ARE YOUR LINKEDIN CONTACTS A TRADE SECRET?

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If salespeople connect with their business contacts on LinkedIn or another social media site, can they take that information with them when they leave the company?  Maybe not, according to a federal court in California.

Employees who wish to start their own businesses are often faced with difficult questions.  Can I take my customer list with me?  Can I contact customers of my former employer?  We have received many inquiries on these questions through our websites, pcghlawyers.com and hammers-law.com, both from employers and employees.

David Oakes worked for six years as a salesman for a cell phone accessories company. He had signed an agreement saying that he wouldn’t disclose any proprietary information, including the company’s customer base. When the company terminated him, he started a competing business. His old company then sued, claiming, among other things, that he had maintained his LinkedIn contact list after he was terminated.

Oakes asked the court to throw the suit out, arguing that contacts on LinkedIn are not a “trade secret.”

But the court said a jury should decide the question. Among other things, the jury will have to consider (1) whether the contact list was built up as a result of the company’s business efforts, as opposed to simply being generated by LinkedIn’s “People You May Know” algorithm, and (2) whether Oakes “disclosed” the information by making his contact list accessible to others.

If you have questions about your right to limit employees from taking customer lists, or if you are an employee wishing to start a business, contact a lawyer.

Stephen Hammers, Price, Crooke, Gary & Hammers, Incorporated, 10 Corporate Park, Suite 300, Irvine, California 92606,(949) 573-4910; (800) 511-6058; www.hammers-law.com 

 

COPYING COMPETITOR’S WEBSITE? THINK AGAIN.

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If you’ve put a lot of time and money into designing a distinctive website or online store, and a competitor comes along and copies your site’s look, what are your rights?  Can you file a lawsuit?  Yes, according to a federal court in a recent California case. The “look and feel” of a website is protected by the trademark laws.

Surprisingly, this is one of the first court rulings ever on this question.

In Ingrid & Isabel, Inc. v. Baby Be Mine, LLC, the U.S. District Court for the Northern District of California has made an important ruling.  The case involves two websites selling maternity products. Ingrid & Isabel claimed that a competitor by the name of Baby Be Mine had illegally copied its website design. Specifically, Ingrid & Isabel claimed that Baby Be Mine had copied (1) the idea of putting its logo in pink-orange pastel feminine lettering, (2) the use of models with long wavy hair, shown from head to mid-thigh, wearing white tank tops and jeans, and (3) the general colors, patterns, fonts and wallpaper of Ingrid & Isabel’s site.  Baby Be Mine filed a summary judgment motion arguing that the case should be thrown out.  It argued that there is little, if any, precedent suggesting that a cause of action can succeed on a claim that a website has been ‘copied.’

The District Court disagreed with Baby Be Mine.  It found that the case can and should be tried.  In the past, courts have ruled that the design of a physical store can amount to “trade dress” – such as the color scheme of 7-11 markets, or the distinctive décor of a Mexican restaurant chain. But this is one of the very first occasions in which a court has protected the design of online stores as well.

“Trade dress” refers to the distinctive way that a product is packaged or presented. Examples include the shape of a Coca-Cola bottle or the color of Tiffany’s blue boxes. You obviously can’t trademark the general idea of putting soda in a bottle or jewelry in a box, but if the color and shape are distinctive enough and are separate from the functionality of the product, then they’re protected, and a competitor can’t simply copy them.

Of course, websites are different from trademarks, which provide businesses with a number of additional rules to consider.  I’ve blogged about the importance of protecting trademarks in an earlier article (https://www.hammers-law.com/business-fraud/dont-skimp-protecting-trademarks/).  But differences aside, this ruling is important because it affirms that a website can be protected by the law.  In particular, a website can be a significant aspect of a company’s “trade dress,” and online shops now have legal recourse if their websites appear to have been copied by a competitor.

WAGE GARNISHMENT: A MINEFIELD FOR ORANGE COUNTY BUSINESSES

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Wage garnishment in Orange County is as difficult as it is in the rest of the country.  More than 10 percent of employees between the ages of 35 and 44 had their wages garnished last year, according to a new study by payroll company ADP. That’s a staggering figure, and it creates a serious problem for employers, who are subject to complex state and federal laws about garnishment and can be sued if they make a mistake.

For years, wage garnishment was generally limited to people who fell behind on child support payments or owed money to the IRS. But that’s changed, as more and more private companies are using wage garnishment as a way to collect overdue consumer debts.

