The state’s new minimum wage law may cause employers to fret a bit

On July 1, 2014, California’s minimum wage increased to $9 per hour — but there are some related issues that could have a larger impact on businesses than the increase in wages.

The minimum wage increase not only raises regular and overtime wages, it also affects the classification standards of “overtime exempt” employees. In most cases, exempt employees must be paid a monthly salary that exceeds at least twice the minimum wage.

“The concern is that employers will not take that into account. Because exempt employees are not hourly, employers may not go back and see whether that salary translates to at least the minimum wage per hour,” says Wendy E. Lane, a partner at Greenberg Glusker.

Smart Business spoke with Lane about how the new wage law is affecting California employers.

What possible hazards should employers be aware of with the new wage law?

The law carries a huge potential for class action liability. The minimum base salary for employees to be exempt of overtime, meal and rest period obligations under three of the major exemptions — administrative, executive and professional — has now been raised because the minimum salary for those exemptions is based on a factor of two times the minimum wage.

As of July 1, in order to qualify for these exemptions, an employee must earn $3,120 per month, which is $37,440 annually. Employees must also meet certain ‘duties’ criteria in addition to being paid a salary of at least double the minimum wage.

The liability is that bigger companies with a large number of exempt employees all in the same boat likely could have a potentially sizeable class action suit.

How should employers examine their exempt employee situation?

While there are many factors that go into determining if an employee is exempt, including their level of expertise, training, and discretion, if they don’t meet the minimum salary requirement everything else is irrelevant.

A high-ranking employee could be in charge of other employees and make key company decisions. But if  he or she is not meeting the minimum salary test, the employee cannot be classified as exempt.

Then, if the employee you had treated as exempt worked more than eight hours in a day or more than 40 hours in the week, they were working overtime, but you hadn’t been paying them overtime. They probably worked through at least some of their meal breaks.

There are considerable penalties for having not properly paid overtime or provided the meal breaks because, in effect, you have been treating a nonexempt employee as exempt.

These cases are even harder to defend because most employers may say, ‘If they are exempt, we don’t need to track their time.’ Well, how do you prove there was or was not overtime if you don’t have timesheets? It suddenly becomes much more difficult, and the presumption is against the employer under California law.

What impact could the new law have on a company’s bottom line?

Obviously, the additional cost is a concern to employers, but it needs to be weighed against the cost of retraining a person. Let’s say that some employees were let go in order to pay for this raise at the lower level. Retraining somebody also carries costs.

There are also arguments that as people make more, they may no longer have to choose between food, rent or medicine — and may have more cash to contribute toward prevention and health care — which may improve the employee’s status with respect to attendance issues and sick time.

Employers must find ways to use the minimum wage increase to their benefit as this may be just the first of several minimum wage increases that will be going into effect.

Employers should consult with counsel as they make difficult decisions, such as lowering salaries of employees or terminating employees to be able to afford this change in the minimum wage.

Companies need to ensure they don’t make personnel decisions that will inadvertently expose them to greater liability (such as for claims of discrimination or retaliation) because they are not looking at the big picture as to whom they are selecting.

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Proposition 65: What you do not know will hurt your business

Thomas H. Clarke Jr., partner, Ropers Majeski Kohn & Bentley PC

Thomas H. Clarke Jr., partner, Ropers Majeski Kohn & Bentley PC

California Proposition 65 — the Safe Drinking Water and Toxic Enforcement Act of 1986 — has spawned a cottage industry that profits from putting businesses on notice that they have products containing chemicals on the list of potentially hazardous substances.

But the mere presence of a chemical in a product doesn’t mean that there has been a violation, and there are steps you can take to protect your business when you receive a notice, says Thomas H. Clarke Jr., partner at Ropers Majeski Kohn & Bentley PC.

“Everyone seems to lose sight of what Prop 65 is about because the plaintiffs want you to see a list of chemicals in your product and think you’re a bad person. But the law is not about the chemical being present, it’s about exposure,” Clarke says.

No exposure above a specified level, no violation.

Smart Business spoke with Clarke about what you should know about Prop 65.

What is the main flaw with Prop 65?

