Ohio’s shale gas region has slated capital projects valued at more than $12 billion, with the industry expected to add 66,000 jobs and $5 billion annually to the state economy starting this year, according to economists at Cleveland State University.

More than 3 million acres have been leased for drilling, with gas and oil companies pouring nearly $7.5 billion in bank accounts for the right to drill. The oil and gas industry, and the legal issues surrounding it, are going to have a profound economic impact on Ohio.

That activity has led to disputes about ownership of oil, gas, and mineral interests.

“There’s a developing area of law regarding the Dormant Mineral Act of 1989, which was amended in 2006,” says Christopher F. Swing, a partner at Brouse McDowell, with more than 22 years of experience in real estate law and litigation, focusing on title, land, mineral interests, and oil and gas disputes.

Smart Business spoke with Swing about the Dormant Mineral Act and how courts are addressing it in cases involving ownership.

What is the Dormant Mineral Act, and how was it changed in 2006?

Ohio’s Dormant Mineral Act operates to ‘abandon’ sub-surface mineral rights, in favor of the surface owner, in instances where the surface and sub-surface rights previously were severed. Under the 1989 version of the statute, as originally enacted, owners of oil, gas and mineral interests must take some action to enforce or preserve those rights within a 20-year period, or the interests may be deemed abandoned. Under the 1989 version, therefore, abandonment may occur based upon nonuse alone. The 2006 amendment, on the other hand, requires notice to potential mineral rights owners, and a mechanism for recording notices and affidavits, so that a potential mineral interests’ owner first is made aware of any intent to declare those interests abandoned.

Two predominant issues have emerged, creating uncertainty in the statute’s interpretation and application: first, which version of the statute applies in a given set of circumstances? And second, is the 20-year window ‘static’ or ‘rolling’? For example, there is case law that says you need not apply the 2006 version of the statute (provide notice, among other things) if the mineral interests already may be deemed abandoned, based upon nonuse alone, under the 1989 version.

How have courts applied the legislation?

Although cases have interpreted and applied the legislation differently, the case that appears to most thoroughly explain the proper public policy and legislative rationale, in both interpreting and applying both versions of the statute, is a case decided last fall in Carroll County, Dahlgren v. Brown Farm Properties. In Dahlgren, the Honorable Judge Richard M. Markus ruled that, under the 1989 version of the statute, an actual abandonment claim, based upon nonuse alone, must be made prior to the effective date of the 2006 amendment for the mineral rights to be declared abandoned under a static 20-year look-back period contained in the 1989 legislation. Markus applied the 2006 version of the statute, because there was no actual claimed abandonment prior to the 2006 enactment, notwithstanding the undisputed nonuse of the mineral rights in the preceding 20 years.

Markus also found that, unlike the 1989 version, the 2006 amendment contemplates a rolling 20-year savings window, calculated from the date the mineral rights owner receives notice of intent to declare those rights abandoned. Interestingly, he adopted the nonuse feature in the original act, and the notice and recording features in the amendment, suggesting their combination would pass federal constitutional due process scrutiny.

While the case is on appeal, what makes the opinion potentially attractive, ultimately, to the Ohio Supreme Court is that the judge accounted for the need to have an effective means of clearing land title (so as to encourage the development of these natural resources), employing an interpretation and application of the statute that addresses three key issues: nonuse, recording and constitutionality.

Christopher F. Swing, Esq., is a partner at Brouse McDowell. Reach him at (330) 535-5711 or cswing@brouse.com.

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The JOBS Act, passed in 2012, changed rules to make it easier for small businesses to secure funding from investors.

“The Securities and Exchange Commission actually has three initiatives related to the JOBS Act. Crowdfunding has received most of the attention, but the SEC also amended Regulation D to allow small businesses to use general advertising and offers the Regulation A option, which is sort of a mini registration,” says James S. Hogg, a partner at Brouse McDowell.

Smart Business spoke with Hogg about how these JOBS Act options work and what they offer small businesses looking to raise funds.

What has changed with the amendment to Regulation D?

