More content is being published exclusively through the Web, which means those seeking to either obtain a patent or attack the validity of a third-party patent need to exercise greater diligence when conducting a patentability or validity search.
“It’s important that the scope of prior art searches, whether used for preparing patent applications or defending infringement accusations, consider Web-based information,” says Mandy B. Willis, an associate at Fay Sharpe LLP.
“Companies need to be more aware of online postings by searching websites when conducting patentability and freedom-to-operate searches,” she says.
Smart Business spoke with Willis about the Web’s impact on prior art and how to apply diligence in this new publishing environment.
How can a solely Web-based reference qualify as a prior art printed publication under the patent laws?
In the past, many companies looked just at patents, patent publications and printed articles when conducting prior art searches. But the court in a recent case, Voter Verified, Inc. vs. Premier Election Solutions, Inc., provided guidance on how to determine whether a solely Web-based reference qualifies as a prior art ‘printed publication.’ The court created a three-part test to make this determination.
What is the test for determining whether an online article qualifies as a printed public document?
The first prong of the three-part test is public awareness. This prong is used to determine if the relevant public is aware of the website which contains the article. And, ‘relevant public’ means persons interested in the technology in question.
The second prong of the test is, having found the website, whether the article can be found by a person exercising reasonable diligence. In one example, this prong can be met if search tools on the website are sufficient to retrieve the article in response to a query using search terms that relate to the subject matter of the article.
And, the third prong is whether the article was accessible to the public before the effective filing date of the patent and/or application in question. This prong is met if the website was undisputedly open to any Internet user by the critical date. A showing of accessibility can be supported if all submissions on the website are treated by the community as public disclosures or if users can freely and easily copy the website content.
To pass the test, all three prongs must be met.
Is evidence of indexing a prerequisite to establishing that an online reference is a printed publication?
The key inquiry regarding whether a solely Web-based reference can be prior art is if the reference is or was sufficiently accessible to the public exercising reasonable diligence. However, it’s not necessary to provide any evidence of how the public located the website or article; the reference just has to have been discovered.
Indexing allows the interested public to locate an article on a website and can be a relevant factor in proving accessibility, but it’s not an absolute prerequisite. Accessibility is based on a host of facts and circumstances surrounding a reference’s disclosure.
Must the disclosure in the online reference be identical to the claims in a patent application or an issued patent to qualify as prior art?
No. Under section 103 of the patent laws, the disclosure in an online reference must only make the method or system of the claim obvious, either alone or when combined with another reference, to one of ordinary skill in the art. It does not have to be identical to the language in a patent application, just similar.
What can a company do to protect its patents from being invalidated or itself from being accused of infringement?
In the event that a patent holder accuses you of infringement, you can try to invalidate that patent with a prior art, which could be a Web-based article. Therefore, document your search strategy and the search terms you use to find the reference to support a showing that the prongs can be met.
If you are building a patent portfolio and/or applying for a patent, expand your patentability search to online publications. If you’re aware of postings that can be cited against your claims during prosecution, you can craft stronger claims earlier in the patent process, which can save you time and money.
Mandy B. Willis is an associate at Fay Sharpe LLP. Reach her at (216) 363-9000 or email@example.com.
Insights Legal Affairs is brought to you by Fay Sharpe LLP.
In the age of social media, it seems everything is transparent. In the case of social media contacts, which can be visible to the public through sites such as Facebook, LinkedIn and Twitter, there are questions as to whether that information can, nonetheless, be deemed a trade secret, and if so, who owns the trade secret.
“It was only a few years ago when businesses began incorporating social media in their marketing strategy,” says Yuri Mikulka, chair of the Intellectual Property Department at Stradling Yocca Carlson & Rauth. “Now, it’s recognized as one of the most powerful marketing and PR tools for companies, whether big or small. In fact, when positioned well, social media data can serve as an important asset of the company, especially for those relying on Web traffic and member lists to generate revenue.”
Smart Business spoke with Mikulka about ensuring social media information receives the highest possible protection and remains an asset even when employees leave.
What constitutes a trade secret?
Generally speaking, a trade secret is information that derives independent economic value, actual or potential, from not being generally known to, and not readily ascertainable through, proper means by the public. A company can enforce its exclusive right to possess and use such information as long as reasonable measures are employed to keep such information secret.
Can you protect your social media profiles as a viable trade secret?
