Beware the Dangers of a Big Ego

By Frank Natoli

The following is the first, hopefully, of a series of small business war stories designed to be instructive and entertaining for our entrepreneurial readership. If you have a story you would like to share, please email it to us so we can consider posting it on the Entrepreneurs’ Forum and in our quarterly newsletter. We only ask that it be no more than 500 words.

This is one of my many stories from the small business trenches; I hope you enjoy it!

I was all of 25 years old and working with two other partners to open a new nightclub on the Jersey shore. One of these partners, we’ll call him Vito, was a mentor of sorts to me. The other, Tony, was his employee and long-time friend. Both were older. Tony was one of the most disagreeable and surly men I’ve ever encountered. And the fact that I was considerably younger than him only irritated him more. You see, Vito and I had already begun this project before bringing on Tony, who had a lot of good experience in the bar business. But Tony would not agree to an equal partnership and demanded that my interest be cut even though my investment was the same monetarily. The problem was that we needed his expertise even though I was the primary manager for the business.

After a particularly long morning of heated discussion on the subject, I had an opportunity to think it over alone. I was young, but not naive. I understood that “profits” may not be realized for awhile and that I deserved some salary for the vast amounts of time I will be spending managing the business beyond what the other partners will be contributing. That said, I suggested, in the interest of coming to a compromise and posturing as if I was a little defeated, that I would reduce my ownership interest to twenty percent, in exchange for a shift pay in cash for every shift I worked at the club. This amounted to two shifts per day (most days) at $75.00 per shift. At that time, we were open six days a week. Tony agreed grinning like the cat that ate the canary.

As it happened, the club was very successful on some nights but struggled on others. So, at the end of the week, there was just enough money to pay all the overhead and salaries. Yes, I was the only partner actually making money for my time. This infuriated Tony, who continued to complain to Vito. I remember vividly standing outside the office and hearing Vito say “what do you want me to do Tony; the kid out-smarted you.” I smiled for a week straight after that; the little victories mean so much.

I am Frank Natoli, Esq., the Founder & CEO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal solutions designed for entrepreneurs, small businesses, independent inventors & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome!

Support@LanternLegal.com or Visit Us at: www.LanternLegal.com

Do You Have a SMALL BUSINESS WAR STORY You Would Like To Share?

If so, please Email it to us at: Support@LanternLegal.com for consideration to be posted in our Forum and Quarterly Newsletter.

Let’s face it, for many of us starting a new business on a shoestring budget the prospect of hiring a competent business attorney is little more than a pipedream. As a grassroots entrepreneur, I get that. But as a small business and IP lawyer, I also know that there are some legal considerations a new business cannot afford to overlook. That said, I attempted to identify what I consider to be, the four most important considerations even the bootstrapping start-up will need to address.

1. PROTECT YOUR PERSONAL ASSETS:

In short, this means you absolutely positively need to create a properly formed limited liability entity (LLC, C-Corp, S-Corp, etc.) if you plan on conducting any kind of business activity anywhere. The old “sole proprietorship” that you can file in your county offers no legal distinction between YOU and the company. This means any action filed against you in the course of your business activities will be directed at you and more importantly, your personal assets. A limited liability entity will serve as a shield to protect your personal assets from a law suit. Forming a proper business entity should not be a daunting and expensive process, but be sure to discuss it with a competent legal advisor so you understand all the responsibilities, formalities and obligations involved.

2. PAPER YOUR DEALS PROPERLY:

Too many new businesses anxious to get the revenue ball rolling ignore the importance of having the appropriate contracts and agreements prepared to protect their interests. This can be a big mistake. I always make sure my clients have, at the very least, their primary contract(s) (service agreement, EULA, License, Privacy Policy, etc.) developed BEFORE they begin transacting their business. Bootstrappers also need to be keenly aware that copying and pasting another’s contract to your website or using some “boilerplate” contract you grabbed online can be extremely counterproductive. Every transaction, business, website, individual or company has unique issues that should be addressed before committing to any deal. Remember, this is all about an “ounce of prevention . . .”