In the past, a private placement had to be done without general advertising, so you would either use a broker to find wealthy investors or you would find them; it was more or less word of mouth. Once you found investors, you would do a conventional private placement.

According to the SEC, $900 billion was raised that way in 2012. Of that, about $8 billion was raised in offerings of less than $5 million each. The amended regulations are intended to allow more small businesses to participate by expanding the pool of investors they can reach. But when you use general solicitation — Internet, newspapers, radio — you can only sell to accredited investors and there are more rigorous procedures to follow to ensure buyers are accredited.

To be accredited, an investor must have a net worth of $1 million or annual income of $200,000. You can still raise funds the old way under Regulation D, which allows for up to 35 non-accredited investors and an unlimited number of accredited investors. But if you use general solicitation, all investors must be accredited.

How can small businesses use crowdfunding?

Nothing is set until the SEC adopts final rules, but based on the proposal, companies are limited to raising $1 million in a 12-month period.

Crowdfunding has hit a couple of snags. One involves regulation; the proposal doesn’t allow for state regulation and some regulators would like to see more safeguards, while other people want to get money to small businesses as quickly as possible.

The SEC proposal requires use of a funding portal such as Kickstarter or Indiegogo and limits purchasers — a person with net worth of less than $100,000 can’t spend more than $2,000 or 5 percent of their net worth a year, and someone with a net worth of more than $100,000 is restricted to 10 percent of their net worth.

Crowdfunding would also require annual reports, although they would be basic — including financial statements that may have to be reviewed by a CPA firm, and if the amount raised was more than $500,000, you would also need an audit. As proposed, the rules might make crowdfunding unattractive. I’m sure that’s part of the comments the SEC is wrestling with.

What is happening with Regulation A offerings?

Historically, if you did a Regulation A offering, which is like a mini registration, it would not be given an exemption from state registration. As a result, only 0.2 percent of offerings under $5 million used Regulation A.

The SEC has made it a two-tier system by adding a new rule that allows an exemption from state securities law registration. You can still raise money the old way, but if you elect to do so under the new rule, there are reporting requirements in return for the state law exemption. The maximum amount that can be raised would also increase from $5 million to $50 million.

This is still in the proposal stage, and comments are being accepted through March 24.

How do businesses decide what route to take?

If you’re really small and raising funds entirely in Ohio, you can sell to up to 10 investors without any filings, but make sure you meet the requirements for this exemption. Most companies with larger offerings will probably continue to opt for Regulation D, but when the regulations are finalized they may consider crowdfunding or Regulation A if those are exempt from state securities registration.

James S. Hogg is a partner at Brouse McDowell. Reach him at (330) 434-4106 or jsh@brouse.com.

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The environmental due diligence process can be time-consuming, which is why buyers should get started early when entering into negotiations to purchase property.

“Depending on when environmental due diligence begins, environmental issues might not be discovered until close to the end of the deal. That could result in a transaction not closing for months after initially planned, which was the case in a matter we had this year,” says Meagan Moore, a partner at Brouse McDowell. “Be ready to begin a Phase 1 assessment when you initiate discussions regarding a purchase.”

Smart Business spoke with Moore about Phase 1 and Phase 2 environmental assessments, and the protections they provide buyers regarding potential liability related to contamination.

What is the first step in the environmental due diligence process?

Hire an environmental consultant to perform a Phase 1 study. That will give you a better understanding about the property. Because of the way certain environmental regulations are written, even a purchaser that has no culpability for what is on the property could be responsible for cleanup costs. Therefore, it’s best to know what you’re getting in advance so you can plan for it during the transaction.

Phase 1 is a report intended to identify potential environmental issues associated with the presence of hazardous substances or petroleum products on a property. It involves a review of federal, state and local records, government databases, interviews with people familiar with the property and an on-site inspection by the environmental consultant. The review provides an overview of the property’s history and whether there is any information or visible signs of a release or contamination on the property.

Some sellers may conduct a Phase 1 study in order to expedite the transaction. It is important to note that Phase 1 is only valid for 180 days and typically the environmental consultant must grant third parties authority to rely on the report.