This emerging area of law was preliminarily addressed in two recent court cases. Christou v. Beatport, LLC centered on ownership of a MySpace list used by a nightclub to promote its events. When an employee opened a competitive venture, the club sued him for misappropriating its MySpace profiles. The employee responded that MySpace is public and cannot constitute a trade secret. The Colorado federal court disagreed, noting that ‘Friend- ing’ a business or individual grants . . . access to some of one’s personal information, information about his or her interests and preferences, and perhaps most importantly for a business, contact information and a built-in means of contact . . . ’ and that this information is not necessarily public.
Another case in a California federal court, PhoneDog v. Kravitz, centered on a Twitter account maintained by an employee on behalf of the employer. The departing employee kept the account for his own use but changed its name and erased any reference to his former employer. The employer sued, seeking $340,000 in damages, allegedly based on an industry value of $2.50 per follower. The court rejected the employee’s argument that a Twitter follower list cannot constitute a trade secret.
These recent decisions seem to indicate that even if social media profiles are visible online, they can receive trade secret protection — as long as some portion remains inaccessible to the public and employee passwords and login are required to view the information. Nonetheless, because these decisions were issued during early stages of cases, keep an eye out for new cases in your jurisdiction on these issues.
How do you protect social media information as potential trade secrets?
Here’s what your company can do:
• Put in place policies, procedures and employee agreements that outline and define acceptable and prohibited use of social media.
• Make it clear in writing that any work-related social media is company property.
• Have employees sign a social media policy. At least one court recognized the importance of the employee’s signature in determining whether the company owned social media contacts.
• Get employee buy-in to effectively enforce your policy by providing training and seeking participation to protect the company’s confidential information.
• Maintain employees’ login and password information to company-related social media, and change it when employees leave.
• Periodically monitor employee online activity because trade secrets lose protection when disclosed. If disclosure is inadvertently made, quickly take down the information.
• Consult an attorney to review your social media policy, agreement and practice.
• Periodically update your policy because law and technology are changing so fast.
Yuri Mikulka is chair of the Intellectual Property Department at Stradling Yocca Carlson & Rauth. Reach her at (949) 725-4000 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth
Data, stored digitally, has become critical to a business’s ability to function. However, major catastrophes — from fires to earthquakes to floods — can cripple hardware and put terabytes of a company’s data at risk, making it vital to have a business continuity plan in place to protect digital information.
“A business continuity plan is insurance for your data,” says Pervez Delawalla, president and CEO of Net2EZ. “It ensures that your business can sustain a disaster that affects your ability to access data at your main site.”
Smart Business spoke with Delawalla about data security and the role it plays in a business continuity plan.
What is a business continuity plan and how can it impact a business?
From a technology perspective, a business continuity plan is your strategy for resuming business following a natural or man-made disaster in as short a period of time as possible. Your plan should be based on the type of data you create on a daily basis, how it is being maintained and the amount of time your business can operate without being able to access it.
Business plans differ from company to company. But generally, if you can’t sustain being without access to particular data for more than a few minutes, that data is critical, and that plan will look different than plans that pertain to data you can live without for hours or days.
Business continuity can save a business even when there is no disaster. Accidental removal or deletion of certain data sets can be very damaging to a business. However, if you have a business continuity plan and regularly back up your data, you will have less reason to worry.
What are the elements of a business continuity plan?
First, determine how you will back up your data. Critical information should be backed up every hour. Less critical data can be backed up more infrequently.
Make sure data is being backed up and secured off-site so that, if you can’t get to your office, the data is available to you. Your backup site should be outside of your primary location.
Second, you need a plan to restore your data when things come back online. Test your off-site server to understand how much lag time there is until data can be restored and employees can start using it.
Third, outsource your primary server farm or infrastructure to an outsourced data center. Outsourcing your server to a data center means it is housed in a facility with multiple levels of redundancy designed to sustain power outages and has multiple, high-speed connections coming from diverse entrances so data can be accessed even if the fibers are cut in the street. You can use facilities such as these as your secondary server, no matter where your business is located. Then, if something happens, you will have access to your data.
When should a business continuity plan be implemented?
The minute you have critical data, you need a plan to back it up. However, with the economic downturn, many companies cut the aspects of their business continuity plan that dealt with data protection because it doesn’t get used until a disaster hits, and it is an easy area to squeeze the budget. Businesses are saying they have a limited budget and they have to continue to operate, so they will just deal with it when it happens. But by then, it is too late.