The burden is placed on the defense. A plaintiff only needs to show that the chemical is present and there’s a reasonable exposure pathway. Then the burden shifts; the defendant must prove the exposure is below the warning threshold. If plaintiffs were required to prove exposure, all of the games go away because frequently the only exposure scenarios they present have nothing to do with product usage.

For example, a client was selling a keepsake binder and one of the plaintiff’s scenarios involved the binder being on the floor, and a baby crawling over and licking it. The regulations state that an exposure is determined by normal use by an average consumer. The thesis that babies licking binders happens frequently is ludicrous.

Plaintiffs exaggerate so that you are intimidated and will not contest the case. They want a settlement that pays them substantial sums. To justify their fees, they will impose some reformulation standard, but quite often there’s no evidence the reformulation has any beneficial affect on exposures.

Why do businesses agree to settlements rather than go to trial?

Plaintiffs know what it costs to defend these lawsuits and are clever about making a settlement offer. If it’s going to cost $150,000 to defend, they’ll seek $80,000 to $90,000.

Upon receipt of a 60-day notice that a lawsuit will be filed, be proactive — model the use of the product. Such evidence is not cheap. In the case of the binder, about $8,000 was spent to prove the exposure was under the threshold. Such evidence changes the dynamics of the case.

How should a business react when it receives a warning letter?

When a business receives a 60-day warning letter, it should take immediate steps to assess the product. Probably 90 percent of these notices are tossed. No one worries about them; it’s only when a lawsuit is filed that they realize they have a potential problem.

After assessing whether there is an exposure, you know if the case is defensible. If it is, that’s the posture to take. If not, then you need to settle, and one of the things you’ll need to do is change the composition of the product. If you assess early, then this process is in your control, not the plaintiffs.

What is being done to solve the ‘greenmail’ problem?

Assembly Bill 227 addresses the kind of shakedown lawsuits that get a lot of publicity. Plaintiffs review public records for violations, like allowing smoking near an ATM machine. Then they fire off letters stating the business is in violation of Prop 65, and demand money.

AB 227 covers those activities that are frequently exploited. If it passes, someone receiving one of these shakedown notices can cure the problem immediately because usually the only requirement is a warning sign. There is a small penalty provision, but most of the money goes to the state.

However, if you really want to eliminate abuse, demand that the law be amended to put the burden of proof on the plaintiff. There’s nothing wrong with warning people, but to associate the presence of a listed chemical in a product with an actual threat of real harm lacks merit.

Thomas H. Clarke Jr. is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (415) 543-4800 or [email protected] Learn more about Clarke.

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How to avoid some common pitfalls when doing business online

Christina D. Frangiosa, attorney, Semanoff Ormsby Greenberg & Torchia, LLC

Christina D. Frangiosa, attorney, Semanoff Ormsby Greenberg & Torchia, LLC

Anything published online lasts forever, so it is important to set the right tone for your company’s online communications and to mean what you say from the outset. You might try to retract or amend these public statements, but it is relatively easy to find prior versions, thus causing embarrassing or false statements to not truly disappear, says Christina D. Frangiosa, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

“It’s safer to wait to publish materials to the Web until you have confirmed they are accurate, not misleading and not based on someone else’s intellectual property rights,” she says. “False statements about either your company’s products or about a competitor or its products could lead to lawsuits claiming false advertising, unfair competition or commercial disparagement. Misuse of the company’s or a competitor’s intellectual property can result in a loss of rights, or even, perhaps, an injunction or damages.”

Smart Business spoke with Frangiosa about avoiding legal mistakes on the Internet.

How should you handle statements about your competitors and their products?

Avoid knowingly making false statements about a competitor or the quality of its products. Publishing statements about them without appropriate due diligence could result in negative publicity for your company, corrective advertising costs or monetary damages.

How does cutting and pasting content from other websites create copyright concerns?

Many users have a common misconception: If they can find ‘free’ content on the Internet, then they must be able to use that content for any purpose. Just because content may be freely accessible does not mean that you have a right to use it. Copyright holders have exclusive rights, including the ability to choose to publish or not to publish their works; posting something on a public website constitutes publication. Copying and pasting someone else’s images, text or video into your company’s website without permission could expose the company to copyright or trademark infringement suits, among other claims.