There are some environmental issues that the Phase 1 investigation does not cover, including whether the property has wetlands or the building contains asbestos. Those can be added to the scope of a Phase 1 if a buyer envisions potential issues with a property. Any documented or visible signs of contamination noted in the Phase 1 are considered a recognized environmental condition (REC).

If the Phase 1 report includes a REC, what should a potential buyer do next?

A Phase 2 assessment should be conducted, which typically involves a subsurface investigation. Soil and groundwater samples are taken for lab analysis to determine if there is hazardous material present. It’s not going to delineate the extent of the contamination, but it will confirm or deny the presence of hazardous materials.

If the contamination is confirmed, you’ll have to determine how it should be addressed — whether remediation should be done or if the material can be left in place.

All these concerns can be factored into the negotiation process with the seller. You could include indemnity agreements with the seller and establish an environmental escrow account to pay for any issues that arise.

Do any former uses require a different approach?

A Phase 1 assessment should be done for any industrial or commercial property. But you definitely need an assessment if there was a gas station, dry cleaner, auto repair shop or industrial use of the site. Phase 1 assessment requirements are the same no matter what type of business; it doesn’t matter if it was a textile plant or gas station. But if you’re looking at a property that had historical operations that could have led to contamination, a Phase 1 assessment is necessary to determine the condition of the property so you’re aware of what you’re buying. As a buyer, you want to know everything upfront so that can be a part of the negotiations and you can limit your liability.

Meagan Moore is a partner in the Environmental Practice Group at Brouse McDowell. Reach her at (216) 830-6822 or mmoore@brouse.com.

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Benjamin Franklin once stated, “In this world nothing can be said to be certain except death and taxes.” If he were alive today, he might include on his list of certainties an annual increase in health care costs for employers and employees.

Smart Business spoke with Jonathan L. Stark, a partner at Brouse McDowell, regarding the increased attention employers are giving to instituting wellness programs to combat spiraling health care costs and the potential issues that may arise when employers structure such programs.

Can employees be required to participate in a wellness program?

Yes, employers can institute mandatory wellness plans, but such plans cannot discriminate against plan participants or beneficiaries based upon eligibility, benefits, or premiums because of a ‘health factor,’ or violate other laws.

Health factors include a participant’s physical and mental illness, claims experience, medical history and genetic information. Discounted insurance premiums or rebates of deductibles or co-payments if the participant abides by health promotion or disease prevention programs are allowed.

What significant changes have the final wellness regulations generated?

The final rules, effective Jan. 1, 2014, implement a change in the Affordable Care Act that increases the maximum award allowed under a wellness program from 20 percent of the total cost of health care coverage (employee and employer cost) to 30 percent. The maximum reward can be 50 percent for wellness programs that prevent or reduce tobacco use. Also, the definition of a ‘participatory’ program has changed slightly. Previously, a program, such as a walking program, was participatory, but now it falls within the category of an ‘activity-only’ program which must offer the five wellness program requirements. Now, participatory programs are more passive, such as attending health education seminars or receiving reimbursement for purchasing a gym membership.

Can a wellness program dictate that employees not use tobacco?

A wellness program can condition rewards on a participant’s non-use of tobacco. However, employers should be aware that some states have laws that protect employees engaging in lawful conduct during off-duty hours, including protections for tobacco use.

If a program offers rewards to participants for achieving a health outcome, what problems could arise?

Employers should be careful in requiring participants to achieve any specific health outcome (e.g., specific cholesterol level or body mass index) to avoid issues in which health factors may lead to discrimination based on health status, genetic information, medical conditions and disabilities. If a specific target is used to measure compliance in a wellness program, or if a certain activity is required, there should be a reasonable alternative standard for a participant who may find the standard difficult to meet due to a medical condition or if the participant’s doctor advises the participant that satisfying the standard is too risky. An option to waive the standard must also be offered.

