Chapter 7
LAWS, REGULATIONS and TAXES

IN This Chapter
Our legal system
Business regulations
Contracts and leases
Intellectual property

Introduction
How does the legal system affect your business? How can you use it to protect your interests? We will answer these and other questions by discussing the major areas of business regulation.
There’s no way we can discuss every law that might apply to your business. Laws vary from state to state and change frequently. Treat this chapter as a jumping-off point for your own research, and seek help from trustworthy accountants and lawyers who understand the issues businesses in your industry face.
Our Legal System
The American legal system consists of statutory laws, judicial interpretations and administrative rules originating from the executive, legislative and judicial branches of government.
The federal court system consists of the United States Supreme Court; federal magistrates; federal district courts; and 11 appellate circuit courts. There are also special federal courts for bankruptcy, taxes, customs and patent appeals.
Federal courts hear cases of federal law and those which involve the crossing of state lines or waterways. Each state has its own supreme court, and most have an intermediate court of appeal. All states also have appellate trial courts, which are usually based on county lines.
The courts hold trials, hear appeals from lower courts, and probate estates. They also review the decisions of administrative agencies and the actions of state and federal legislatures. In doing so, they establish legal precedent through their interpretations. The resulting common law governs many types of business contracts.
Federal and State Law
The executive branches of federal and state governments have established administrative agencies to implement federal codes and state statutes. These agencies create laws by way of administrative regulations, many of which affect businesses.
Federal law often acts as a minimum standard, leaving individual states free to enact stricter laws. The minimum wage is a good example; states can set a minimum wage above the federal level, but not below it. The same is true of counties and cities, which often pass local regulations that are stricter than state law; bans on plastic shopping bags are a well-known example.
Civil and Criminal Law
There are two further divisions of the law: civil and criminal. A tort is a civil law action in which a plaintiff sues a defendant in order to be “made whole” after being injured by the defendant. Remedies are generally either money damages—which may include compensation for pain and suffering—or injunctions that order the defendant not to take an action that would injure the plaintiff. In some cases, punitive damages may also be awarded.
By contrast, criminal law concerns the rights of society versus the actions of individuals. Its purpose is to maintain public peace and safety; penalties range from fines to jail terms.
Ordinances and Zoning
Local ordinances cover building codes, business licenses, the use of one’s home for business purposes, and so forth.
They also cover zoning, which regulates the use of land and buildings in order to protect public health, safety and general welfare. For information on zoning laws in your area, check with your local building or zoning department. If you have a home-based business, common zoning restrictions include:
No onsite sales, deliveries or inventory
Little or no signage, noise, hazardous waste or odors
No employees other than family members
Uniform Commercial Code
The UCC covers business contracts, including invoices, bills of lading and letters of credit. It has chapters dealing with checks and promissory notes, warranties, security interests and liens on personal property. It also requires manufacturers to protect customers through product liability standards.
Taxation
Federal, state and local governments all have the power to collect taxes. In addition to state and federal income tax, your business may be subject to the following tax requirements:
Sales tax. All but three states impose sales taxes on certain types of business transactions. States with sales tax usually require businesses to register with the state taxing authority.
Property taxes. Most states assess taxes on real estate as a means of funding state government. Many states have adopted enterprise zones or renewal districts whereby businesses are given tax breaks for locating in certain areas.
Excise taxes are imposed by federal, state and local governments on certain types of goods, such as gasoline or cigarettes; and certain activities, such as driving heavy trucks on highways.
Payroll taxes. The federal government requires employers to pay or withhold payroll taxes, which include Social Security, Medicare and unemployment. Usually, employers must make quarterly or monthly payments. Incorrect or late payments can result in severe penalties. Employers must also withhold sums from employees for state unemployment compensation and injured worker compensation. In metropolitan areas, city taxes may be withheld as well.
BUSINESS Regulations
The following summary is not intended as legal advice. Our goal is to provide basic knowledge to help you seek expert advice. The Business Fees, Permits and Taxes Worksheet and the Business Regulations Worksheet will help you to stay organized and ask the right questions.
Note that when operating in multiple states or jurisdictions, you may have to comply with multiple, possibly conflicting laws and regulations. Your lawyer and accountant can help you understand your obligations.
You should also understand your rights and options under the Regulatory Flexibility Act of 1980 and the Small Business Regulatory Enforcement Fairness Act of 1996. These bills are designed to ease the regulatory burden on small businesses while also giving them greater input into the rulemaking process. Under these bills, regulatory agencies such as OSHA and the EPA must provide compliance assistance to small business and offer alternative enforcement methods and penalty reduction policies where possible. To learn more, visit the SBA’s Office of Advocacy at www.sba.gov/advocacy.
Licenses, Permits and Fees
Depending on where you operate and what type of business you run, you may need special licenses and permits for your business, yourself or your employees. These might include professional licenses for service providers, such as those required by accountants and contractors; business permits, such as those required by restaurants that serve liquor; state or county business licenses that give you the right to operate in a specific jurisdiction; sales tax licenses that allow you to collect tax from customers and remit it to the state; environmental licenses and permits, such as those regulating the flow and treatment of wastewater from business operations; and zoning licenses, such as those affecting signage, parking and so forth.