How might misuse in social media undermine company trademarks?

Companies today use their websites and social media to communicate about their products or services. Specific employees may be assigned to prepare and/or post content. These employees should be informed about how to use the company’s trademarks to further develop the brand and maintain existing rights. If employees misuse these trademarks on the company’s sites, they may unknowingly undermine the value of the brand, and perhaps cause problems for trademark renewals or other filings.

Some employees may also use the company’s marks on personal social media. For example, an executive might use a company logo rather than a headshot on his or her Facebook page. Any statement made on these pages about company business could be seen as a formal company representation, and perhaps cause problems for the company with the Securities and Exchange Commission or other governing bodies.

What can you do to protect against these pitfalls?

  • Create your own content, rather than relying on design elements you see on other sites. This may have a higher upfront cost but could reduce your litigation exposure in the long run.
  • Seek a license to use any content in which you are interested, and pay the appropriate royalty fee for its use. There are organizations that accept those royalty payments on behalf of content owners.
  • Obtain images, videos or other content from a valid image collection service, authorized by the copyright owner.
  • Ensure employees understand the source of the content they plan to use before they upload it to the company’s site. They should be trained to avoid the impulse to right-click, ‘save as’ and then upload.
  • Avoid using a competitor’s trademarks to advertise your own goods or services.
  • Ensure employees understand the appropriate use of trademarks.
  • Establish a social media policy that includes explanations of limits on use of the company’s trademarks.

 

Christina D. Frangiosa is an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. Reach her at (215) 887-0200 or [email protected]

Find about more about privacy and intellectual property law on Christina’s blog.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How employers should comply with the Family and Medical Leave Act

Michael B. Dubin, member, Semanoff Ormsby Greenberg & Torchia, LLC


Michael B. Dubin, member, Semanoff Ormsby Greenberg & Torchia, LLC

The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. However, should an employer fail to comply with the FMLA requirements, the employer could be subjecting itself to litigation and possibly fines from the Department of Labor.

“There are a lot of obligations on the employer. To the extent that you’re not aware of these, you should contact an attorney to make sure you’re following the strict requirements of the FMLA,” says Michael B. Dubin, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Dubin about employer compliance with the FMLA.

What does the FMLA allow employees to do?

Eligible employees are entitled to 12 workweeks of unpaid leave in a 12-month period for:

  • The birth of a child and to care for the newborn child.
  • The placement with the employee of a child for adoption or foster care and to care for the newly placed child.
  • To care for the employee’s spouse, child or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the essential functions of his or her job.
  • Any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter or parent is a covered military member on ‘covered active duty;’ or 26 workweeks of leave during a single 12-month period to care for a servicemember with a serious injury or illness if the eligible employee is the servicemember’s spouse, child, parent or next of kin (military caregiver leave).

What employers are covered by FMLA?

The FMLA only applies to employers that meet certain criteria. A covered employer includes a private-sector employer with 50 or more employees in 20 or more workweeks in the current or preceding calendar year; and public agencies and public or private elementary or secondary schools, regardless of the number of employees.

What employees are eligible for FMLA leave?

Employees are eligible if they: have been employed by a covered employer for at least 12 months, which need not be consecutive; had at least 1,250 hours of service during the 12-month period immediately preceding the leave; and are employed at a worksite where the employer employs at least 50 employees within 75 miles.

Can an employee take intermittent leave?

Under certain circumstances, an employee may take FMLA leave on an intermittent or reduced schedule basis. That means an employee may take leave in separate blocks of time or by reducing the time worked each day or week for a single qualifying reason. When leave is needed for planned medical treatment, the employee must make a reasonable effort to schedule treatment so as to not unduly disrupt the employer’s operations. Employers must be careful to accurately track intermittent leave.

Can an employee be terminated at the conclusion of the 12-week leave?

Upon return from FMLA leave, an employee must be restored to his or her original job or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment. However, there is a limited exception for ‘key employees’ where reinstatement will cause ‘substantial and grievous economic injury.’