All outcome-based and activity-only wellness programs must meet the following five requirements:

  • Eligible individuals must have the opportunity once a year to earn health-contingent awards.
  • Available awards must not exceed 30 percent of total health plan coverage costs, however, if there are tobacco cessation rewards, those rewards may increase the reward limit to 50 percent.
  • Programs must be ‘reasonably designed’ to promote health or prevent disease.
  • Plan information must describe how the reward is earned and offer reasonable alternative means to obtain the reward.
  • Participants must have the opportunity to earn the reward. Activity-only programs must offer a waiver of the requirement or a reasonable alternative to the initial standard if an individual’s medical condition makes it unreasonably difficult or medically inadvisable to achieve the initial standard. And outcome-based programs must offer a waiver or reasonable alternative to every participant.

Jonathan L. Stark is a partner at Brouse McDowell. Reach him at (216) 830-6814 or JStark@brouse.com.

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It used to be that buyers would send out purchase orders with standard terms and conditions, and sellers would ship the product with invoices containing their own conditions. Now that more business is conducted online, conditions are agreed to by click-wrap — clicking a box to accept the terms of the website.

That causes problems when employees wind up agreeing to terms that greatly benefit the seller or supplier to the detriment of the purchaser, says Todd C. Baumgartner, a partner at Brouse McDowell.

“For whatever reason — it might be psychological — there is a lot less negotiation with terms and conditions on websites. It’s important to know what you’re agreeing to, and negotiate if you need to protect your interests,” Baumgartner says.

Smart Business spoke with Baumgartner about how to handle click-wrap agreements and potential problems when they’re agreed to without proper review.

How are differences resolved when buyers and sellers have different terms?

The Uniform Commercial Code has standard rules to follow when that happens. But what’s occurring now is that, General Electric, for example, uses a website instead of putting terms and conditions on the back of invoices. There is no paper going back and forth. GE has the clout to pull that off — companies will just accept the terms in order to be GE’s supplier. But you can negotiate terms and conditions on websites.

A 2002 case, I.Lan Systems Inc. v. Netscout Service Level Corp., demonstrates what can happen with these click-wrap contracts. The buyer, I.Lan Systems, negotiated an extensive software license agreement with all sorts of protections. However, whenever there was an update to the software, it was downloaded from a website by the IT department. Every time that happened, they downloaded a new license agreement that voided the prior one. The new agreements were skewed in favor of the software company, stating that it was not responsible if the software crashed the computer system. When that happened, there was fairly extensive damage, but the court ruled the software company was only liable for the original purchase price.

It’s critical that companies understand every time an IT employee clicks these buttons, they’re getting a new software licensing agreement whether they realize it or not.

What’s the best way to deal with click-wrap agreements?

Don’t just click boxes. Have the head of the IT department review everything, and set up a policy in-house with appropriate procedures so these matters are presented to the right decision-makers.

If there’s something in the agreement that’s not acceptable, depending on your leverage, you can tell the software company you’re not doing click-wrap updates or negotiate an agreement covering the updates.

Click-wrap agreements are not necessarily a bad thing for the buyer or seller, but it’s important that it’s mentioned in bold at the bottom of your invoice or purchase order that the terms are on the website. The seller also needs to keep track of the terms and conditions it had. Then, if a company comes back later and claims it didn’t understand the terms, or didn’t know what was agreed to, sellers can produce what was on the website two years ago.

What sort of problems can arise years later?

Many times disputes are about specifications that the product was supposed to meet, and if it didn’t meet those specifications, what damages might be involved. As a supplier, you want to limit your consequential damages to replacing the product. A buyer will argue that it lost revenue as a result of the defective product. If the agreement doesn’t have the proper damage limitation, it’s going to be a problem for the supplier.

Are purchase agreements done differently online?

Essentially they’re set up the same way; it’s just that people are less likely to negotiate something that’s on their computer screen. Companies will still ask for changes to terms and conditions on a website, but the number of requests for changes drops substantially. Everyone’s classically conditioned to review a contract in Microsoft Word line-by-line; as businesspeople we’re still catching up with the fact that websites can be changed.

Todd C. Baumgartner is a partner at Brouse McDowell. Reach him at (440) 934-8113 or tcb@brouse.com.

