You don’t have to be pirating software to get in trouble during a compliance audit.
“Where companies get ensnared is in the deployment phase. It’s not that they are trying to get away without paying, they get caught up in the terms of conditions found in the fine print of licensing agreements,” says Heather Barnes, an intellectual property attorney with Brouse McDowell.
Smart Business spoke with Barnes about what businesses can do to make the software audit process go smoothly.
What prompts an audit?
Software companies include the right to request audits as part of the terms and conditions of the software license agreement. The fine print contains the right for the software company to audit your computers and systems. Sometimes audits are performed because that organization received a tip from a discharged employee. There also are companies that conduct audits as a regular course of business, either itself or through a third party, such as The Software Alliance. Because of the economy, software revenues have decreased, so software owners are replacing lost revenue by ramping up enforcement with compliance audits.
Once you’re notified about an audit, what should you do?
If you are an organization with in-house counsel, contact them immediately. Smaller companies should retain outside counsel, because attorneys can make a big difference in the final outcome.
The first thing an attorney will do is assist with the parameters for the audit — how and when it will occur, as well as the scope. If there is a noncompliance issue, legal counsel can draft a settlement agreement; they may even negotiate the settlement to a more reasonable number. Even if there are no compliance issues, you still want a document drafted that acknowledges how the audit was conducted and what was found, as well as a release of any claims the software company could have brought.
What problems can occur if you proceed without legal counsel?
Much is dependent on the particular company, but the audited company wants to prevent the software owner from having free reign of its systems, and that is a role legal counsel can help control. For example, legal counsel can assist in defining the scope of the audit by determining which computers are included in the audit. Do you include every computer? Just computers in use? What about the computers that are older and sitting in a warehouse? A software company could attempt to include any computer you own, even those that are obsolete and unused.
Another potential issue is how the audit concludes. You might come to an agreement at the conclusion of the audit and think a settlement is in place. Without legal counsel involved, a company could find itself with no settlement agreement or other document detailing what occurred and the responsibilities of each side going forward.
What are typical noncompliance issues and how much do they cost to fix?
Terms and conditions of the software license agreement vary by company. Many companies allow you to use older versions of software when you obtain a license for their latest product, but some do not. However, many people think that it’s an industry standard that you can deploy older versions.
Another problem is maintenance of business records proving owned licenses for software. You need to have documentation and keep those records current and accessible. That can be complicated when the software was purchased from multiple third-party vendors and for software that is old. Companies should conduct internal audits to ensure they are in compliance with what their records reflect, which could help mitigate exposure when an audit occurs.
Normally, if you are out of compliance, you’ll be charged the licensing fee you should have paid. If it is $200, $300 or $500 per license, multiply that by the number of computers out of compliance and it can get expensive quickly.
Further, if you’re found to be noncompliant, develop internal procedures to ensure compliance in the future. If you are audited once and are found to have compliance issues, it is just a matter of time before the software owner is back to check again.
Heather Barnes is an intellectual property attorney at Brouse McDowell. Reach her at (330) 535-5711 or firstname.lastname@example.org. Learn more about Heather Barnes.
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Although it’s best used as a last resort, filing for Chapter 11 bankruptcy can offer struggling businesses a chance to restructure debt and emerge as successful entities, says Marc Merklin, managing partner at Brouse McDowell.
“Chapter 11 is a tool and not an end in and of itself,” he says. “Businesses that go into it without knowing what they want to accomplish often flounder and fail because it’s an expensive process. The longer it goes on, the greater the risks and costs. Companies that succeed have a specific goal and accomplish it as quickly as possible.”
Smart Business spoke with Merklin about alternatives to bankruptcy and how to best utilize the Chapter 11 process, should it prove necessary.
Are there options short of bankruptcy that should be considered first?
A workout is the best option because bankruptcy is expensive and risky. Try individual negotiations with the lender or creditors. Often with the lender there can be workout or forbearance agreements. They can be difficult to negotiate and disruptive to cash flow as lenders often add fees and expenses, as well as interest rate increases. Still, it’s usually desirable to attempt to work that out before seeking Chapter 11 protection. Most lenders understand that Chapter 11 will not only delay the exercise of their remedies and cost additional funds, but also carry risks such as ‘cramdown,’ which means forcing creditors to accept a plan they oppose.
Even if you have multiple creditors, you can negotiate with a group of them through an out-of-court settlement, whereby you give creditors notes for past due obligations and then amortize them. That can be difficult depending on the number of creditors.
What are the differences between Chapter 7 and Chapter 11 bankruptcy filings?
Chapter 7 is liquidation, so there is a trustee appointed and the business is almost never sold as a going concern. Even if you’re going to sell the business or liquidate it, it’s often better to do it under Chapter 11 because the company can still manage itself rather than being liquidated by someone who has no knowledge of the industry or business.