How does geographical diversity play into business continuity?
Consider what a disaster can mean to your operations and what your business can sustain in terms of cost. The farther your backup servers are from your primary site, the more it costs to transfer information from one place to another. Smaller companies could likely use a public connection to transfer data without incurring too much cost.
The farther away you keep your data, the more redundancy you can create with a solid plan. However, the more redundancy you create, the more costs increase. It is less expensive if you keep your data closer to your primary location, but it also increases your risk, for example, in the event of an earthquake or hurricane. But, ultimately, the question you should ask is, ‘How long can I afford to go without access to my data?’
A company’s brand can be thought of as the sum of all of its customers’ experiences with its products, employees, physical locations, etc.
“Brand is especially important for businesses in the service sector because what they do within their industries is similar across firms,” says Ryan Barringer, senior vice president, marketing and brand strategy, at Bridge Bank. “Banks, for example, provide customers with access to credit or capital so they can achieve their goals. That’s true for most banks, so it’s important in a financial services context to determine how your brand is different from a competitor’s and how you leverage that difference to stand out.”
Smart Business spoke with Barringer about the benefits of establishing brand differentiation.
What are the benefits of having a strong brand?
A strong brand makes it easier for customers to make buying decisions and serves as a shortcut in the process. Strong brands can be considered assets that have future earnings potential. If a firm has a strong brand it can serve almost as a guarantee of future business and it can help unify employees of a company under one strategic approach.
Which kinds of firms can benefit the most from having a strong brand?
All companies would be well-served to think through how they are different from their competitors. Firms that compete in undifferentiated markets or business sectors can especially benefit from a strong brand. Professional service companies such as CPAs, law firms and hospitality companies are providing the same service, but the delivery of that service can help them differentiate and earn more business.
Conversely, for firms competing in commodity markets, say for instance wheat, a brand isn’t going to help much because as price takers they sell based on what the market will pay. For price setters in undifferentiated markets, however, there are tremendous opportunities to use brand as a competitive advantage.
How can companies measure brand value?
Brand consultants have created proprietary systems to assess the financial value of a company’s brand equity, but this can be quite expensive. And while the accountants do not have a defined method for measuring brand as an intangible asset, new methods are being designed as part of International Financial Reporting Standards. What is most important is for companies to try to understand what role their brand plays in the decision making process of their customers. They can engage in market research with existing customers — ask about their perceptions of the brand and compare those perceptions across competitors.
Companies also can create a brand report card that measures different aspects of the brand, such as how integrated and consistent are its marketing messages and whether its operation is delivering on the promise it makes in its marketing. There are great examples of scorecards, but companies really want to track brand perception and performance over time.
Another easy way to get a grip on whether a brand is a source of future business is to ask customers if they would recommend the product or service to a friend. It’s called a Net Promoter Score, used by many firms to measure loyalty, which can help to indicate a strong or weak brand.
Smaller to mid-size companies that haven’t adopted brand management, as a formal competency, should take it seriously. It’s an investment with future dividends and something to aspire to over time.
How can businesses build their brands?
First, realize a brand is not a logo, color scheme or a tag line, but it’s the summation of all experiences or brand touch points — all the ways a customer interacts with your company builds brand perception. Map out all these ways and make sure each touch point aligns with a company’s true brand essence. (This supposes that the company understands the meaning of its brand from a variety of perspectives including its employees, customers and target market.) Every time a person interacts with a company it’s an opportunity to reinforce or detract from brand values. Breaking it up into small experiences and ensuring they all integrate well and send the same message is a great way to engage in brand building.
Ryan Barringer is senior vice president, marketing and brand strategy at Bridge Bank. Reach him at (408) 556-8677 or email@example.com.
Insights Banking & Finance is brought to you by Bridge Bank
Challenging a patent is a strategic decision made by a individual or business and can be done for a number of reasons and at various stages of the patent process — such as during the patent “pending” phase or after the patent has been granted and issued. However, challenging a patent before or after granting is expensive and could have some pitfalls, such as potentially making the challenged patent more resilient to validity assertions if a challenge fails.
Smart Business spoke with James Scarbrough, a partner with Fay Sharpe, LLP, as well as law clerks Matt Burkett and Erik Keister, about strategies for challenging patents and when it’s appropriate to do so.
Why would someone challenge a patent?