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As we emerge from the worst recession in memory, employers are cautiously rebuilding their workforces. Many long-term unemployed are starting to get interviews and offers, and some are seeing a new wrinkle: credit background checks.

Those checks might unearth financial problems that would cause an employer to reject a candidate. But beware of the Fair Credit Reporting Act (FCRA), the Consumer Credit Reporting Reform Act and additional state laws.

It is important to protect the company’s bank account by ensuring that access is limited to those who can be trusted. So how can you tell for sure? While there is no fail-safe guarantee, credit background checks can raise red flags early in the process.

“The wisest course for employers is to make the best hires they can, using all of the legitimate, nondiscriminatory information accessible to them within the law,” says Karen C. Lefton, a partner in the Labor & Employment group at Brouse McDowell.

Smart Business spoke with Lefton about her recommendations on conducting credit background checks.

What steps should a company take as it makes hiring decisions?

1) Get the candidate’s consent for the credit check in advance and in writing. Work with your attorney to create a clear consent form. It should state that the candidate acknowledges and agrees that the consumer-reporting agency will furnish a report to the employer, and that the employer intends to use the information for employment purposes.

2) Engage a reputable consumer-reporting agency, one well versed in the limitations of the FCRA, to conduct the review.

3) Provide the agency with reasonable criteria for its review, such as verification of the applicant’s Social Security number, balances totaling $2,000 or more that are at least 60 days past due, lack of credit, current garnishments on earnings, overdue child support or other outstanding collections of $2,000 or more.

4) Make sure the report is limited to the criteria sought. If the search turns up information that the employer should not know about — the candidate’s disabled child, for example — that information should be withheld to insulate the employer from any allegation of discrimination in the hiring process.

5) Before taking adverse action, provide the candidate with written notice that a copy of the report is available, as is a summary of his or her rights under the FCRA.

Keep in mind that errors occur. The ‘John Smith’ applying for a job may not be the same ‘John Smith’ with a horrendous credit history. Fairness requires that all candidates be given the opportunity to contest black marks. Only then can you ensure that hiring decisions are based on bona fide qualifications, or the lack there of. The hiring decision should be based largely on whether there is increased company risk, whether that risk is outweighed by the benefit of the candidate’s other credentials and the specific access his or her new position gives him or her to company funds.

Can credit checks be used as a basis to not hire or promote someone?

Yes, if you have followed the steps outlined. You are not required to hire a CFO mired in debt to collect your receivables or to pay your bills. Further, the FCRA does not distinguish between job candidates and current employees, meaning that consumer reports may be used to evaluate a person for promotion, reassignment or retention. But, again, employees must give conspicuous consent to the performance of credit checks.
 
What should be part of a background check, and does it vary by position?

Good credit and sound financial history are absolutely essential when an employee has access to money, whether yours or a customer’s. And don’t be lax because the sums aren’t huge. A local library employee, fired after $350,000 was discovered missing, goes on trial for aggravated theft later this month, accused of stealing nickels and dimes regularly over six years. Criminal background and driving records also might be relevant. A history of violence or criminal behavior are disqualifying for employees working in secluded areas with customers or in the customers’ homes. A bad driving record can knock out a delivery position candidate. Employers must be vigilant to avoid putting customers, co-workers or the public in peril due to bad hiring decisions.

Karen C. Lefton is a partner in the Labor & Employment practice group at Brouse McDowell. Reach her at (330) 535-5711 or klefton@brouse.com.

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Businesses and individuals managing employee retirement plans need to understand their Employee Retirement Income Security Act of 1974 (ERISA) obligations and the liabilities associated with plan mismanagement.

“Plan fiduciaries must act prudently. They must do things such as diversifying investments to minimize risk, and they must always act in accordance with plan documents, as long as those plan documents comply with ERISA,” says Kerri L. Keller, a partner at Brouse McDowell.

“There are certain actions that plan fiduciaries must never do. These include using plan assets for personal gain or for business purposes,” she says.

Smart Business spoke with Keller about the role of a plan fiduciary and how to comply with ERISA requirements.

Who is a plan fiduciary?