The goal under Chapter 11 is to restructure and emerge. In the past five years, more Chapter 11 filings have been sales as going concerns rather than true reorganizations. In a sale as a going concern, assets go to a buyer who will operate them as the business but under new ownership and a new structure free of claims and debts. In a restructuring, the company largely emerges the same even if there is a new investor or new ownership.
What are the benefits of filing Chapter 11 bankruptcy?
One is cramdown — the ability to force a payment plan when creditors are not willing to agree to a payment plan on their own.
The other is the ability to reject burdensome contracts that are causing huge losses. You can go into bankruptcy and reject that contract, convert it to a claim that you pay under a plan and not be bound by the contract. For example, if you’re selling to a customer at a huge loss and they’re holding you to that contract, you can reject that contract. They’re going to have a claim, but it would be an unsecured claim under bankruptcy and might be paid at 10 cents on the dollar. The company is then freed from the requirement of producing those goods at a loss and can generate positive revenue going forward.
But while Chapter 11 can be a very useful tool, it’s not the most desirable process because of the cost of accountant and attorneys’ fees, as well as the risk for existing owners and equity holders in the company. Under the absolute priority rule in bankruptcy code, equity holders or owners fall last in line. They cannot retain their equity ownership without contributing new value to essentially ‘pay’ for those equity interests after confirmation of the Chapter 11 plan.
Marc Merklin is a managing partner at Brouse McDowell. Reach him at (330) 535-5711 or email@example.com.
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House Bill 479, known as the Ohio Asset Management Modernization Act (AMMA), is the new law that means Ohio residents will no longer have to set up trusts in other states in order to protect their assets.
“It’s an important piece of legislation,” says Richard H. Harris, partner and chair of the Estate Planning & Probate Administration Practice Group at Brouse McDowell. “Prior to this major change, we weren’t exactly at the forefront in this area of asset protection planning.”
Smart Business spoke with Harris about the legislation, which will go into effect on March 27.
What will the AMMA change?
It contains a number of different protections, but basically it provides better creditor protection across-the-board. One of the more significant provisions is the creation of a domestic asset protection statute known as the Ohio Legacy Trust Act, which, in layman’s terms, means that for the first time an Ohio resident will have the ability to create an irrevocable trust, retain certain beneficial interests in that trust and have the trust assets protected from creditors.
Long-standing law in Ohio and most other jurisdictions provides no creditor protection to settlors of revocable trusts — those trusts which you create during your lifetime to hold your assets for your benefit and which keep the trust assets from being subject to probate at your death. Other jurisdictions such as Delaware, South Dakota and Alaska have enacted statutes that enable an individual to set up a domestic asset protection trust in that jurisdiction that will give some creditor protection to the person who created the trust. One of the key requirements in these jurisdictions was that you had to use a trustee who was a resident of the state or a trust company that is legally authorized to operate in that state, and some or all of the trust assets had to be custodied in the state as well. House Bill 479 was enacted, in part, to keep trust assets and the trust administration business in Ohio and to make Ohio competitive with a growing number of other jurisdictions in providing creditor protection to self-settled asset protection trusts.
Are there any exceptions?
Yes. You can’t set up a domestic asset protection trust in Ohio to avoid alimony or child support, or if you already have an issue with a creditor — that would be a fraudulent conveyance. This type of planning is most useful in situations where someone is in a high-risk environment, such as a physician who has a high risk medical practice or entrepreneurs or any high-net worth individual whose work involves a significant amount of risk of personal liability.
What are the other significant creditor protection provisions contained in this new legislation?
One is a significant increase in the homestead exemption. Right now, it’s $21,625 per debtor. With the new law, it increases to $125,000 per debtor and it’s stackable, which means a married couple can protect up to $250,000 of equity in their house from the reach of creditors.
The legislation also created an optional personal property recording system. Transferors will be able to record a notice of transfer of personal property with the local county recorder. Recording a conveyance of personal property will put all creditors on constructive notice of the property transfer, which will have the effect of cutting off the right of the future creditor to challenge the transfer at a later date. The new legislation also clears up an ambiguity in Ohio law regarding inherited IRA accounts. Ohio’s exemption statute that exempts certain property from being subject to attachment by creditors has been revised to specifically include inherited IRA accounts and 529 Plans.
What might this mean for Ohio residents?
The AMMA obviously provides much better asset protection planning for anybody who lives or works in Ohio. Gov. John Kasich approved it because he thought it would encourage business activity and professionals would be more likely to maintain their assets in Ohio. ?
Richard H. Harris is a partner and chair of the Estate Planning & Probate Administration Practice Group at Brouse McDowell. Reach him at (330) 535-5711 or firstname.lastname@example.org.