There are several reasons to challenge a patent. For example, someone can challenge a patent if they think that the person(s) that obtained the patent stole or copied the invention from them. Another reason to challenge a patent is if there is a concern that a product or process may infringe one or more claims of the patent. Also, if a person has been accused of infringing a patent, and the person wishes to prevent or end a lawsuit or encourage a patent license agreement, the person may then challenge the patent. A patent or pending patent application can be challenged through the U.S. Patent and Trademark Office (PTO) as an alternative to court litigation.
How does a patent challenge work?
One type of challenge can be made after a patent application is filed but before a patent is granted or issued. This particular challenge is called a pre-issuance submission. Documents that can be considered prior art, such as another patent, a published patent application, or any other printed publication of potential relevance can be submitted to the Patent Office. The person submitting the prior art must also provide a concise description of relevance of each document. The submission must occur before a notice of allowance is mailed or the later of two events: (a) six months after the application is published, and (b) a mailing of a first Patent Office Action in which one or more claims are rejected.
The entity whose patent application is being challenged can submit a response to the challenge, but is not required to unless requested by the Patent Office.
Another type of challenge proceeding is called a derivation proceeding. In a derivation proceeding a person may challenge a patent or pending patent application if they think that an inventor in an earlier filed patent application derived the claimed invention from an inventor of their patent application. Any such petition may be filed only within the one-year period beginning on the date of the first publication of a claim to an invention that is the same or substantially the same as the earlier application's claim to the invention.
A third type of challenge is called a Patent Post-Grant Review. A Post-Grant Review is performed once a patent is issued and must be done within the first nine months of the grant date of the patent. A patent owner is given three months to respond after the review request before the Patent Office decides to proceed forward with the review. The patent owner has one opportunity to file a response or amend claims. The challenge can be based on several factors within patent law, such as patentability, anticipation, obviousness, or indefiniteness.
What happens if you win a challenge? And, if you lose?
Winning a challenge could result in the patent being invalidated and any products or processes thought to infringe the patent claims can then be freely produced without threat of a lawsuit or legal action with regard to the challenged patent. A successful outcome might also result in the patent claim scope being limited such that a competitive product can be manufactured or sold without concern of infringement. Winning the challenge could also stop a lawsuit from being filed or a pending lawsuit that has been filed against the challenger. If a challenge is lost, i.e., the patent or patent application survives the challenge, the challenger could potentially be found liable for infringement in a pending or subsequently filed lawsuit. Additionally, a patent that survives a challenge may become stronger in that it has survived a review against additional prior art.
What’s the difference between challenging a patent before or after it has been granted?
When challenging a patent application before a patent is issued via pre-issuance submission, the challenger submits prior art and then is not involved in the process after that point. A pre-issuance submission can be made by anyone before a patent is granted.
When challenging a patent after grant, it depends on the timing whether it is before or after nine months since the patent had been granted. A Post-Grant Review can be performed if it is less than nine months after grant of a patent. A Post-Grant Review is advantageous in that the patent can be invalidated on more grounds and there is a lower burden of proof. Which challenge is appropriate depends on the timing of the challenge, the basis for the challenge and the person or entities making the challenge.
What costs might a company incur by challenging a patent?
Fees for the different types of challenges vary, and can range from $180 for every 10 documents submitted in a pre-issue prior art submission, to $60,000, which is the estimated cost of preparing a petition for derivation. And those figures may not take into all costs incurred, such as attorney fees. Ultimately, a company has to do a cost/benefit analysis to determine whether it’s worth spending the money to file a challenge, weighing the risks of not filing and possibly being exposed to liability.
James E. Scarbrough is a partner with Fay Sharpe, LLP. Reach him at (216) 363-9141 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Fay Sharpe, LLP.
Most small business owners believe running their businesses through a corporation protects them from personal liability. Generally, this is true. However, courts can “pierce the corporate veil,” holding shareholders accountable for the liabilities of a company when it’s found to be the “alter ego” of the shareholders.
“When shareholders use a company as their personal piggy bank, ignore formalities when operating the business and leave no assets in the corporation, courts will not let them be shielded from liability,” says Matthew Montgomery, an attorney at Stradling Yocca Carlson & Rauth.
Smart Business spoke with Montgomery about responsibly maintaining the corporate form.
What protections does incorporating provide?
Corporations provide protection from liability at a level you can’t get as an individual operating as such in the market. It’s a good way of limiting liabilities for shareholders of a company doing legitimate business and following proper procedures.