Many employer FMLA policies provide that if an employee fails to return to work at the conclusion of the 12-week leave, the employee will be deemed to have abandoned his or her job and/or will be automatically terminated. Employers are discouraged from maintaining this type of policy as it may be deemed a violation of an employee’s rights under the Americans with Disabilities Act (ADA). At the conclusion of an employee’s FMLA leave, employers should consider whether the employee will be able to perform the essential functions of the job with or without a reasonable accommodation (pursuant to the ADA), which may include additional time off following FMLA leave.

If confronted with an issue under FMLA, employers are cautioned to contact an attorney to ensure they are acting in conformity with the FMLA and avoiding the numerous pitfalls inherent in complying with the FMLA.

Michael B. Dubin is a member at Semanoff Ormsby Greenberg & Torchia, LLC
. Reach him at (215) 887-2658 or [email protected]

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Patent trolls are lurking. How will you protect your business?

Christian Drago, patent attorney, Fay Sharpe LLP

Christian Drago, patent attorney, Fay Sharpe LLP

Patent trolls can be huge, single-minded licensing companies. These nonpracticing entities purchase patents from small inventors who don’t have the desire or funding to create what they’ve patented and threaten potential infringers to get money through licensing fees or lawsuits. Business owners of small and midsize companies can be caught off guard when they receive the letter claiming their product infringes an existing patent, and often don’t know what to do.

“Fighting the alleged infringement usually costs more than the licensing fee the troll is seeking,” says Christian Drago, a patent attorney at Fay Sharpe LLP.

This can make a business owner feel trapped. However, he says patent trolls often cast a wide net, sending letters to companies that may not be infringing. That’s why it’s important to know how to respond.

Smart Business spoke with Drago about how to deal with patent trolls.

Who is most at risk of being the victim of a patent troll?

Generally, infringement claims are a lot more successful when made against small to midsize businesses because they don’t have the capital to fight an infringement suit, so they often opt to pay the license fee.

A patent troll is not going to pick a company out of the clear, blue sky. It will buy a company’s products and reverse engineer them, or scrutinize its marketing collateral for product descriptions. It’s important for companies with patents to be careful what they post on their website. Market your company, but don’t give too much away because you could be giving ammunition to a troll.

If you receive a letter from a nonpracticing entity, what do you do?

First, don’t panic. The entity is soliciting a licensing fee and its track record in litigation is not great. Contact a patent attorney and have him or her review the claim and your product to find out if you’re actually infringing. Don’t use your in-house or general practice attorney; courts want outside independent review.

If it’s discovered that you’re not infringing, get a non-infringement opinion by outside counsel. That can be used to offset damages and show you acted in good faith by procuring the assistance of an attorney.

The attorney will compose a letter that says your company had outside counsel review the claim and determined you are not infringing. Now the troll has to do its cost/benefit analysis and decide whether it wants to pursue this any further. The troll may just move on.

However, if willful infringement is discovered, meaning you continue to infringe after you’re made aware of the infringement, the penalty can be upped by a judge. That’s why it’s important to show you acted on the well-reasoned opinion of counsel as soon as possible.

How can you protect yourself?

If you’re going to file for a patent, you want to file as soon as is practical. Bring an attorney onboard while the product is in development, not when you join the market. Have a patent attorney conduct a patentability search and get a freedom to operate opinion. This gives you the best idea of what patents are out there.

If the attorney finds similar, existing patents, he or she can show them to your engineers, and the engineers can innovate around current designs. This could give you a competitive edge and allow you to go after competitors when they infringe on you. The process also focuses the company on what it’s doing in the market.

If you have to backpedal because you failed to do your due diligence, your R&D costs could double because of scrapping a project and going back to the drawing board.

However, keep in mind patent searches aren’t exhaustive because, at the time of the search, there may be applications that are being reviewed but have not published. Patents issue from three to five years after they’re filed and they’re published 18 months after filing. That leaves a gap.

That’s why, it’s important to take these letters seriously and get counsel involved right away. You need to quickly determine the best course of action based on the facts, not the claims.

Christian Drago is a patent attorney at Fay Sharpe LLP. Reach him at (216) 363-9000 or [email protected]

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How trade secrets are often overlooked when deciding what to protect

Andrew Fleming, Partner, Novack and Macey LLP

Andrew Fleming, Partner, Novack and Macey LLP

When people consider intellectual property (IP) they most often think patent or copyright, which can be very valuable to a business. But, in fact, one form that’s often overlooked is trade secrets.