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Think your company has no confidential information that needs to be protected? Think again.
“All companies have confidential information which, if compromised, could cause immeasurable damage,” says Kate B. Wexler, an attorney in the Business, Corporate & Securities practice group at Brouse McDowell. “Confidential information can be tangible or intangible and of a technical, business or other nature.”
Wexler says there are occasions where such information needs to be shared with employees, contractors, suppliers, customers, vendors, potential partners and others, and a confidentiality agreement should be put in place to protect the company’s interests.
Smart Business spoke with Wexler about confidential information and situations when you might want a confidentiality agreement.
What needs to be kept confidential?
Any information not generally known to the public should be treated as confidential, provided that you take steps to keep your information confidential as well. When you are sharing your company’s confidential information with any third party, you’ll want to press for a definition of confidential information that is as broad as possible to avoid any argument later on that any particular piece of information was not covered by the confidentiality agreement. It can be as general as all information, whether written or oral, delivered by your company in connection with a contemplated transaction. Of course, as the recipient of such information, you’ll want to limit this definition by requiring that all information disclosed be marked ‘confidential.’
Under what circumstances would you enter into a confidentiality agreement?
Contexts in which confidentiality agreements are used include agreements with individual employees to ensure they understand their obligations to the employer; agreements with potential partners in a joint venture; supplier agreements; and agreements between companies wishing to explore a potential acquisition or merger.
Although parties often rush through the step of entering into a confidentiality agreement when their new relationship begins, and sometimes omit it entirely, it’s critical in defining the relationship’s rules.
These rules not only include defining what’s mine and what’s yours, but they also address the level of care a receiving party must take with your confidential information; prohibitions against reverse engineering; disclosure to governmental entities; compliance with laws to which your company and your information is subject — e.g., HIPAA, GLBA, U.S. export laws; injunctive relief should a party breach the confidentiality agreement; and what happens to the information when discussions end.
Other issues often addressed in confidentiality agreements are confidentiality of the fact that the parties are even in discussion, and nonsolicitation, which prevents a potential partner from attempting to poach your employees that they may meet in the course of exploring this potential relationship.
Are there restrictions?
Yes, there are many situations where the disclosure of confidential information is required by law. For example, judicial or governmental order or by deposition, interrogatory, request for documents, subpoena and civil investigative demand. These situations can be addressed in the confidentiality agreement as permitted exceptions. It is also interesting to note that there are certain non-U.S. jurisdictions that will not recognize an agreement that prohibits reverse engineering.
Are there occasions when you might want to terminate a confidentiality agreement?
One such situation would be when the parties enter into a definitive agreement whereby confidentiality obligations between the parties would be addressed. Another might be when one or both parties no longer wish to pursue the objective of the relationship. In that case, a well-drafted confidentiality agreement would anticipate that situation and while the parties may no longer share information, their obligations to maintain confidentiality with respect to the previously disclosed information continues for a certain period of time.
Kate B. Wexler is an attorney with the Business, Corporate & Securities practice group at Brouse McDowell. Reach her at (330) 535-5711, ext 399 or email@example.com.
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Social media has pervaded the workplace. With more than 1 billion people on Facebook and 140 million Twitter users generating 340 million tweets a day, companies see the potential of social networking and often rush to get on board without formulating a comprehensive policy.
“Take a step back and consider the implications of posting — whether officially in your business, unofficially by employees, or about your business by disgruntled customers or competitors. Develop a plan for protecting your interests on all those fronts,” says Karen C. Lefton, a partner at Brouse McDowell. “That means drafting, implementing and, where appropriate, disseminating your policy before you are the target of a nasty post.”
Smart Business spoke with Lefton about what companies should consider now with social media.
What can companies do to protect themselves against disparaging statements made by customers or competitors?
Anyone who posts defamatory statements about your business may be subject to a defamation action. There must be a false statement of fact, published to at least one other person, with the requisite degree of fault — negligence or actual malice — resulting in damages. It is important to recognize that ‘opinion’ is protected. This is especially significant in the social media context, where reviews are pervasive and even encouraged on companies’ websites. When you do this, you invite potentially negative comments, but not ones that would be actionable in defamation.
Does that mean reviews are exempt from defamation lawsuits?
Reviews are usually excluded because opinions are protected speech. A false statement of fact is essential to a successful defamation claim. However, if someone says, ‘There was a cockroach in my oatmeal,’ that is demonstrably a statement of fact. If it is false, the restaurant where the oatmeal was served would have a potential defamation claim.
Whom would you sue?
The poster. Internet Service Providers generally have immunity for the posts on their sites, but the poster does not. Historically, defamed entities were reluctant to take action against an individual poster because the cost far exceeded the payoff. However, many homeowners’ insurance policies cover individuals for actions in defamation, which may provide some recompense for defamatory posts.