3. MAKE SURE YOUR TRADEMARK DUE DILIGENCE IS DONE BEFORE YOU START SPENDING BIG MONEY ON YOUR BRAND!

None of us would consider buying a business without conducting the proper due diligence on it. Yet so many entrepreneurs give short shrift to their trademark due diligence, which is also a form of insurance. Here is the scenario we see all the time: new business starts without giving any consideration to their brand or product names (trademarks). In the beginning, this poses no issue. But then things start moving along and more meaningful money is spent on marketing, advertising and branding efforts. Now, this new business is well on the radar of their competitors and just as things look great – BAMM – you are hit with a Cease & Desist letter from a firm poised to launch an infringement action. Now you realize that you spent all that money on a brand name you have no right to use. If you intend to use your business name as a trademark that identifies your goods or services, you should have that name searched, cleared and filed before you start making a significant investment. Just filing the name with your state of registration does not protect your trademark. Having this done correctly from a knowledgeable professional does not have to break the bank, but it should be in your budget and not overlooked.

4. LEGAL RESEARCH ON YOUR SPECIFIC BUSINESS OPERATIONS:

It should go without saying that if there is any question about the legality of the nature of your business, it should be researched before making any investment. I can’t tell how new entrepreneurs come to us with what they think is just a great idea only to realize that it violates the laws of all 50 states and several treaties. Many types of businesses, such as investment advising, financing, sweepstakes/contests, even some retail and e-commerce businesses all require the proper licenses or registrations. In many instances, the entrepreneur can unwittingly be committing a crime. So this is serious. Make sure your business operations clear all necessary federal and state regulations and laws before committing and putting yourself in a compromising situation.

This is by no means an exhaustive list of issues a new business needs to consider. I merely suggested what I think are some of the most important aspects often overlooked by a bootstrapping entrepreneur. I know how expensive reliable legal services can be, which is exactly why I created our service, but wherever possible you should consult a professional to help you avoid the many pitfalls a new business can face.

I am Frank Natoli, Esq., the Founder & CEO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal solutions designed for entrepreneurs, small businesses, independent inventors & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome!
Support@LanternLegal.com or visit us at www.LanternLegal.com.

*This posting should be considered general advice and is NOT intended to be a substitute for the advice of competent legal counsel.

What is a non-compete clause?

A non-compete clause (or covenant not to compete) is a term used in contract drafting, and it refers to an agreement under which one party, usually an employee, agrees to not pursue a similar profession or trade in competition against another party, usually the employer. Employers require employees to sign non-compete agreements in order to maintain a competitive edge in the market. These agreements seek to prevent the employee’s abuse of confidential information and trade secrets obtained from his earlier employment.

Here is an example of what a non-compete clause might look like:
For a period of one year after the termination of this Agreement, within 50 miles of Company’s headquarters, Employee shall not directly or indirectly, for his own benefit or for or with any person, firm or corporation whatsoever other than Company’s, engage in any business that directly involves home construction and that competes with Company.

Non-compete clauses typically are comprised of three elements: (1) The time-frame during which the employee is restricted; (2) the geographical area in which the employee is restricted; and (3) the conduct/employment with respect to which the employee is restricted.

Will courts enforce a non-compete agreement?

An employee of yours signs an employment contact that contains a non-compete clause prohibiting the employee from taking employment with a competitor. The relationship quickly deteriorates, and the next think you know, the former employee has taken a position with a fierce competitor. Your primary concern is that your former employee will use confidential information and trade secrets (which could include contact lists) to advantage your competitor. You attempt to address your concern by amicably discussing the situation with your competitor. However, your competitor is quite satisfied with your former employee’s performance and has no intention of letting him go, much less making him do so. Your only remaining course of action is to seek an injunction against the former employee. To do this, a court will have to review your employment contract and determine whether your non-compete can serve as a basis for the injunction.

The degree of enforcement afforded to non-compete clauses will depend largely on the state where enforcement is sought.

The validity of contracts is generally determined by state courts. As such, the validity and level of enforcement afforded to non-compete clauses will depend on the state in which enforcement is sought.

In a few states, such as California, for example, non-complete agreements are illegal. Because of public policy considerations, namely, interfering with an individual’s ability to make a living, California expressly voids any such agreement: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Courts in most states, however, do enforce non-compete agreements to some degree at least. In these courts, the cornerstone for enforcement is reasonableness. If a non-compete clause is reasonable in its totality, it will be upheld. On the other hand, if a reviewing court finds that the clause as drafted is unreasonable, it may do one of two things, depending on the state court. In some states, the court may “blue pencil” the clause and edit it to the point where it would be reasonable if it had been so drafted originally. For example, if a non-compete restricts certain types of employment for a period of 30 years – a period clearly unreasonable, a court may revise the paragraph and insert a duration of 2 years in place of 30 years to create a valid non-compete agreement.