What constitutes a protectable trade secret varies from state to state, but the gist of what trade-secret law protects is similar in almost every state. A trade secret is any sufficiently valuable, secret information that can be used in the operation of a business to afford an actual or potential economic advantage.

“Given this broad definition, it should come as no surprise that a wide variety of things have been found to constitute trade secrets, including product formulas, data compilations, customer or client lists developed through hard work, manufacturing techniques and some forms of business know-how,” says P. Andrew Fleming, a partner at Novack and Macey LLP. “The point is that many things could be protectable trade secrets if a business took the time to identify and properly protect them. All too often, however, businesses do not do a good job at either.”

Smart Business spoke with Fleming about how your company should be protecting your trade secrets.

How might a company’s trade secrets be vulnerable?

It is hard for a business to protect something unless it knows what it is — a business has to identify its trade secrets before it can protect them. A little common sense goes a long way. Business owners should start by asking a simple question: ‘What does my business do better than the competition that my competition does not know about, and that I do not want them to know about?’

What policies should a company put in place to protect its trade secrets?

The next step is protecting that trade secret. This can be tricky because, as the name implies, a trade secret loses protection when it is no longer secret. Moreover, the law does not protect a trade secret unless its owner takes reasonable steps to keep it secret. Although there is no hard and fast rule, a business should consider:

  • Password-protecting computers containing its secrets.
  • Limiting access to secrets on a ‘need-to-know’ basis.
  • Keeping hard copies of documents containing or describing its secrets under ‘lock and key.’
  • Entering into contracts with its employees that requires those employees to maintain secrecy during employment and after their employment ends.

A business also might consider using reasonable non-compete agreements with employees who know trade secrets to keep them from going to the competition. After all, if a former employee cannot work for a competitor, he or she has little incentive to reveal secrets once employment ends.

How has social media affected a company’s ability to protect its trade secrets?

The explosion of information on the Internet has made it more difficult for businesses to argue information or know-how is sufficiently secret to constitute a trade secret. It is now far easier to find descriptions of techniques, know-how and even customer lists — a point underscored in Sasqua Group, Inc. v. Courtney. There, the defendant allegedly took secret and valuable customer information to her new job, and the plaintiff argued the information was a trade secret. The court acknowledged that the customer information could in the early days, i.e. pre-Internet and pre-social media, have been sufficiently secret, but since virtually all of the allegedly protected information could be found on the Internet, including through social media sites, it no longer qualified.

It is not difficult to imagine other scenarios in which a business could lose trade secrets via the Internet or social media. For example, a disgruntled employee could intentionally post secrets so the otherwise secret information loses its protection. Even a happy employee unwittingly could disclose secrets through careless posting, such as establishing links to all customers on a social media page.

There are no easy answers to such problems, but businesses must remain on guard, take care when creating or posting to social media sites, and educate employees about the pitfalls of using social media.

P. Andrew Fleming is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or [email protected]

 

Novack and Macey LLP social media: Learn more about Novack and Macey LLP on LinkedIn.

 

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How ‘comprehensive’ policies may leave your business exposed

Steven J. Ciszewski, Partner, Novack and Macey LLP

Steven J. Ciszewski, Partner, Novack and Macey LLP

Most businesses have ‘comprehensive’ insurance policies that cover damage to the company’s physical assets and protect against third-party bodily injury or tangible property damage claims against the company. But this traditional coverage generally does not fully protect against losses related to intangible assets, like computer-stored data and intellectual property.

“Businesses need to be aware of this exposure and consider specific coverage designed for their individual business needs and risks,” says Steven J. Ciszewski, a partner at Novack and Macey LLP.

Smart Business spoke with Ciszewski about where comprehensive polices might fall short and how to plug the holes with additional coverage for your business’s needs.

What types of coverage are available for computer-stored data and other cyber risks?