What if the harmful statements are made by your own employees? Can you fire them?
Be very cautious. Section 7 of the National Labor Relations Act protects employees who engage in concerted activity, so employees who post disparaging comments about wages and working conditions — including bad things about the boss or the business — are usually protected. This applies as much to employees in nonunion settings as to those in unionized workplaces.
An employer may be found to have violated the act not only by disciplining a worker for what he posts but for merely having a policy that could be interpreted as chilling an employee’s Section 7 rights. Your policy governing employees’ use of social media must be very carefully drafted.
Are there pitfalls if employees post as part of their job, sanctioned by the company?
Absolutely. According to the Society of Human Resource Management, 68 percent of businesses require employees to use social media as part of their job. Of those, 73 percent give no training in how to use it appropriately.
Every company with a social media presence should have a policy governing its official website and social media accounts, including identifying those employees authorized to speak on behalf of the company and training them to ensure that private information — whether about employees, business plans or anything else — does not leak out. This is a growing problem because communication on social media is so quick and casual that it often does not get the same attention as a printed marketing piece. It should get more, as it will last virtually forever.
How can you avoid social media pitfalls?
Get expert help drafting your policies. Implement them. Follow them.
Karen C. Lefton is a partner at Brouse McDowell. Reach her at (330) 535-5711, ext. 341 or firstname.lastname@example.org.
For information on Brouse McDowell’s Labor and Employment Group, visit http://www.brouse.com/OurPracticeAreas/tabid/55/MainAreaId/5/Default.aspx.
For a complete bio of Karen C. Lefton, visit http://www.brouse.com/OurAttorneys/AttorneyProfile/tabid/90/aid/252/Default.aspx.
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Over the past year, the National Labor Relations Board (NLRB) has issued a number of directives with the potential to affect many employers across Ohio and the nation.
A common theme from the NLRB has been that employers need to clearly state that work rules do not restrict the legal rights of employees. Examples of NLRB actions include striking down a large retailer’s social media use policy and a car dealership’s rule about being courteous. In both cases, the NLRB ruled that employees could interpret the broad language of employer policies as prohibiting protected discussions about topics such as wages or working
“The board is emphasizing that an indirect violation can occur if, hypothetically, an employee who wants to exercise concerted rights with fellow employees might read a rule as preventing him or her from doing so. You’d have to be thinking of hypotheticals in order to be looking at that as a problem,” says Stephen P. Bond, partner with Brouse McDowell, LPA.
Smart Business spoke with Bond about the NLRB and what companies should do in response to recent rulings.
Are the recent NLRB actions just a concern for employers with unions in place?
No. Under federal law, the focus is on employees’ rights to engage in concerted activities for the purpose of mutual aid or protection. This may exist whether there is a union or not, and the board has the authority to enforce those rights. In fact, the board issued a directive ordering all employers involved in interstate commerce to post a notice to employees informing them of their rights under federal law. But, at this stage, enforcement of that order has been postponed while the courts decide whether the board has the authority to enforce such a requirement.
Why is this happening now?
It is easy to understand that if an employer enforces a work rule that directly prevents an employee from doing something he or she has a right to do, the government would have a problem with that. But, recently, the board has emphasized an interpretation that if an employer adopts a rule that could reasonably be construed as prohibiting legal labor activities, then that also will be prohibited by the board, even if the employer had a legitimate reason for the rule. And the board holds that the ambiguous employer rules — rules that reasonably could be read to have a coercive meaning — are construed against the employer. So, there have been cases cited by the board under this standard where seemingly innocent rules have come under attack.
Can you provide some examples?
In the case of Costco Wholesale Corp., 358 NLRB No. 106 (Sept. 7, 2012), the board had problems with a number of Costco’s employee rules. First, there were rules against unauthorized posting of any materials on company property; discussing private matters of employees, including issues about being off work for various reasons; disclosing sensitive information, including payroll, Social Security numbers and personal health information; and sharing confidential employee information such as addresses and email addresses. The board did not like these rules because they went too far and may have prevented employees from using information in connection with other employees for mutual benefit in ways that are protected.
The board further objected to a company rule prohibiting employees from electronically posting statements that damage the company or damage any person’s reputation. And the board did not like a rule that prevented employees from leaving company premises during the workday without permission. In both respects, the board envisioned possible scenarios in which the employee could interpret these rules as preventing them from proceeding with rights they have under federal law in dealing with their employers.
In Karl Knauz Motors, 358 NLRB 164 (Sept. 28, 2012), the employer had this work rule: Courtesy is the responsibility of every employee. Everyone is expected to be courteous, polite and friendly to our customers, vendors and suppliers, as well as to their fellow employees. No one should be disrespectful or use profanity or any other language that injures the image or reputation of the dealership.