For example, if a small incorporated business owner has a delivery fleet and a driver has an accident, the company would be liable, and not the owner or shareholder. Also, loans can be taken out through the corporation without the shareholder having personal responsibility for repayment. Further, incorporation shields a shareholder from being held personally responsible for any regulatory or non-criminal violations made by the company.
Are corporate protections limitless?
No. There are rules that guide how a corporation should be run. When they’re not followed, liability for the company’s actions falls back on the shareholder, whether he or she is a startup inventor or running a large corporation with hundreds of subsidiaries. Corporate business formalities need to be followed and a level of capital needs to be maintained to handle liabilities. In instances where the corporation is found to be the ‘alter ego’ of its shareholder, then direct liability can fall on the shareholder.
What happens if someone is using a corporation as his or her alter ego?
Should the company be sued and the shareholder has been incorrectly using the corporate form, even if not explicitly named in the suit, the shareholder will be held personally liable for the damages inflicted.
A company often generates much higher liability than an individual. Without the legal protections of a corporation, facing charges can be catastrophic.
What’s considered an abuse of a company’s corporate status?
Generally, courts look to see if you’re observing corporate formalities, which means they want to see that you’re holding board meetings and important company decisions are being made by a board, so board minutes must be kept.
It’s also common for individuals to loan themselves money from the business or treat it like it’s their own piggy bank. Owners often think they put money into the company and they deserve it back, which is true; but the corporate form has to be respected, so a salary must be approved and paid and loans generated from the company must be proper business loans that bear interest.
How can companies ensure their corporate veil will not be pierced?
Research what your state requires through its department of commerce, such as the necessary officers, records you must have and taxes you must pay. And seek the guidance of limited corporate counsel to ensure you’re following all corporate formalities. This step is often skipped because people think it’s too expensive, but if you have to hire a defense attorney, it’ll cost much more.
Take the time to understand how a corporation protects you. Otherwise, you may unwittingly unravel those protections and become the alter ego of the corporation you’ve created. Dealing with this issue before it becomes a problem will save you countless dollars and a lot of headaches.
Today’s businesses are facing new kinds of threats, not physical ones but those that attack through the Web.
Hackers have focused on the private sector, using technology to commit espionage against companies of all sizes, gaining access to secrets from U.S. businesses to leverage a competitive advantage.
“This has created a very real cyber war zone. It’s no longer just a hacker nuisance,” says Pervez Delawalla, president and CEO of Net2EZ.
Smart Business spoke with Delawalla about the tools that companies can use to combat the very serious threat of a cyber breach.
What types of threats do businesses face?
Companies face a range of threats. For example, business identity theft can lead to a breach where credits can be issued or obtained under a business’s unique identity. Or a company’s trade secrets could be compromised through leaks in its cyber security.
If a hacker wants to get information about a company, the first thing he or she will do is look for personal information about its CEO, which could be available on networking and social media websites, and also by gaining access to the CEO’s personal computers. These multilevel and multithreaded attacks are very precise. Whereas previously, cyber attacks could be compared to carpet bombing, they’re now more like precision missile strikes.
What aspects of a business are most at risk?
Financial data are most at risk in the private sector, as this information is very useful and profitable for groups to exploit and sell. The second most at-risk area is business secrets, which are stolen and used to gain a competitive advantage against companies.
How can a company reduce the risk of cyber threats?
Companies should inventory their most sensitive information, that which gives them a competitive edge, and protect it. Traditional intrusion detection and prevention systems, such as firewalls, should be put in place as a first line of defense, but they aren’t completely effective.
To protect extremely sensitive data, companies can hire a security team to monitor and protect their systems around the clock. Businesses can outsource their cyber security and consult with experts to determine what layers of security can be put in place to protect their customer and financial data, as well as their trade secrets.
How are these security systems implemented?
A consultant will look at the data a company maintains and interview its officers to determine how data is prioritized. After the initial discovery sessions, systems will be put in place to see who is accessing what data, where data flows, who has what access level and the patterns of access to determine a security platform that makes the most sense for that particular company.
Initially, the cyber security team will monitor data flow and access for a period of time to build a history and understand what could be considered normal patterns of behavior. This history will then be used to make a strategic security plan.
Once in place, the security team actively monitors cyber behavior. If or when an anomaly occurs, it’s immediately stopped and investigated by the security team in order to find out more about it and defend against it.