Other state courts are not so accommodating and will delete the entire non-compete paragraph from the agreement if they find that a non-compete paragraph as drafted is unreasonable in the slightest. As an example, if a court typically finds that the duration of a non-compete clause in a given industry should be no more than 2 years, it may completely delete a non-compete clause containing a 3-year duration period. Practically speaking, this would mean that the employee would be free to pursue any employment without restriction even within a 2 year period of termination.

What will courts look at to determine the validity of non-compete agreements?

Consideration. Many courts will first look to see whether consideration was received by the employee in exchange for his agreement. Consideration is not a concept unique to non-compete agreements; rather it is a requirement for all valid contracts in the United States. The idea behind consideration is to ensure that each party to a contract is receiving some benefit from that transaction – that the contract is not a one-sided exchange. If I purchase a car from you, each of us receives consideration - you get money, and I get the car in exchange.

In most cases where a non-compete clause is inserted in an employment agreement there is valid consideration. The soon-to-be employee is receiving the benefit of a promise of employment, and in exchange, the employer is benefiting by the employee’s promise to perform as a worker.
What one needs to look out for are cases where an employee or contractor is signing the non-compete agreement as a stand-alone agreement and is receiving no additional benefit for signing that agreement. Thus, where an employee already has signed an employment agreement and has been working for some time, the employee needs to receive some additional benefit as consideration for signing a non-compete agreement later on.

Reasonableness. Courts that do enforce non-compete agreements will do so only when the agreements are reasonable as a whole. Typically, three elements will be looked at to determine whether the agreement is a reasonable one. 1) Duration: What is the duration of the agreement – for what period of time will the employee be restricted under the agreement? Whether a particular duration is reasonable will depend on a number of factors, such as industry and location. In the high tech industry, for example, courts will expect shorter duration periods because of the fast-moving nature of the industry. It would be unreasonable to prevent an employee from seeking employment with a high tech competitor 5 years after his employment terminates, when the competitive elements likely will have changed dramatically. 2) Area: In how large a geographic area does the non-compete agreement restrict the employee? Again, whether the restriction over a given geographic area is reasonable will depend on the type of industry and employment at issue. Today, especially in the high tech and internet industry, this element is becoming less and less relevant because many companies operate throughout the United States and competition is not limited to any given geographic area. 3) Nature of Restriction: How broad are the restrictions in the non-compete agreement? The broader the restrictions, the more likely it is that a court will find the agreement to be unreasonable. A court may honor the agreement up to the point where it finds that the restriction legitimately is needed to protect the former employer’s interests.

Conclusion

Non-compete agreements are enforceable in the majority of states, at least to some degree. But it is important to keep a couple of things in mind when considering a non-compete agreement as a way to maintain a competitive edge in the market. First, remember that many jurisdictions require that the employee receive some benefit for signing a non-compete agreement. This is not usually a problem if the non-compete is embedded in an employment agreement because in such a case the employee’s benefit is the employment itself. Second, the non-compete agreement must be reasonable with respect to its duration, geographic area, and the nature of its restrictions. If it is unreasonable, some courts will remove the entire non-compete clause instead of revising it. As such, it is wise to narrow the non-compete agreement as much as you can while still protecting your interest.

I am Moshe Lapin, Esq., the Co-Founder & COO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal solutions designed for entrepreneurs, small businesses & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome!

Support@LanternLegal.com or visit us at www.LanternLegal.com.

*This posting should be considered general advice and is NOT intended to be a substitute for the advice of competent legal counsel.

A limited liability company (LLC) is a business structure that combines the characteristics of a partnership with those of a corporation.

1. Pass-Through Taxation v. Double Taxation:

Like partnerships and sole proprietorships, limited liability companies have pass-through taxation. This means that the entity does not hold any of the profits it generates, and instead, any profits or losses flow directly to the owners of the entity. By contrast, profits of most corporations do not flow directly to the shareholders of the corporation. Instead, profits are held by the company, which pays taxes on those profits, and then the corporation distributes dividends to the corporate shareholders. The shareholders are then taxed on a personal level. Practically speaking, this means that members of an LLC pay only one round of taxes – personal income tax - on profits the company generates. In the corporation setting, on the other hand, profits are taxed on two levels. Once when the profits are collected by the corporation, and a second time when the shareholders receive dividends – the personal income tax.