But the board held that an employee could take this to mean he or she could not criticize his or her employer or object to working conditions, even if talking to co-workers, conduct which is allowed under federal law.
What should employers do about this?
First, employers need to be aware of the potential of an employee making a claim that a work rule may be violating employee rights under federal law, even if there is no union.
Second, they should look at existing policies and handbooks with this issue in mind. Particularly, look to see if there are any obvious ways they are running afoul of any of these rulings.
It’s not necessary to change all of your rules, but look at ways the rules can be interpreted and whether they can be clarified to make sure they’re not in violation. The board talks about putting in language that says the intention is not to prevent employees from engaging in their lawful rights. You can use the company’s existing language and put in a disclaimer that might save you from getting into one of these problems.
Stephen P. Bond is a partner with Brouse McDowell, LPA. Reach him at (440) 934-8080 or email@example.com.
It takes time and money to create a document retention plan, but it’s even more costly to wait until litigation is pending to determine how to get needed information.
“The work done on the front-end will help protect the company. It’s not something every company has, but it’s something every company should have,” says Kerri L. Keller, a partner with Brouse McDowell, LPA.
“Companies may shy away from creating a document retention plan because they don’t want to spend the money up front. It can take a lot of time and effort.”
But when one email server could have 30,000 or 40,000 emails, it can be quite expensive to pay someone to sift through everything to find relevant documents.
Smart Business spoke with Keller about the importance of a document retention plan.
What is a document retention plan and why does a business need one?
A document retention plan is a policy that provides for the systematic review, retention and destruction of documents. A business needs one for numerous reasons, but primarily to reduce the cost associated with document production during litigation, assist in complying with laws requiring the preservation of certain documents and to facilitate access to records.
How does a business draft a document retention plan?
First, identify which documents are important. These are usually employment records, accounting and corporate tax records, and legal records, but can also be business-specific documents, such as invoices and order forms. Key documents are often stored on computer hard drives, or consist of things like emails and Web pages.
The next objective is efficiency. It’s not feasible for a company to retain every electronic document and email created, so the key is to have a plan. The policy should also be developed with an eye toward minimizing costs should the company be involved in litigation.
How does the lack of a document retention plan impact a company during litigation?
Electronically stored information is a major contributor to the cost of discovery in litigation. When documents are produced in litigation, they must be reviewed by counsel prior to being presented to the other side. Companies with inefficient policies may have inflated legal costs attributed to this. For example, if there is a lack of a central corporate repository, information can be spread across servers and backup tapes. Duplication increases the time and expense of reviewing documents. If there is a lack of a corporate policy, irrelevant information can be saved, which again, leads to expense in reviewing documents. Likewise, if critical documents are mingled in with less critical documents, or personal documents mixed with business documents, costs in reviewing them can increase. A policy serves the function of mitigating risks, reducing costs and improving access to records.
How does a business implement a document retention plan?
A business must first identify and categorize the universe of documents. It must then consider what categories of documents are essential and relevant. Certain state and federal laws set forth the time that some documents are required to be retained. The policy must enable a business to locate records quickly and effectively, ensure that records can be protected when needed for examination or litigation, and allow for nonselective destruction of documents once retention needs are met. The plan should be reduced to a detailed document and followed.
When a business is sued, or considering a lawsuit, it must implement what is called a ‘litigation hold.’ A litigation hold stops the routine destruction of documents that might contain relevant information. It’s OK for documents to be destroyed in the routine course of business. It is actually preferable, as each unnecessary and obsolete record can be used by an adversary. Records are generally assets only as long as they are needed. Once litigation is threatened, or contemplated, the routine destruction of documents must be stopped. A litigation hold is the process used to advise employees of their obligation to preserve records and suspend the company’s document destruction process.
When and how should a litigation hold be issued?
The duty to preserve arises when a party knows, or reasonably should know, that a suit is about to be filed, when a suit is filed, when a discovery request has been made or when a court issues a discovery order. It can arise before a complaint is filed, such as when a demand letter is sent by an adversary.
The litigation hold notice should be disseminated by either senior management or the company’s legal department. It should be someone who commands the recipient’s attention — not an assistant. It should be sent to all individuals who will be directly involved, such as those who are likely to have relevant documents and knowledge of the facts, as well as any document custodians. The relevant persons must be directly contacted. Both the notice to the recipient as well as the recipient’s acknowledgement of receipt must be documented. The notice must be broad enough to catch all documents, but specific enough to provide guidance.
What are the consequences if the litigation hold is not followed?