In the past few years, these creditors have filed millions of lawsuits. Last year, some 4 million people had their wages garnished for credit card debts, student loans, car payments, medical bills and other consumer obligations. In fact, among employees earning $25,000 to $40,000 a year, more had garnishments for consumer debts than for child support.

There are complex federal and state laws that dictate how employers must respond to garnishment requests. Sometimes they conflict, in which case the employer must generally follow the law that results in the smallest garnishment.

Garnishment orders are typically made by a local court, after a worker has fallen seriously behind on a debt and the creditor has filed a lawsuit. Generally, a business must comply with the order and is not required by federal law to obtain a worker’s authorization to withhold money from a paycheck (although state law may vary).  Employers who fail to abide by garnishment orders, often pursued in California as “Writs of Execution,” can face fines, and even liability for the employee’s debt in some cases.

Under federal law, garnishment is limited to a percentage of a worker’s “disposable earnings.” Figuring this figure can be complicated.  It includes wages, salaries, bonuses, commissions, and pension earnings, but doesn’t include tips. This amount must be reduced by federal, state and local income taxes, along with Social Security and unemployment deductions – but not voluntary deductions such as union dues, health insurance payments or retirement plan contributions.

Garnishment amounts for consumer debts are limited to 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal hourly minimum wage, whichever is less. (Again, state laws may be different.)

Under federal law, up to 65% of disposable income can be garnished for alimony and child support, but this figure depends on whether the worker is supporting a new spouse or child as well as how far behind he or she is on the payments.

There are special rules that apply to garnishments of tax debts, bankruptcy-related debts, money owed to federal agencies, and student loans owed to the U.S. Department of Education.

The rules are so complex that it’s not unheard of for a local court to issue a garnishment order that’s not consistent with federal or state law. In such a case, the employer will need to go to the court and ask it to fix the problem – a company can’t legally break the rules even if it’s following a court order.

Some businesses have been known to fire employees rather than deal with wage garnishment issues. Curiously, federal law prohibits a business owner from firing someone due to a single wage garnishment, while theoretically allowing an employer to fire someone who has two separate wage garnishments at the same time, or who voluntarily assigned wages to a creditor rather than waiting for a court garnishment order.

In summary, employers should be extremely careful about garnishment. Employers who violate the federal law on firing over a garnishment can be sued for reinstatement and back pay, and can even be prosecuted criminally.

BUYING A VACATION HOME WITH FRIENDS OR FAMILY? SOME THINGS TO CONSIDER…

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Sales of vacation homes have been rising sharply lately. Across the country, the number of vacation homes sold last year was up 30% from the year before, according to the National Association of Realtors.  Vacation homes now account for 13% of all home sales. The median price last year was $168,700. Interestingly, most vacation home buyers are under age 45.

Many people have long dreamed of owning a second home, but buying one can seem like an overwhelming task.  One solution to addressing that task, both with regard to the time invested and financial risk, is to join forces and invest with friends or family.  This can be an ideal solution – you get to use the home for part of the year, just as you planned, but the costs can be shared and risks reduced.

Before you take the leap, it’s important to think through everything that will be involved, and what will happen if something goes wrong. You’ll want to have a frank conversation with your partners and draw up an agreement that covers all the bases – a kind of “real estate prenup.”

Here are some things you’ll want to take into account:

What will you use the home for? Are you primarily interested in using the home yourself as a getaway, or renting it for income? You’ll want to be on the same page about this right away, so you don’t wind up disappointing someone’s expectations.

How will the time there be shared? This is critical, and you need a plan. The problem is that it’s often hard to work things out in advance and set a schedule in stone, because everyone’s needs will change over time.

If a brother and sister are sharing a property and they both have small families, the conflicting needs of the families might not be an issue at all. But if four or five families are splitting a home, there are bound to be schedule conflicts, and it can be good to have a formal system.  Some co-owners have created an online spreadsheet on which they can sign up for use of the house. Some randomly assign weeks at the beginning of the year, with the owners being allowed to trade and barter among themselves.

This type of system can be tweaked depending on your needs. For instance, all the owners might be guaranteed a certain number of weeks during the peak season, or families with children might be given priority during school vacations.

You’ll also want to consider whether owners who spend more time at the property should also contribute more to maintenance, insurance and utilities.

Who – or what – will own the property?  Good question for the attorneys(!!)  Often, the best solution for property ownership with friends and family is a limited liability company.  An operating agreement will be drafted to establish the rights and obligations of the “members” in the LLC.  An LLC can help with protection from creditors, and can make it easier to sell or give away an interest in the home. (On the other hand, it might limit your ability to deduct mortgage interest on your taxes.)