A plan fiduciary can be any business or individual who exercises discretion, control or authority with respect to plan management. It can also be any business or individual who manages plan assets or exercises discretion or control with respect to the disposition of plan assets. An ERISA fiduciary also can be those businesses or individuals who provide investment advice to a plan, or are responsible for plan administration.

Examples of plan fiduciaries are the named fiduciary or plan administrator, such as the employer or plan sponsor. But sometimes third-party service providers, investment managers and advisers, insurance brokers, and officers of the employer or plan sponsor can be deemed plan fiduciaries.

What are the responsibilities of a fiduciary?

Every plan fiduciary has a duty of loyalty, a duty of prudence, a duty to diversify and a duty to act in accordance with the plan documents. Plan fiduciaries should know that they could incur personal liability for breaching any of their ERISA-imposed responsibilities, obligations or duties.

This personal liability can require a plan fiduciary to pay back to the plan any losses that result from a breach of fiduciary duties, and to give back any profits that the fiduciary may have made from using plan assets. Fiduciaries must act solely in the interest of the plan participants, and for the exclusive purpose of providing plan benefits and defraying reasonable plan expenses.

Are all employer actions considered fiduciary actions?

No. Certain business actions are not considered fiduciary actions, such as the employer’s decision to establish a plan, what features to include, and the decision to amend or terminate a plan. In other words, when an employer acts on behalf of its business, it is generally not acting in its capacity as a plan fiduciary.

However, actions taken to implement these decisions can transform a business or individual into a plan fiduciary. Fiduciary actions generally include exercising discretionary functions over the management of a plan and its assets.

What are the obligations and liabilities associated with plan mismanagement?

For starters, ERISA fiduciaries can be liable — even personally — for breaching any of the responsibilities, obligations or duties imposed by ERISA. If a fiduciary breaches a duty to the plan, he or she may be required to personally pay back any losses to the plan and restore any profits made by the use of plan assets. A court also can order any other relief that it deems appropriate.

What would be an example of a breach?

A breach would occur if a business owner used plan assets to finance a purchase of equipment to open a new division. The business — and the owner in his or her personal capacity — would likely be required to pay the plan back and disgorge any profits that were made by the improper use of the plan’s assets. As previously stated, a plan fiduciary must act in the best interest of the plan and its participants — not in the best interest of the employer or owner.

The IRS, the Department of Labor, and the Department of Justice all have a role in ERISA oversight. These are the agencies that will generally perform compliance investigations and enforce penalties against the plan or plan fiduciaries.

Kerri L. Keller is a partner at Brouse McDowell. Reach her at (330) 535-5711, ext. 257 or kkeller@brouse.com.

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Traditionally, businesses protect their intellectual property (IP) with patents and trademarks. These patents are generally utility patents, which protect the function or use of a product. Trademarks protect the name or logo under which a product or service is sold. 

A more meaningful protection for businesses could include design patents and trade dress, says Barry A. Winkler, an attorney in the Intellectual Property Group at Brouse McDowell.

“These protections are issued much more quickly and with far less expense than utility patent applications. Design patents protect the decorative appearance of a product. Trade dress can protect the product packaging or product configuration,” Winkler says.

“For example, Volkswagen protected the shape of the Beetle and Apple protected the shape of the iPod by using both a design patent and trade dress. While using either a design patent or trade dress alone will provide some protection for the appearance of a product, using both provides even broader protection.”

Smart Business spoke with Winkler and Jennifer L. Hanzlicek, an attorney in the Intellectual Property Group at Brouse McDowell, about how design patents and trade dress can address areas of IP that are often overlooked.

What are the key differences between design patents and trade dress?

Although there is some overlap between design patents and trade dress, there are differences in the scope, timing and duration of the protection provided. A design patent protects a product’s appearance no matter what the product does, whereas trade dress protects the appearance only for the specific goods and services represented by the product.

As for timing, a design patent can be filed and issued before the product is used or even manufactured. Trade dress cannot be registered until the product is in use. Currently, a design patent is in force for 14 years after it is granted, but trade dress can last indefinitely as long as it continues to be used with its specific goods and services. 