The consequences can be severe. Spoliation occurs when documents are destroyed or not preserved in a pending or reasonably foreseeable action. The penalties can include the cost of recreating the information, an instruction at trial that the missing information would have been beneficial to the adverse party, the exclusion of favorable expert testimony, a judgment against the party that spoliated the evidence, monetary sanctions and even criminal sanctions. While it takes work to create a document retention plan, the work is worth the effort.
Kerri L. Keller is a partner with Brouse McDowell, LPA Reach her at (330) 535-5711 or firstname.lastname@example.org.
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Smaller businesses often don’t have the wherewithal to enforce their patent rights because pursuing this type of litigation is very expensive, and they lack the expertise. However, the rise of nonpracticing entities (“NPE”) — organizations that enforce patents against alleged infringers with no intent to manufacture or market the invention — have made this an area that businesses need to take seriously.
“When you are a company that has one or two patents in an area and you’re fighting against an entity with hundreds in that area, it’s difficult to win,” says Michael G. Craig, a patent attorney with Brouse McDowell.
If you don’t have a standalone IP protection program, you’re losing revenue now, have lost it in the past and will continue to do so in the future.
“In the past, people assumed patents were a trophy for smart people to hang on their walls,” he says. “Now companies are monetizing their IP. Studies have shown that some 50 to 60 percent of a company’s worth comes from trademarks alone. These are commodities that need to be monetized. If you don’t have a strategy to do that, you are losing revenue.”
Smart Business spoke with Craig about NPEs and the importance of IP protection strategies.
What is a nonpracticing entity?
There are different types of nonpracticing entities. Generally, NPEs own and enforce patents but don’t intend to manufacture the products or provide the services associated with them. They instead enforce the patent rights in other ways. Some NPEs purchase patents from companies that don’t have the wherewithal to enforce those rights, doing so through licenses or lawsuits against infringers. These are groups created solely to buy up the intellectual property of others and enforce those rights without any other business plan or means of revenue.
Some entities hold defensive patents. Companies can partner with them for protection against lawsuits, and collectively, they become a harder target because they’re part of a group. There is also the purchase of patents for offensive purposes, such as buying patents to take over a segment of the market and force others to leave or enforce their rights.
Patent trolls are another aspect of NPEs. They hold patent rights, wait for someone to monetize the idea and then pounce. EBay’s one-click purchase — which allows buyers to bypass the bidding process and buy the item instantly — was a victim of a patent troll, as was BlackBerry, which had a patent troll sue it for its technology, worth hundreds of millions of dollars.
Why are NPEs significant?
They can drive the way a company’s patent strategy is developed. NPEs don’t have anything to lose when enforcing their rights. When you are sued, you have to allocate resources to defend your rights, which takes money away from your core processes. NPEs’ resources and business models are designed to enforce patents. You need to understand what NPEs are doing because they change the landscape of IP, and you need to develop an R&D strategy to navigate it and determine where you fit in.
You can join an aggregator, which is an NPE that aggregates IP property for the benefit of having safety in numbers. Those that join them can use the IP of others, as well as the aggregator’s resources for protection, offensively or defensively. And because the cost of a lawsuit is so deleterious, most will give up their IP rather than pursue a lawsuit. Also, when you practice in an area, particularly one that utilizes an industry standard, such as wireless networking, there is likely to be an NPE from whom you, or your parts supplier, may need to license the technology.
What can companies do to protect themselves from NPEs?
There is an overarching concern in the industry that there is no protection against an NPE. The reality is, under the current legal system, NPEs are not doing anything wrong. They would say they are just protecting the rights of inventors. IP is actually property that can be bought and sold and infringements against that need to be protected.
Err on the side of overprotection. Managing IP may seem expensive at first, but as far as costs associated with patenting or licensing, in the long run, the payback is tremendous. Further, you need a strategy to deal with NPEs in areas in which you do business, such as licensing agreements and hold harmless agreements.
IP programs should have the use of legal professionals to help them determine what is worthwhile to patent and how to go about it. A lot of companies have brainstorming sessions to come up with a list of ideas of what to patent, then flesh them out and go to their legal professionals with a list of ideas to determine which are worth protecting and the costs to do so.
Also, every company needs to have a strategy on how to protect their IP when certain situations arise, such as a potential infringer or infringement.
What should companies do when they are in a potential infringement situation?
That can be an anxious time, particularly if it is a product that drives your business. Your first call should be to an attorney who specializes in that area to analyze the claim to see if it has merit. They could contact the other party and negotiate because you don’t want to reach litigation. The worst thing you can do is put your head in the sand, because after you have been notified, it becomes willful and the penalties can add up.
You don’t need to reach that point. If a company is unsure of what the next step should be, contact a professional to manage the process. All you need is a little help to point you in the right direction and periodic management from an attorney to help along the way.