What happens if someone wants to sell?  This is a critical question to address in the Operating or Partnership Agreement.  Even if your best friends plan to keep the home forever, they could suffer financial problems and need to back out.  Since it can be hard to sell a fractional share of a home, many agreements provide that every few years, the co-owners will each have the option to force a sale of the entire property.  Another idea is to give the other owners a “right of first refusal,” which means that if someone wants to sell their share, the other owners have the option of buying that person out.  Obviously, you want to avoid co-owning a home with strangers or people you don’t get along with.

How will expenses be handled? While it’s possible for owners simply to contribute money for repairs and other expenses “as needed,” this can lead to a lot of confusion and even conflict. In most cases, the better method is to have owners contribute a fixed amount of money on a regular basis that can be used to pay expenses.

It’s a good idea to have a separate bank account for the management of the property, which is especially easy if the property is owned by an LLC. A separate bank account will minimize issues over who owes what and who paid for what. And if you plan to rent the property to generate investment income, a separate account will make it much easier to track expenses and profits for tax purposes.

If you’re planning to use the property to generate income, you’ll want to establish some rules about when the profits can be withdrawn from the account versus being kept there to pay future expenses.

What about routine maintenance? If maintenance is going to be a significant issue – perhaps because no one lives close enough to the property to take care of things as they arise – then it might be wise to consider hiring a management company.  But even hiring the management company and overseeing its work is a task that must be allocated among the members or partners.

FANNIE MAE WILL CONTINUE TO BACK LARGER MORTGAGES

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Fannie Mae and Freddie Mac, the quasi-government entities that insure or repurchase a high percentage of mortgages in the U.S., will continue to back mortgages as large as $417,000 – and as large as $625,500 in some high-value areas.

That’s the word from the new director of the Federal Housing Finance Agency, which oversees the two mortgage giants.  The agency had planned last year to reduce the largest Fannie and Freddie-backed loans to $400,000 (and $600,000 in the most expensive locales), but it now says that continuing to insure larger loans will help the country’s housing recovery.

This is good news for buyers who want to obtain larger mortgages. Mortgages of more than Fannie and Freddie’s maximum amounts are usually considered “jumbo” loans, and borrowers typically have to meet much higher standards and restrictions to obtain them.

‘CROWDFUNDING’ BUSINESSES HAVE OBLIGATIONS TO INVESTORS

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Start-up businesses are increasingly seeking funding on websites such as Kickstarter or Indiegogo, and promising small rewards to individual investors in return for micro-contributions.  Examples of these businesses include the Veronica Mars movie, which raised millions of crowdfunding dollars by promising small contributors posters, DVDs and movie scripts, and a space telescope project that offered “space selfies.”

Note to start-ups: pay attention to your legal obligations.  Recently, the State of Washington accused a Kickstarter company of reneging on its promise to send small contributors decks of horror-themed playing cards. The state is seeking restitution plus additional damages of $2,000 per contributor and the costs of bringing the suit.

Keep in mind that the promises made through crowdfunding sites establish legal obligations.  If a start-up ends up getting hundreds or even thousands of contributors by offering small rewards, the promises have to be honored.

 

LESSEE LIABLE FOR SLIP AND FALL?

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If you are a commercial tenant, running a business and occupying under a commercial lease, can you be liable for injuries if a visitor or other passerby slips and falls outside your business? 

The answer depends on a number of factors.  The most important, however, may be a Court’s assessment of legal responsibilities of landlord and tenant under the commercial lease.

This issue came up recently in a non-California case against P.F. Chang China Bistro restaurant.  A woman by the name of Sabena Beriy fell on what she claimed was a poorly maintained curb outside a P.F. Chang’s. P.F. Chang’s had leased the property from a landlord as part of a larger development. The lease provided that P.F. Chang’s was responsible for any injuries on its “premises,” and that the landlord was responsible for any injuries that occurred “outside” the premises.

P.F. Chang’s claimed that Sabena’s fall occurred in the common area of the development, not in its restaurant. It also claimed that the landlord was responsible under the lease for designing and maintaining the parking areas, driveways and curbs.

The landlord prevailed in the end.  According to the court, the area in front of the restaurant was not “common,” but was exclusively for P.F. Chang’s use and was part of P.F. Chang’s “premises.” Further, while the landlord was supposed to build and maintain the curb, the lease provided that any such improvements on exclusive-use areas were again part of P.F. Chang’s “premises.”