There’s a lot more discovery involved in the security consulting process today because of the many networks and extremely large data pools that even a single company can have in place. Also, there is the need to look at these networks and data access actively and have people monitoring it constantly, rather than passively putting a firewall in place and then expecting that it will keep all of a company’s most valuable information safe.
Pervez Delawalla is president and CEO of Net2EZ. Reach him at (310) 426-6700 or email@example.com.
Insights Technology is brought to you by Net2EZ
Intellectual property (IP) might be one of the most valuable assets of your company. But if it’s not protected, you can be foregoing a significant advantage in the marketplace.
There are four major IP categories:
- Patents, which protect inventions;
- Copyrights, which protect artistic forms of expression;
- Trademarks, which protect brands; and
- Trade secrets.
Generally, the types of IP small businesses may be interested in protecting are unique to the kind of company and its core competencies. For example, businesses that are predicated on developing new products or technology will be interested in patent protection, while another business may be identified by its brands and would want to protect those through trademarks.
However, John P. Cornely, of counsel at Fay Sharpe, LLP, says it’s important to take a close look at everything — from catalog photographs to manufacturing processes — to ensure the security of all of your IP.
Smart Business spoke with Cornely about successful strategies to identify and protect IP.
How does a small business identify and track its IP?
In a small business, to some extent, you have IP being created by many people in your organization at many points in the workflow cycle. You want to be systematic about identifying your IP. When it comes to patents, consider using an invention disclosure form. These forms can be made available to employees, especially those involved in the invention creation process, and are used to collect the data necessary for completing a patent application — inventor’s names, the date the invention was created, a description and/or drawings of the invention and the location of records that support the invention, such as a hard drive or lab notebook.
Encourage your inventors to use the forms and have regular sessions to review inventions and the potential for protection. Regular review meetings can also assist in identifying and/or ranking the relative importance of multiple inventions.
This form system can be used with other types of IP to identify creations and have a way to systematically collect information about them.
What are important inventions to protect?
It’s most important to protect those that make a product stand out in the market. As a small business, maybe you don’t have the resources to file 100 patent applications and might only be able to do a couple each year, so it’s critical to identify where to best apply your resources. Find the aspects of your products that make them more valuable and desirable in the marketplace. Think of it in terms of what features of your products your competitors would like to copy and select strategic patent protections that will keep your competitors from doing so.
Should companies federally register their trademark?
Yes. There are procedural benefits to registering your trademarks that will help in potential infringement actions.
When you start using a trademark in commerce you naturally gain common-law rights whether you’ve registered the mark with the federal government or not. However, one of the problems is those common-law rights are limited to the geographic area in which you’re doing business. So if you’re selling a product in Cleveland, Ohio, under a specific mark, you only have common-law rights in Cleveland. A federal trademark registration extends your rights nationally. Further, federal registration of your trademark provides you with procedural benefits if there’s an infringement action.
And, much like patents, you want to register those marks and brands that are most important to you if your resources are limited.
What can a company keep as a trade secret?
Sometimes there may be an idea that’s not a good fit for patenting or that you don’t want to disclose, for example, like a process of manufacturing a product. Trade secrets are great tools for protecting some ideas because, theoretically, the protection can last forever while patents commonly expire after 20 years. However, the secret generally has to be something no one else can easily discover, for example through reverse engineering; you have to treat it cautiously and control its dissemination. Many small businesses may think they have trade secrets, but since they are not effectively treating them as such that information won’t enjoy the legal status of trade secret, which has certain advantages.
Some things are easy to keep secret, such as formulas and manufacturing processes, because only a few people have or can discover that information. If the information can be discovered from viewing or reverse engineering your product, you won’t be able to keep that a secret. One risk is that if your secret is discovered legitimately then you’ve lost your trade secret status, but if someone were to uncover your trade secret through theft or breach of contract, then you have a case.
How does a small business secure rights to the company’s IP from its employees and contractors?
While this is important, it’s also often overlooked. You want to have some language in your employee or contractor agreements that details ownership of any IP rights. Contrary to what some might think, it’s not always the small business that owns the rights to IP developed by contractors. For example, when hiring a contract photographer to take pictures for your website, the copyright for the work (i.e., the photographs) stays with the photographer unless you have a written agreement that says otherwise. That also extends to contract programmers who can retain the copyright for developed software absent a sufficient written contract to the contrary.
In general, it’s a good rule to have your agreements explicitly spell out IP ownership rights in writing up front.