Some aspects of computer- or data-related losses might be protected by commercial crime coverage that applies when a third party or employee commits a crime or fraud directed at your business. This coverage can be an add-on to a general commercial policy or a stand-alone policy. Beyond that, many insurers offer both first-party and third-party coverage dedicated to computer and cyber risks. First-party coverage typically pays for costs incurred if your computer network or data systems suffer a catastrophic failure. The coverage might pay for costs incurred to restore your network and data, and/or the lost profits suffered because your business lost the use of its network and data. Third-party coverage protects against liability claims arising out of computer or cyber risks — for example, claims arising out of a breach of your network security. In the event of a breach, confidential customer information could be exposed or stolen. Third-party coverage would cover those claims and pay damages suffered by customers, pay for customer notification, and fund a credit-monitoring program for the affected customers.

What coverage is available for intellectual property?

Increasingly, courts have found that trying to secure coverage for intellectual property (IP) risks under a general liability policy is like trying to jam a square peg into a round hole. As a result, businesses with IP assets or exposure are wise to consider dedicated IP coverage. Again, this coverage generally falls into two broad categories: Defense coverage, which pays for the cost to defend and satisfy any judgment arising out of a claim that your business infringed another’s copyright, trademark, patent or other IP; and abatement coverage, which fronts the cost of pursuing a claim against another for infringing on your IP. For abatement coverage, even if your claim fails, the insurer typically covers all or most of the cost. If the claim succeeds and you recover, the insurer may be entitled to some of the recovery to offset the costs it fronted. For businesses with critical IP, both types of coverage are important just to pay for litigation costs, since IP litigation can often become prohibitively expensive.

Are there any other emerging areas where businesses may be unknowingly exposed?

Just like IP claims, many employment-related claims, such as discrimination — race, age, gender, etc. — sexual harassment or wrongful termination, are not covered by most general liability policies. Accordingly, businesses should consider employment practices liability (EPL) coverage. EPL policies pay for defense costs and for judgments arising out of these types of claims against your business by prospective, current or former employees. Again, coverage for defense costs is particularly important since it can be expensive to defeat even a frivolous claim brought by a disgruntled employee.

Steven J. Ciszewski is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or [email protected]

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How executives and managers are vulnerable to individual liability

Michael J. Torchia, Esq., Managing Member, Semanoff Ormsby Greenberg & Torchia, LLC

Michael J. Torchia, Esq., Managing Member, Semanoff Ormsby Greenberg & Torchia, LLC

Michael J. Torchia, a managing member at Semanoff Ormsby Greenberg & Torchia, LLC, gave a seminar to executive clients on individual liability several months ago. “Even if some supervisors knew they had liability under a statute or two,” he says, “seeing their actual exposure to 12 or 14 statutes shocked them.”

“I don’t think business owners have any clue how vulnerable they are to being sued under various employment statutes,” Torchia says.

This exposure is prevalent in areas like discrimination cases, and wage and hour claims which include unpaid overtime, exempt and non-exempt employees, and independent contractor status.

Smart Business spoke with Torchia about individual liability and strategies for protection and avoidance.

How are executives vulnerable to individual liability? 

Many state and federal statutes explicitly state an employee has a right to relief against the employer and an individual.  Some simply define ‘employer’ to include certain individuals. Examples include the Pennsylvania Wage Payment and Collection Law; Fair Labor Standards Act; Family and Medical Leave Act; Pennsylvania Human Relations Act; Pennsylvania Whistleblower Act; Immigration Reform and Control Act; and COBRA. There are also common law court cases allowing an individual to be sued under a variety of claims such as intentional infliction of emotional distress and defamation. Although incorporation helps shield individual assets — as opposed to, for example, a sole proprietor — the corporate veil does not protect individuals here because the statutes specifically allow action against them.

How far into management is the risk?

Generally, if an executive, manager or supervisor is considered a decision maker when it comes to employee issues, especially with regard to compensation, benefits or termination, there could be individual liability. In some organizations, that could be those at the ‘C’ level, president or vice president, but in others a secondary or middle manager could be individually liable.

What about executives who say, ‘I was following orders’ or ‘It was unintentional’? 

‘Just following orders’ or ‘company policy’ may help, but is not an absolute defense. And whether the improper act was or wasn’t intentional is only relevant if the statute requires proving intent, bad faith or a knowing violation.

So, how can executives protect themselves?