Design patents and trade dress can also protect virtual designs that exist in cyberspace, including the color scheme. Design patents protect Google’s teardrop-shaped marker icon on its maps, Samsung’s app icons and Nike’s animated user interface. Apple’s graphical user interface for the iPhone is protected by both a design patent and trade dress registration.

Should you seek both design patents and trade dress protection?

The benefits of using both design patents and trade dress can be demonstrated in the life cycle of a product.

When the design of a new product is complete, you can apply for a design patent to protect the ornamental design before you launch your product. The design patent protects your design for several years as you begin to manufacture and sell your product. Simultaneously, you can apply for trade dress protection for a product’s unique product configuration or product packaging. The trade dress protection then extends beyond the life of the design patent and continues until you cease selling the product.

The number of design patent applications continues to rise as businesses realize the benefit of protecting their product designs. In recent years, design patents have been more aggressively asserted by manufacturers in place of or alongside trade dress claims, including the recent Apple v. Samsung disputes. 

Business owners could be foregoing meaningful protection by failing to pursue design patents and trade dress registrations. Taking these measures can offer increased IP protection, keeping competitors from copying the design and appearance of your products and product packaging. When used together, this powerful combination can provide armor for your product, from the finished design through manufacturing and launch, and continuing with sales until the product is no longer in demand.

Barry A. Winkler is an attorney at Brouse McDowell. Reach him at (330) 535-5711, ext. 358 or bwinkler@brouse.com.

Jennifer L. Hanzlicek is an attorney at Brouse McDowell. Reach her at (330) 535-5711, ext. 364 or jhanzlicek@brouse.com.

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If your business has a loan, your lender might classify it as “troubled” without your knowledge.

“You may still be dealing with a credit officer, but that person is being coached by a workout specialist while you remain unaware,” says Suzana K. Koch, a partner at Brouse McDowell.

Smart Business spoke with Koch and Alan M. Koschik, a partner at Brouse McDowell, about how the business/lender relationship has changed.

How did lenders previously handle missed payments or other problems, and what has changed?

Prior to the Great Recession, lenders would contact borrowers that experienced trouble, such as missing a payment, being out of formula on covenants or experiencing decreased sales, to schedule a meeting to discuss the default. At that time, banks typically referred troubled loans to the special assets or workout department. The bank would assign a workout officer to maximize value by liquidating collateral or other means. The borrower might not always work out troubled loans to its satisfaction, but at least it knew that its banking relationship had changed.

This clear transition to workout is no longer as common. Traditional lenders now assign workout officers to shadow credit personnel on loans classified as troubled without the borrower’s knowledge. Participants in this process, such as accountants and bankers, report that they are frequently avoiding the borrower’s attorneys.

The borrower often is unaware that the banking relationship has changed. Previously, borrowers received a default letter and a workout officer was assigned to them when they were transferred to special assets. Now, borrowers find themselves talking to their original loan officers, who may cajole them by saying, ‘You’re a little out of formula, so let’s see what we can do to revise the loan documents.’ In this common scenario, the borrower negotiates without representation, unaware that the ground rules of the relationship have changed.

Why is this occurring?

Lenders prefer that borrowers not have counsel advising them of their rights. It is much cheaper for the bank, and it receives much better workout terms if the process does not involve the borrower’s legal counsel. A sophisticated attorney representing the borrower would know about the various options that are available and when the lender is asking for more than it should.

Frequently, lenders ask borrowers to waive rights, offer additional collateral and provide personal guaranties. In exchange for these concessions, borrowers often receive meager benefits such as short-term extensions of maturity or standstill periods. With counsel, borrowers would often be able to obtain more favorable terms in these workout negotiations.

Is this practice widespread?

This pattern appears to be happening with most of the region’s banks as a result of the Great Recession. In shoring up workout departments, banks enlisted bankers from other areas to help with troubled loans. As a result, more bankers are now familiar with the workout process. With the easing of the recession, workout departments are shrinking and those bankers are returning to their traditional jobs. However, the effect of this temporary reassignment is that front-end bankers are more comfortable doing the workouts themselves.