John P. Cornely is of counsel at Fay Sharpe, LLP. Reach him at (216) 363-9000 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Fay Sharpe, LLP
At the end of the year, a couple of tax provisions are expiring that have been a great benefit to those who own real estate. First, the 15 percent capital gains tax rate will return to where it was before 2003, to 20 percent. The historically low capital gains tax rate allowed many to sell their properties with a significantly reduced tax obligation. Second, bonus depreciation has made it possible for property owners to write off as much as 100 percent of the cost of machinery, equipment, vehicles, furniture and other qualifying property. This method of depreciation allows the business owner to record lower incomes, and therefore pay less in taxes.
While these tax features will come to an end, Terry Coyne, SIOR, CCIM, an executive vice president with Newmark Grubb Knight Frank, formerly Grubb & Ellis, says there are still solutions that will allow property owners to defer expenses.
Smart Business spoke with Coyne about the changes and what to do if you can’t take advantage of them before they expire.
What real estate tax strategies should business owners take advantage of in the short term?
The capital gains tax rate is scheduled to go up on Jan. 1 from the current, historically low rate of 15 percent to 20 percent because the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act that extended the Bush-era tax cuts until the end of this year will expire. In addition, the Patient Protection and Affordable Care Act, in 2013, will impose a new 3.8 percent tax on certain investment income for households that make more than $200,000 for singles and $250,000 for married couples, which includes real estate transactions. So the net effect of these two tax increases could result in a 23.8 percent tax rate for high earners.
When capital gains rates are raised, those still wanting to unload an investment property should consider a 1031 like-kind exchange. These real estate transactions have actually become less popular in the past couple of years because the capital gains rate has been so low, and building owners are trying to sell by year-end to take advantage of the rates.
This tax-deferred exchange involves selling one qualified property for another within a specific time frame. For example, you can sell a property and take up to 45 days to identify three qualified properties for the exchange. You’ll then have 180 days to close. To do a 1031 exchange, you need to work through a qualified entity, so make sure you’re dealing with someone reputable because if they’re wrong and it blows up, you’ll be stuck with the tax.
Next year, many owners will go from paying the capital gains rate to transacting through a 1031 exchange to avoid paying the taxes on those sales altogether. So, if you can, try to close your transactions this year, and if not, expect to pay more next year if you don’t use a 1031 exchange.
What real estate tax strategies exist for those who own and occupy their building?
For those who own their buildings, the biggest impact could be the potential change to bonus depreciation, which has been around for the past couple of years and was extended by the American Recovery and Re-Investment Act.
Typically, in real estate, you spend money and capitalize it. So, if you put a new roof on your building, you look at the cost of the roof and how long it takes to depreciate it, let’s say over the course of 20 years. Recently, bonus depreciation has allowed you to expense as much as 100 percent of an investment in qualified business properties. The bonus depreciation will likely go away, though it’s not clear when. Going back to standard methods of depreciation is a big deal because it ends a program that provided an immediate tax benefit. Bonus depreciation has had a positive impact on the real estate industry because builders will spend more on improvements or spend on speculation because they’re trading dollars — rather than paying taxes, you’re spending that money on real estate.
You’re well advised to pay close attention to depreciation. The question remains whether it will go back to normal right away or if it will be phased out. If it is phased out, take advantage of it soon because it will never be 100 percent again. Bonus depreciation absolutely creates jobs in the short term because it encourages people to spend money.
What if I miss out on bonus depreciation? Are there other strategies a business owner can use to defer expenses?
It’s a good idea to cost segregate your building, using the expertise of a professional such as an accountant and an engineer, so you can depreciate the components of your property over the life of each component’s expected use and not over 39.5 years, which is a typical depreciation cycle for a building. More sophisticated business owners are segregating their costs and depreciating everything they can because it gives great tax benefits for those who are unable to do bonus depreciation.
The Internal Revenue Service allows you to depreciate a building, not the land, over 39.5 years, so that every year you get a benefit on your taxes, which is a noncash loss. But the code also allows you to cost segregate all of your different costs. For example, the roof is segregated from the parking lot, which is segregated from the HVAC, etc., on a schedule that outlines the ‘life,’ or schedule of depreciation, of the different components of your building. It’s a way to reduce your current income tax obligations.
Terry Coyne, SIOR, CCIM, is an executive vice president with Newmark Grubb Knight Frank, formerly Grubb & Ellis. Reach him at (216) 453-3001 or email@example.com.