Patents are assets that need to be exploited and monetized. The IP landscape is changing, and those who don’t recognize this and look at the other way are going to be left behind.
Michael G. Craig is a patent attorney with the Intellectual Property Group at Brouse McDowell. Reach him at (330) 535-5711 or email@example.com.
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There are many ways that small and medium-sized businesses can find themselves facing financial difficulties that lead to trouble in their commercial lending relationship. When this happens, many times business owners become paralyzed, shutting down and failing to communicate with their lender. While that is understandable, it is the wrong thing to do, says David M. Hunter, chair of the Real Estate Practice Group for Brouse McDowell.
“When a business anticipates that it is entering a period of financial challenge, one of the first things it should do is get competent legal counsel,” says Hunter.
Often, business owners only do this as a last resort. However, retaining knowledgeable counsel early on allows you to obtain practical pointers when there is often greater flexibility to negotiate an agreeable outcome, he says.
“Once a lawsuit is pending, things become much more difficult to negotiate, even with a lawyer involved,” he says.
Smart Business spoke with Hunter about how to work with your bank to preserve good relations during difficult financial times.
When a company realizes it may be headed for financial difficulties, what should it do first?
Small and medium-sized businesses typically have a large file that contains the underlying governing documentation when the business took out the credit facility. In the event that your business is slipping into financial turbulence, locate that file and review the terms and conditions of your loan.
However, most businesspeople are overwhelmed by the paperwork. This is a good reason to get counsel involved early. Your counsel will determine the secured or unsecured position of your lender. If your loan is secured, what are the assets that secure it and what are the current valuations of those assets? Is the loan in default? If not, what is the time period you project you could make the required payments and otherwise adhere to the terms of the loan agreement?
How can an attorney help?
A good attorney either has knowledge to assist a borrower facing a potential loan default or is with a firm with others who have knowledge of the federal bankruptcy law protections or other approaches that would aid a borrower facing an approaching problem.
Once you have secured counsel and discussed the issues, the next step is to contact your lender. Bankers appreciate knowing that a borrower is alert to the problem and wants to collaborate with the bank to address it or explore what remedial options are available.
Business owners often believe that banks want to seize a borrower’s property or shut down a borrower’s business. No bank really wants to do that. If it is reasonably achievable, banks want to rehabilitate nonperforming loans and transform them back into performing loans that pay as agreed. They want to lend money to borrowers that use loan proceeds effectively and to create an improved economic performance for the borrower, which will allow the borrower to repay the loan.
Are there risks in alerting a bank of a potential missed payment?
Some businesses, regardless of efforts taken to head off financial difficulties, can face a situation in which the next loan payment might be missed. No bank will think unkindly of a call from a borrower saying an upcoming payment might not be paid timely. Some borrowers might worry that if a bank finds out about a potential missed payment, an awful consequence will be triggered. But if that is the impulsive reaction you receive from the bank, you are likely dealing with the wrong bank.
However, after 90 days of delinquency, the loan will likely go into a nonaccrual status — a consequence which immediately and negatively impacts the bank’s earnings. This is a more serious situation. If you alert your bank early enough, it will likely work with you to find a solution. But it gets more difficult to take these steps the longer a borrower waits.
At what point does this become a legal issue?
There are legal issues every step of the way. But these become more acute when the evolving facts empower a lender to take steps that can disrupt a borrower’s business. Many loans contain a cognovit provision, a tool a bank can use if a loan is in default. This authorizes a bank to obtain an expedited judgment against a borrower. This expedited judgment can quickly empower the bank to attach the bank accounts or levy upon the assets of its debtor.
It’s important to communicate with your bank before such a provision is implemented in an effort to find a way to augment the terms and conditions of the loan to give the borrower a window of opportunity to make payments. This often leads to the creation of a forbearance agreement — a mutually agreeable written understanding between the bank and its borrower as to how the parties will treat this troubled loan. Forbearance agreements customarily provide that as long as the borrower adheres to the agreement, the bank will refrain from pursuing certain remedies, such as obtaining or enforcing a cognovit judgment.
Preservation of value should be paramount for both the borrower and the bank. Under potential default circumstances, borrowers and banks can do things that can negatively impact a business’s value, and banks know that. If a bank acts aggressively to prompt a forced sale of assets, often the value realized when the assets are sold will be reduced.
Before a borrower gets to that point, the borrower would be well advised to work with a lawyer and devise a strategy to deal with the situation. Often, the owner and lawyer can come up with a plan of payment and present it to the lender. If the plan is reasonable, many times the lender will be receptive.
What are some other potential resolutions?
There is often relief available in bankruptcy. But its practical effectiveness hinges on the size of the company, as the pursuit of such a remedy can often be cost prohibitive. Chapter 11 cases, for example, can come at a high cost and be labor intensive. But a Chapter 11 filing can make sense in certain circumstances.
