffs alleged that Brad Kuskin fraudulently induced them to invest money with him. They further claimed that Gary Kuskin "attempted to make Brad Kuskin judgment proof." Id. at 3. The suit, which only named Gary Kuskin as a defendant, included causes of action for tortious interference with a contract, aiding and abetting fraud, and breach of fiduciary duties. It essentially sought to hold Gary Kuskin liable for intentional torts committed by his son through their business.

Continue reading "Person Assuming Management of Family Business Does Not Assume Liability for Predecessor's Business Torts, According to New York Court" »

file551263252097.jpgA partner in a general partnership based on an oral agreement could unilaterally withdraw from the partnership, the New York Court of Appeals held, because the partnership agreement did not define a specific duration or objective for the business. Gelman v. Buehler, 2013 NY Slip Op. 01991 (N.Y. Sup. Ct., Mar. 26, 2013). New York law allows any individual partner to withdraw and trigger the dissolution of a partnership if the underlying partnership agreement does not identify a "definite term or particular undertaking." N.Y. Pship L. § 62(1)(b). The court rejected the plaintiff's argument that a general goal, defined in stages, was sufficient to meet this legal standard. Business lawyers often advise their clients to put agreements in writing, and this case demonstrates one possible outcome if business partners fail to do so.

According to the court's opinion, the plaintiff and defendant agreed to form a partnership in 2007 shortly after graduating from business school. The plaintiff would later describe their business plan in seven stages:
1. Raise money to start the partnership's operation;
2. Find a business to purchase;
3. Raise additional money to buy the business;
4. "Operate the business to increase its value";
5. Reach the "liquidity event," the point when they could sell the business at a profit;
6. Identify a buyer for the business; and
7. Sell it at a profit.
Gelman, slip op. at 4.

The two partners reportedly anticipated a four- to seven-year time frame for their business plan. They spent several months looking for investors, but the defendant withdrew from the partnership after a dispute with the plaintiff.

Continue reading "New York Court Rules That a Partner May Unilaterally Withdraw from Partnership That Lacks a Defined Duration or Objective" »