The costs of litigation can quickly escalate, especially if you’re facing a motivated and well-funded plaintiff who seems intent on aggressively pursuing litigation. Dealing with litigation can create a big burden upon management to respond, collect documents and be available to give a deposition, testimony or consultation.
“If you have experience with lawsuits, then you understand the cost and time pressures associated with them,” says Stephen L. Ram, Attorney with Stradling Yocca Carlson & Rauth. “That’s why attempting to come to a resolution with the other party ahead of reaching the courts makes sense for both parties.”
Smart Business spoke with Ram about resolving disputes without litigation and the legal protections that exist around conversations undertaken to come to an agreement outside the courts.
What are kinds of disputes do companies become aware of before a lawsuit is filed?
There are a number of common disputes that can come from vendors, contractors and shareholders that stem from some dissatisfaction with your business relationship. Most often, a company is made aware of them through a demand letter sent from counsel, or, as with many vendor disputes, a sales representative will be aware that some looming frustration is becoming more than a trifle and should be a concern for the company.
How do you approach a solution when one or both parties are emotionally charged?
It’s common to have a powerful initial emotional response to a dispute when it arises, particularly when a party makes substantial or possibly outlandish monetary demands. Understand that emotional reactions are natural, but consider what is best for the company and its shareholders and find a suitable resolution. Recognize that the other side has different pressures and emotions to which it’s reacting. Step back and be dispassionate and objective because a measured, discerning approach makes it easier for you to facilitate a resolution. Also consider the applicability of any insurance coverage and notify the broker or carrier after receiving a demand.
What needs to be considered when unequal information is causing or adding to the dispute?
Disputes generally arise because one party speculates the other has done them wrong or has done something suspicious. While there may be a grain of truth to the gripe, the other party’s speculation is usually accompanied by a lack of information or a misunderstanding regarding what actually transpired. Naturally, you will undertake your own formal or informal investigation into the basis for the dispute. There is an opportunity before this dispute boils over into a lawsuit to be open to what the other side needs and wants from you, and you can consider your willingness to share information from your own internal inquiry. Being open to this type of dialogue makes it easier to work toward a resolution.
When should a representative begin talking with the other side?
The decision of when or how to open a dialogue is unique to each situation. Most times, the initial dialogue should be between counsel to ensure confidentiality protections and avoid a blindsided attack. The first step is to gauge and engage the other party, which involves acknowledging the other party’s monetary or other demands. However, you also need to be clear that you do not intend to cave to those demands to manage their expectations, but state your willingness to work with them to reach a fair resolution.
Next, establish parameters for future dialogue. If the other side is requesting information or you would like to voluntarily provide information to correct misunderstandings, legal counsel can assist in determining what documents to provide, what level of detail to share, or perhaps to make a company employee available to tell the story of what happened or answer questions.
If you are going to make a member of management or another company employee available, the third step is preparation. Preparation involves understanding the parameters for the dialogue, understanding of the relevant facts and your story, and that person’s ability to bring back conversations that go astray, or refrain from going beyond the scope of the conversation. This conversation can be as simple as a phone call or as structured as mediation.
Are you putting yourself at risk by engaging in this type of dialogue?
There are legal protections for communications that are undertaken for the purpose of reaching a settlement of a dispute. These protections, available under state and federal law, dictate that what you say during these resolution conversations is not admissible in court to prove liability. This means you can share information that might legally amount to admitting to a breach of a contract, for example, in an effort to reach a compromise.
To invoke the protections of these statutes, you just need to tell the other side you are having the conversation in order to resolve the dispute. But for added protection, talk with outside counsel about what you’re planning, that you’re serious about reaching a resolution, and ask for a confidentiality or nondisclosure agreement. Convince the other side to put this protected dialogue in place, as well. The confidentiality under these statutes and a binding agreement offer comfort to both parties and help facilitate conversations. Still, there may be situations where it’s not advisable to share or only share limited information.
If a resolution cannot be reached, how should you proceed with management of a lawsuit?
Keep an open dialogue and don’t entrench yourself in an emotional reaction or overly rigid position. Allow the other side to see that you’re serious about defending or prosecuting, but hopefully cooler heads can prevail and a resolution is reached, especially if there is an ongoing relationship. An early resolution is usually far less costly and disruptive than one reached after protracted litigation.
Stephen L. Ram is an Attorney with Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4102 or firstname.lastname@example.org.