At a minimum, managers, supervisors and executives should make certain they have adequate insurance. There are a variety of policies for individual exposure, such as employment practices liability, directors and officers, fiduciary liability, and errors and omissions. There are also lesser known policies that cover, for example, inadvertent disclosure of private information.

Another factor is asset protection. In Pennsylvania, assuming the executive is not already named in a lawsuit or under imminent threat of a claim, which could result in a fraudulent transfer claim, assets can be protected by putting a house, cars and bank accounts in joint names with a spouse.  If not married, executives may consider increasing contributions to retirement accounts, which are not usually subject to collection.

How can executives and their companies avoid problems in the first place?

Training and education for managers, supervisors and executives — especially your decision makers — is key. They need to know how to handle all aspects of their supervisory duties, such as hiring, discipline, firings and employee complaints.

The company’s written policies should be consistent with the manager training and what is actually done day to day. Policy review and training should occur at least every three years, and sooner if there is turnover or changes in the law. Seminars and in-person training for middle managers is routinely overlooked or disregarded as unnecessary, but that it is one of the most important steps a company can take.

Most often decision-making executives, managers and supervisors are not trying to violate the law. However, with authority to bind the company, they can unknowingly cause liability to themselves or the business.

Michael J. Torchia, Esq. is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 [email protected]

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How yearly business reviews with an attorney prevent costly legal hassles

Erin Cleary, Associate, Kegler, Brown, Hill & Ritter

Erin Cleary, Associate, Kegler, Brown, Hill & Ritter

Legal requirements, along with small businesses themselves, change constantly. Annual checkups with an attorney could reveal potential problems before they prove to be very costly for your business.

“There are a lot of small business owners out there who use a customer contract form they had a lawyer review 10 years ago and think they’re good to go,” said Erin Cleary, an associate with Kegler, Brown, Hill & Ritter. “We see owners who try to sell after a long, successful career of building their business, but the transaction proves costly and stressful as a result of neglecting certain legal compliance issues over the years.”

Smart Business spoke with Cleary about why it’s important to meet annually with an attorney and how it benefits your business.

What are examples of problems discovered during checkups?

Some small businesses are organized and taxed as C Corporations for no good reason. Those owners could save significant tax dollars by converting their structure to a pass-through entity. In the current environment of constantly shifting tax laws, it helps to check for such opportunities to improve tax structure or capitalize on other tax credits or incentives. These changes lead to real money in your pocket.

Another issue that can arise during a sale transaction concerns commercial contracts with customers or vendors. Contracts might include prohibitions on assignment, unusual indemnification clauses or warranty provisions that might be disadvantageous to the company. It can pose significant liability to hand out a template contract that’s outdated, for example, one that doesn’t take into account the unique risks and liabilities imposed by e-commerce and social media. Updating contracts that are regularly signed cuts down on future liabilities, especially in the context of a sale transaction where a buyer will inevitably ask the seller/owner to stay ‘on the hook’ for the contractual liabilities the business has accumulated.

One of the most serious liabilities can be the failure to properly pay, collect and report taxes, particularly sales taxes and payroll taxes. Generally, there is no statute of limitations for tax evasion, fraud or the failure to file a return, so those liabilities exist forever. In addition, it’s not possible to pass this liability on to the buyer of a business — a tax authority can always go after either the ongoing business or the original owner who failed to comply. In sale transactions with this kind of liability, the seller always ends up fully indemnifying the buyer for any future penalties, audits or investigations that might occur after closing the transaction.

Are there businesses for which legal checkups are particularly vital?

It’s probably more important among less regulated industries. Businesses that are highly regulated have closer relationships with attorneys and are more attuned to legal compliance. But legal oversight is not just about compliance. It’s also about best practices, like making sure employees sign contracts to protect the business’s intellectual property.

Checkups are worthwhile if you’re anticipating an exit from the business, whether it’s a sale, taking on a major investor, going public or transitioning the business to a family member. Even a sale to someone with whom you have a close relationship might undergo the same scrutiny as if you had a completely unrelated buyer. Many businesses, particularly professional practices, do not plan for succession. Periodic conversations with counsel might encourage you to take the time to think this through. If a professional practitioner passes away, a valuable business could quickly become worthless. Having a succession plan might mean the owner’s estate receives compensation for the business when it otherwise would not.