What can you do to protect your business?

Borrowers should be cognizant of their loan terms, including their loans’ financial covenants and reporting requirements, and any possible defaults of these provisions. Despite this vigilance, a default may become inevitable, even if they are only technical defaults.

If you are concerned that you are out of compliance on your covenants, or if you miss a loan payment, contact a workout attorney immediately. Communication with your bank is also important. However, if you are negotiating with your lender, you need representation, preferably from the beginning of the process.

Suzana K. Koch is a partner at Brouse McDowell. Reach her at (330) 434-4632 or skoch@brouse.com.

Alan M. Koschik is a partner at Brouse McDowell. Reach him at (216) 830-6804 or akoschik@brouse.com.

Follow up: For more information on lender negotiations, contact Suzana K. Koch or Alan M. Koschik. 

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Published in Akron/Canton

Federal and state laws generally require that employees are paid minimum wage, as well as overtime compensation when they work more than 40 hours in a week. Many white-collar workers are exempt from these rules, but employers need to be careful about how they classify employees.

“There is no system to ask the federal government if a certain position is exempt. So, employers need to make educated guesses about the duties of a particular job and, based on language in the regulations, decide if that position is exempt,” says Stephen P. Bond, a partner at Brouse McDowell.

Smart Business spoke with Bond about how to properly classify employees as exempt or nonexempt, and the risks involved with improper classification.

Does paying a salary mean a position is exempt?

No, although that’s a common misconception among employers. The first test is that the salary must be at least $23,660. Then, the employee’s job duties — not title —must also fall under one of the exemptions in the regulations. The title doesn’t matter because it doesn’t necessarily mean the same thing at different companies.

What job duties can be exempted?

There are three main exemptions:

?  Executive — Exactly what it sounds like: primarily being the head of a business or a department, and supervising other employees.

?  Administrative — White-collar, management-level worker whose job involves discretion or independent judgment. Clerical work wouldn’t qualify because it isn’t directly related to management of the business operations.

?  Professional — This is the most ambiguous area. It requires that the worker have special knowledge or expertise, typically based on a college degree. However, a college degree doesn’t necessarily make a person exempt.

There also are exemptions for certain duties in the computer field and outside sales, as well as one that covers any employee making $100,000 who regularly performs at least one of the duties of an executive, administrative or professional employee.

How can an employer lose an exemption?

One way is by not being consistent about paying the employee a salary. If you dock someone for missing part of a day, that demonstrates that he or she was not really a salary employee, and cannot be exempt.

However, there is a separate provision that applies if an exempt employee is off work for Family and Medical Leave Act purposes, and allows for deductions that do not affect exempt status.

What are the penalties for incorrect classification?

If an employee’s claim is deemed correct and an exemption did not apply, he or she may be able to claim unpaid overtime for the past two years, as well as collect damages and attorney fees. A disgruntled employee could contact the Department of Labor’s (DOL) Wage and Hour Division and trigger an audit that could result in back pay awards for several employees.

Even when employees are correctly classified as nonexempt, companies can run into trouble in terms of hours worked. If employees work at their desks during lunchtime, that counts as paid time. If you give an employee a smartphone and say he or she has to respond to emails even when at home, that also is work time. Those types of claims can cost a lot of money because employees typically have a record of their hours and the employer doesn’t have anything to contradict it.

How can companies avoid misclassification?

You need to have a qualified human resources person conduct an analysis. It has to be someone who understands all of the implications, and will take the time to consider the various positions and where they fit.

Also, it’s a good idea to re-evaluate exemption status as job duties change, especially if you’re going through a reorganization.

A lot of times, management makes decisions based on what makes economic sense at the time. That’s fine as long as everyone is getting along. But then an employee is fired or disgruntled for some reason and files a claim with the DOL

Stephen P. Bond is a partner at Brouse McDowell. Reach him at (440) 934-8110 or sbond@brouse.com.

Insights Legal Affairs is brought to you by Brouse McDowell

Published in Akron/Canton
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