David M. Hunter is chair of the Real Estate Practice Group for Brouse McDowell. Reach him at (330) 535-5711, ext. 262, or firstname.lastname@example.org.
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The constitutionality of the Affordable Care Act was upheld recently by the U.S. Supreme Court, defining and solidifying many legal obligations employers have when it comes to health care coverage for employees.
“The crux of the Affordable Care Act is to make ‘minimal essential coverage’ more available,” says Christopher J. Carney, chair of the Labor and Employment Practice Group at Brouse McDowell. To achieve this, the Act contains provisions referred to as the ‘employer mandate’ or ‘play or pay.’
However, he says the Act does not require employers to provide minimal essential coverage.
“It is more accurate to state that the Act requires employers that meet a certain minimum employee threshold to make available minimal essential coverage or pay a penalty for failing to do so,” says Carney.
Smart Business spoke with Carney about some of the law’s caveats and what employers need to know in order to become compliant.
How does the law impact employers of various sizes?
The employer mandate provides that ‘large’ employers, or those with 50 or more full-time employees, are required to offer full-time employees health coverage effective Jan. 1, 2014. Businesses with fewer than 100 employees will also be eligible to shop for plans in health benefit exchanges that each state is required to establish as part of the Act.
What are the consequences of noncompliance?
Starting in 2014, large employers will be assessed an annual fee of $2,000 per full-time employee — in excess of 30 employees — if any full-time employee is not offered coverage and enrolls in and receives an income-based tax credit to participate in an insurance exchange. For example, assuming at least one employee satisfies the tax credit requirement, a business with 51 full-time employees that does not offer coverage must pay a monthly penalty of 21 (51 total employees minus 30) times the per-employee penalty amount, i.e., one-twelfth of the annual $2,000 per full-time employee. For purposes of the Act, a full-time employee is one employed at least 30 hours per week on average.
Furthermore, if an employee opts out of an employer’s health plan — either because the employee’s share of the premium would exceed 9.5 percent of his or her income, or because the employer’s or insurer’s share of the total cost of benefits is less than 60 percent and the employee obtains a tax credit for coverage in a health insurance exchange — the employer is also subject to a penalty.
Under these circumstances, the employer must pay a monthly penalty of one-twelfth of $3,000 multiplied by the total number of full time employees who obtain the income-based tax credit for that month. This penalty is capped at one-twelfth of $2,000, multiplied by the total number of full-time employees.
How do the state exchanges come into play?
The Act provides for government-run health benefit exchanges from which individuals and employers with fewer than 100 employees can purchase insurance. Plans in the exchanges will be required to offer four levels of coverage that vary based upon factors such as premiums and out-of-pocket costs. Premium and cost-sharing subsidies will be available for low-income families.
Each state is required to have its own health benefit exchange. If a state chooses not to create its own health benefit exchange, then one will be set up by the federal government. Ohio Gov. John Kasich says the state will not create its own and will rely upon the federal government’s health benefit exchange.
Considering the efforts to derail the Act, what would you advise an employer to do?
Employers should continue with their efforts to comply with the Act’s requirements and some provisions need immediate attention. For example, employers and insurers must provide a Summary of Benefits and Coverage for the open enrollment period beginning on or after Sept. 23, 2012. The SBC is similar to, but does not supplant, the Employee Retirement Income Security Act’s Summary Plan Description. If an employer’s SBC fails to satisfy the requirements of the Act, then the employer is subject to a penalty of $1,000 per failure, per participant. Another example is that the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 for 2012 and going forward.
I would not expect a repeal of this law any time soon. Therefore, employers should determine the extent to which the new rules apply. Because the Act does not apply uniformly, an employer should review the law to identify which requirements apply and the compliance deadlines corresponding to each requirement.
When must employers come into compliance with the law?
The Act was passed on March 30, 2010, and not all changes set forth were imposed immediately. Generally, the provisions that were not controversial went into effect first. The provision prohibiting health plans from denying coverage or limiting benefits for children under the age of 19 because the child has a pre-existing condition went into effect immediately. But the ‘play or pay’ provisions for employers go into effect after Dec. 31, 2013.
What can legal counsel offer as employers look to come into compliance with the law?
Particularly when an employer is close to the 50-employee threshold limit, legal counsel can be helpful in identifying and analyzing employer options and obligations. The ‘play or pay’ regulations have not even been promulgated yet, but expect them to be complicated. Issues that will likely require the assistance of counsel include how to account for independent contractors to whom employee functions have been outsourced and whether common ownership of business would require the aggregation of employees.
Christopher J. Carney is Chair of the Labor and Employment Practice Group at Brouse McDowell. Reach him at (216) 830-6825 or email@example.com.
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