Some owners might like to hire different lawyers for specific needs. These owners should be careful to make sure that at least one of their lawyers is taking time to look at the overall picture to make sure nothing is falling through the cracks.

Unlike accountants, whom you’re naturally going to see annually to file taxes, there is no periodic event that requires you to update your attorney about your business. But keeping up with best practices would nevertheless make an ultimate transaction less expensive and stressful, and reduce post-closing liability.

Erin Cleary is an associate at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5420 [email protected]

 

Event: Change Orders, Claims & Disputes: “Star Wars” in the Construction Industry will take place on March 27. Visit keglerbrown.com for more information.

 

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter

 

How online publishing could affect your ability to secure or retain a patent

Mandy B. Willis, Associate, Fay Sharpe LLP

Mandy B. Willis, Associate, Fay Sharpe LLP

More content is being published exclusively through the Web, which means those seeking to either obtain a patent or attack the validity of a third-party patent need to exercise greater diligence when conducting a patentability or validity search.

“It’s important that the scope of prior art searches, whether used for preparing patent applications or defending infringement accusations, consider Web-based information,” says Mandy B. Willis, an associate at Fay Sharpe LLP.

“Companies need to be more aware of online postings by searching websites when conducting patentability and freedom-to-operate searches,” she says.

Smart Business spoke with Willis about the Web’s impact on prior art and how to apply diligence in this new publishing environment.

How can a solely Web-based reference qualify as a prior art printed publication under the patent laws?

In the past, many companies looked just at patents, patent publications and printed articles when conducting prior art searches. But the court in a recent case, Voter Verified, Inc. vs. Premier Election Solutions, Inc., provided guidance on how to determine whether a solely Web-based reference qualifies as a prior art ‘printed publication.’ The court created a three-part test to make this determination.

What is the test for determining whether an online article qualifies as a printed public document?

The first prong of the three-part test is public awareness. This prong is used to determine if the relevant public is aware of the website which contains the article. And, ‘relevant public’ means persons interested in the technology in question.

The second prong of the test is, having found the website, whether the article can be found by a person exercising reasonable diligence. In one example, this prong can be met if search tools on the website are sufficient to retrieve the article in response to a query using search terms that relate to the subject matter of the article.

And, the third prong is whether the article was accessible to the public before the effective filing date of the patent and/or application in question. This prong is met if the website was undisputedly open to any Internet user by the critical date. A showing of accessibility can be supported if all submissions on the website are treated by the community as public disclosures or if users can freely and easily copy the website content.

To pass the test, all three prongs must be met.

Is evidence of indexing a prerequisite to establishing that an online reference is a printed publication?

The key inquiry regarding whether a solely Web-based reference can be prior art is if the reference is or was sufficiently accessible to the public exercising reasonable diligence. However, it’s not necessary to provide any evidence of how the public located the website or article; the reference just has to have been discovered.

Indexing allows the interested public to locate an article on a website and can be a relevant factor in proving accessibility, but it’s not an absolute prerequisite. Accessibility is based on a host of facts and circumstances surrounding a reference’s disclosure.

Must the disclosure in the online reference be identical to the claims in a patent application or an issued patent to qualify as prior art?

No. Under section 103 of the patent laws, the disclosure in an online reference must only make the method or system of the claim obvious, either alone or when combined with another reference, to one of ordinary skill in the art. It does not have to be identical to the language in a patent application, just similar.

What can a company do to protect its patents from being invalidated or itself from being accused of infringement?

In the event that a patent holder accuses you of infringement, you can try to invalidate that patent with a prior art, which could be a Web-based article. Therefore, document your search strategy and the search terms you use to find the reference to support a showing that the prongs can be met.

If you are building a patent portfolio and/or applying for a patent, expand your patentability search to online publications. If you’re aware of postings that can be cited against your claims during prosecution, you can craft stronger claims earlier in the patent process, which can save you time and money.

Mandy B. Willis is an associate at Fay Sharpe LLP. Reach her at (216) 363-9000 or [email protected]

Insights Legal Affairs is brought to you by Fay Sharpe LLP.