2. Limited Liability:

Like corporations, LLC members are not personally accountable for company liabilities and debts. LCCs and corporations are treated as independent entities and, assuming that their status as independent entities is maintained, the liabilities of the company do not extend beyond the company to its owners. Thus, company creditors usually will be unable to reach the personal assets of LLC owners. By contrast, when a partnership or sole proprietor is sued, their owners are held liable for their entities’ liabilities, debts and claims because partnerships and sole proprietorships are not legally independent of their owners. It is important to note, however, that LLC owners and corporate shareholders can lose the liability shield by acting illegally, unethically, or irresponsibly.
For many start-up companies, the LLC combines the best features of the partnership and corporate business structures.

I am Moshe Lapin, Esq., the Co-Founder & COO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal products designed for entrepreneurs, small businesses & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome! Support@LanternLegal.com or visit us at www.LanternLegal.com.

*This posting should be considered general advice and is NOT intended to be a substitute for the advice of competent legal counsel.

SAVING YOUR WEBSITE FROM IDENTITY THEFT

Your website can be a casualty of identity theft. Businesses spend substantial time and money developing web presence that communicates a look-and-feel that captures the businesses’ philosophy and mission. The look-and-feel of your website is the combination of its art, style, layout, colors, photographs, and of course, content.

But many website owners won’t be in a legal position to do anything about the theft of their website identity – even when confronted with blatant copying of their websites. The reason for this is that many website owners are unaware that they in fact don’t possess intellectual property (IP) ownership over their web design. I will explain how this happens and how to ensure that you retain copyright ownership of your web design when contracting with web-developers.

Do I have a leg to stand on?

An individual or company must have standing, a legal right to initiate a law suit. In most cases, a victim will have standing if their legal rights were infringed upon. In copyright infringement cases, the plaintiff - the one taking legal action - must be the copyright owner. That is, you must have a copyright interest in the materials that have been infringed upon to take legal action against the infringer.

Of course, unless you have a written agreement with your web-developer, that clearly explains who owns what, the web-developer likely would be the copyright owner of at least some of the site’s components - not you! In fact, absent a written agreement to the contrary, it would be the web-developer who could take action if your website were copied by another. Can you imagine how frustrating that would be?

Do you own the copyright interest in your website?

Again, the default rule when it comes to copyright law is that the one who creates it owns it. Although you hired your web-developer to design your website, the developer – as the creator – owns the copyrights in the website design. (For the sake of this entry I assume that your web-designer is not your employee but is instead an independent contractor).

Let’s apply the default copyright principle to the three major components making up your web-pages:

a) The Website Content. The IP rights to the text on your website usually are retained by the writer even without an agreement. So if you or a member of your company was the writer of that content, the web-developer would have no copyright ownership over that text. The IP rights to the images would be retained by the photographer unless some licensing arrangement was made.

b) The Website Design. Unless there is a written contract to the contrary, the web-developer would retain all rights to the website design – the look-and-feel, which includes the unique combination of images, colors, sizes and page layout.

c) Source Code. Source code is usually generated by the web-developer, and as a result, the developer would retain copyright ownership over it.

Why should copyright ownership matter to me?

There are lots of good reasons. Technically speaking, if copyright ownership is retained by your web-developer, you would be obligated to obtain your web-developer’s permission before making copies of that design for other web pages. Also, you would not be permitted to create a new page design based on the developer’s original one. This is because the owner of the copyright interest has the “exclusive right to create such derivative works.” But much more importantly, your lack of copyright ownership means that you won’t be in a position to protect your site and take legal action when necessary to protect your website’s design.

What can I do to ensure that my company retains copyright ownership of our website?

There are two types of contracts you need to consider when having a website developed: (1) a work-made-for-hire agreement; and (2) an assignment of copyrights. A work-made-for-hire, which is entered into before the developer begins work, generally states that any future work performed with respect to the copyrighted work under the contract will be the IP of the hiring party and not that of the developer. If the site has already been designed, an assignment of copyrights will be needed to transfer the copyright interest from the developer to you.

Before you sign any contracts with a web-developer make sure you discuss the IP ownership of the various elements of the future website. Certainly, you want to ensure that your company will retain all brand-specific IP, such as any logos or other imagery that is closely associated with your product or service and which the developer is designing. You may want to include a work-made-for-hire clause in the website development contract, or at the very least include a provision stating that the web-developer agrees to transfer all copyright interest in the design elements of the website once he or she has been paid in full.