Commercial tenants should take note.  It’s important at the time of negotiating the lease exactly which areas establish legal responsibility for the tenant, and which do not.  This is especially true in the context of the tenant’s liability insurance.  Failure to accurately assess which property is part of the tenant’s premises, and which is not, may end up not only with primary responsibility for an accident, but inability to tender a claim to insurance!

SUPREME COURT SAYS “NO PATENT” IN ALICE CORP. LTD.

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A business cannot obtain a patent for taking some ordinary process in the real world and coming up with a computer program to make it easier, according to the U.S. Supreme Court.

In ALICE CORPORATION PTY. LTD. v. CLS BANK INTERNATIONAL ET AL, decided in June of this year, a company called the Alice Corporation tried to patent an online system to reduce risk in financial transactions. Alice’s program was little different from a third-party clearinghouse or escrow service, except that it offered all such services automatically online. The fact that the activity could be accomplished on-line did not make it worthy of a patent, according to the Supreme Court. Alice didn’t really come up with a new idea, technique or process. It simply took an age-old process and created an app for it.

The decision is important because many companies have been seeking to drub out competition through patents that isolate their on-line apps. The high Court obviously feels that reduction in competition in this manner is not one of the policies served by the patent process.

Immediately after the Supreme Court decision, other courts began throwing out patent claims along the same lines. For instance, a judge in New York rejected a patent for a computer program that helped people plan meals. The program let people choose meals from picture menus, learn how the meals would fit into their diet or nutrition goals, and let them substitute items and see how those changes affected the results. But that’s no different from what nutritionists have been doing for years, the judge said, and even if a computer program makes it easier and faster, it’s not such a new idea that it can be protected with a patent.

DON’T SKIMP ON PROTECTING TRADEMARKS

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Ever heard that you don’t actually have to register a trademark?  Perhaps you believe you only have to “use” your trademark in business to have “a right to it.” That’s true to some extent – but beware!

Trademarks are obviously an important aspect of branding and marketing an business.  They are particularly important for start-ups.  One of the key things investors look for is whether a new company has properly secured its trademark rights.

Before investing in a business name, symbol, type of packaging, or any other distinctive representation of your business, it’s worth paying to conduct a trademark search.  The consequences of discovering too late that someone else is already using your idea are serious. Unauthorized use of a trademark can result in a lawsuit, meaning high legal fees, and the results can include destruction of all marketing materials and merchandise, and/or the requirement that a new market plan be initiated.

Recently, a Massachusetts company called Chocolate Therapy discovered this too late, and was forced to rebrand its entire business. The company ended up holding a contest to rename the store (with the winner getting a box of chocolates).

Consider investing in a federal trademark registration. Again, this isn’t absolutely necessary, but it provides significant advantages. It allows the trademark user to claim the trademark nationwide (as opposed to just in the places where business is conducted), and certainly provides a leg up in the event of a court dispute!

SALE OF BUSINESS INTEREST CAN TRIGGER TAX RESULT

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What triggers a “technical termination” of a business for tax purposes according to the IRS?

If more than 50% of the interests in a partnership or a multi-member LLC is transferred within a 12-month period, the entity technically ceases to exist under federal tax law. That’s true even if the business continues to operate as normal for all other intents and purposes.

A technical termination can occur even where partial sales occur in different calendar years. So if 25% of a business’s interests is transferred in September 2014 and another 25% are transferred in July 2015, this would still count as a sale of 50% of the business in a year.

A termination can also occur if a multi-member LLC becomes a single-member LLC – even if less than 50% is transferred. So if an LLC has two members, one with an 80% interest and one with a 20% interest, and the majority owner buys out the other owner, that’s still a termination according to the IRS.

This “technical termination rule” is not the end of the world for a business, but it’s something to be consider and address with proper paperwork. For example, a special tax return is due within a few months after the “termination” occurs. Recently, according to public IRS cases, one family business was hit with more than $12,000 in IRS penalties and interest because the family did not realize they needed to file their “special return.”

The partnership or LLC undergoing a transfer or sale must also make new federal tax elections and start over with new depreciation periods – which can significantly reduce tax write-offs. And if the business operates on a fiscal year, the owners might end up having to report more than 12 months’ worth of taxable income in the year the termination occurs.

So, the obvious lesson here is be sure to consult with your CPA before closing on a sale or transfer of a portion of your business.