At the end of the day, this is your property and you need to protect it. A little due diligence and forethought will go a long way to protect your interests.

I am Moshe Lapin, Esq., the Co-Founder & COO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal products designed for entrepreneurs, small businesses & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome! Support@LanternLegal.com or visit us at www.LanternLegal.com.

*This posting should be considered general advice and is NOT intended to be a substitute for the advice of competent legal counsel.

The number one concern I have observed with our clients’ online terms and agreements is NOT with the substantive drafting of the provisions, but with the way these contracts (and yes, they are binding contracts) are implemented on the website. That said, I thought for my first entry, I would offer a quick guide on how to properly implement online terms and agreements for maximum enforceability.

1) Users need a meaningful opportunity to review your terms and proper notice that some form of action will bind them:
Make sure you give notice to users that there is a binding agreement in place that governs their use of the site. This is covered, of course, if you use a “click-through” agreement because they have to actually agree to terms in order to access the site. Also, Users need to be able to actually review your terms. For example, don’t have the terms on a timer that will then disappear and avoid using “pop-up” boxes for contract terms - the FTC doesn’t like this. And while the use of “browse-wrap” terms may be enforceable (where assent (agreement) is given by simply visiting the site and taking some action on the site, like turning a page), they are not as strong as the “click-through” alternative.

2) Users must actually take that action:

The action can be anything, really, like turning a web page, or entering data, or clicking on an icon. But whatever it is, they need to perform that action in order to be bound.

3) Make this notice of terms “immediately available” when visitors come:

This is important; display NOTICE of your binding agreement on your home page and above the fold (on top) if applicable. Assent to your terms (for all intensive purposes) must occur prior to the User’s action. Otherwise, you run the risk that the terms become unenforceable.

4) Make clear that it is a “binding agreement” and not just a suggestion or request to read terms - It must appear in your notice:

For example, “By using this Website in anyway (or by clicking through to another page, or submitting a query, etc.), the User is bound to our Terms of Use.”

You are permitted to use a hyper-link to your terms in your notice, but note that you should set it off from other text by size, color and type of font. Also, you cannot have more than two (2) layers of links, the wording has to be clear and, again, place the notice above the fold.

5) You need to make sure that the User can:

1. Read the terms (at their own pace)
2. Be able to navigate back and forth, and
3. Be able to revisit the terms (not just a one-time viewing never to be seen
again kinda deal!)

6) Users do not have to actually read the terms to be bound nor do they need to be able to negotiate them:

Remember, most people will never read them and they do NOT have to (even though it is in their interest to do so).

7) The presentation must be “conspicuous” (size, font, etc.):

This is intended to protect your interest by making sure Users cannot say that they did not see important terms. Do not try to hide things with font size!

Proof issues - avoid “click-stream data” because it can create privacy issues and make sure you keep old versions of your websites:

Be prepared to prove that your User was informed and that notice was given and the explicit action was taken, thus assent to your terms is established. The best way is to keep a record of those Users who “click through” as an action of assent, as opposed to monitoring all click-streams.

9) Notice must precede specified action of assent:

You always want to place your notice of terms up front (I can’t say that enough!).

10) Lastly, Terms of Use that are “subject to change without notice” are
not always enforceable:

The better way is to e-mail blast an advanced notice of any changes to your terms or Privacy Policy and allow members to “opt-out” if they do not agree to those changes. They rarely will, and you can make it proactive, meaning they have to take action or they consent by their omission. That is, require action on their part to opt out within a reasonable time frame.

These measures were offered up as a “best practice” quick-guide for enforceability. There is, of course, a lot more that concerns the enforceability of any contract. But taking even a few small steps can transform your online docs from toothless into a mouth full of fangs!*

I am Frank Natoli, Esq., the Founder & CEO of the law firm of Natoli-Lapin, LLC, home of Lantern Legal Services. Lantern Legal is our suite of cost-effective, flat-rate legal products designed for entrepreneurs, small businesses & artists. If you believe we can ever be of service, feel free to contact us - your inquiries are always welcome! Support@LanternLegal.com or visit us at www.LanternLegal.com.

*This posting should be considered general advice and is NOT intended to be a substitute for the advice of competent legal counsel.