Some states also assess special fees on regulated professions and industries, such as beer, wine and spirit manufacturers.
Wage and Hour Regulations
The main law affecting workers’ pay is the Fair Labor Standards Act (FLSA) of 1938. Employers must display an official poster outlining the provisions of this act; you can get free posters by calling 866-4US-WAGE. You may also be required to post certain rules clearly in the workplace.
Rules mandated by FLSA include:
Minimum wage. Some states have a higher minimum wage than the federal rate. Check with your state department of labor for current information.
Recordkeeping. Records you must keep include each employee’s full name, social security number, address sex, and occupation; total hours worked each day and week; basis on which wages are paid; and overtime hours worked.
Overtime. It’s illegal to change the start of the work week to avoid paying overtime.
Deductions from wages for such items as uniforms and tools are illegal if they reduce employee wages below the minimum wage or reduce overtime pay.
Pay interval. Pay periods must be one month or less. Certain states require a shorter interval.
Time off. Although the FLSA doesn’t require you to grant paid vacation days, holidays or sick days, be aware that if you promise such days off in an employee handbook or other written form, or have paid these days in the past, you may be legally required to give these benefits to all employees. Some states mandate paid time off for voting, military service and school conferences.
Breaks. Many states regulate the frequency and length of breaks.
Employers who violate the FLSA usually have to pay the employee all unpaid wages, including overtime. Serious abuses may result in large fines; a second offense may lead to jail time. Most investigations result from employee complaints; it’s illegal to fire or harass employees for such complaints.
The Department of Labor’s FirstStep Employment Law Advisor tool can help you understand which employment laws apply to your business: www.dol.gov/elaws/FirstStep.
Organized Labor Laws
The National Labor Relations Board has adopted a number of statutes and administrative regulations relating to unfair labor practices and collective bargaining with labor organizations. Some states require union employment or its equivalent in public projects. If you’re going to have a manual labor force or bid on public projects, consult your state labor department or a labor attorney.
Child Labor Laws
In many states, children 14 to 17 must have a work permit and there are limits on how many hours they can work per day. Most states distinguish between employees and family members. Check with your state labor department for more information.
Family and Medical Leave Act (FMLA)
The FMLA applies to employers of 50 or more people. It entitles workers to a maximum of 12 weeks of unpaid leave in cases of pregnancy, adoption, family or personal illness, or elder care. State or local laws that provide greater family and medical leave rights than the federal act are not superseded by it, which means that your employees may have a choice of whether to request such leave under federal or state law.
Also, the federal law applies to all legally married same-sex couples, even if their state of residence does not recognize such marriages. Your state department of labor will be able to help you understand how these laws affect your business.
Affordable Care Act (ACA)
The ACA imposes various duties on employers, many of which depend on size:
All employers covered by the FLSA must notify employees of the ACA’s health marketplace, regardless of their enrollment status or part-time/full-time status. The Department of Labor offers sample notices at www.dol.gov/ebsa/faqs/faq-noticeofcoverageoptions.html.
Businesses that offer health plans must provide employees with a “Summary of Benefits and Coverage” that states what the plan covers and how much it costs.
Employers of any size that offer self-insured health plans must provide Form 1095-B, Health Coverage, to each covered employee. They must also provide these forms to the IRS by using Form 1094-B, Transmittal of Health Coverage Information Returns. This is a brief informational return confirming that employees have the minimum essential health coverage mandated by the ACA.
The ACA requires insurers to spend a minimum of 80 percent of premium dollars on medical care instead of administrative costs. Insurers that spend less must send rebates to their customers. For employers with group health plans, this raises the question of whether the rebate counts as a plan asset, and if so, how to allocate it. Consult your tax advisor on this question.
Businesses that employ more than 50 full-time equivalent (FTE) employees, but do not offer “affordable” health coverage that provides minimum essential to full-time employees and their dependents, may be subject to an Employer Shared Responsibility Payment if at least one full-time employee receives a premium tax credit or cost-sharing subsidy through the ACA marketplace. The annual penalty is $2,000 per full-time employee, minus the first 30 employees. Roughly 96 percent of small businesses are exempt from this rule; visit business.usa.gov/healthcare to learn more.
Additional regulations and filing requirements may apply to businesses with more than 50 FTE employees.
…
I owe my business idea to forgetfulness.
I like to go on a couple of long bike rides every week, when the weather cooperates. When I say “long,” I mean 100 miles or more. But I couldn’t ever remember to charge my phone before I headed out. My wife wasn’t too happy about that, and you can understand why.
I won’t deny being forgetful about it. But the way I see it, some of the blame should go to manufacturers who ignore the way people live and the things they like to do. Supposedly, everything these days is about the individual: everything’s customized, everything’s personal. There’s no more one-size-fits-all mentality. And mobile devices are a perfect example of that.
That’s what they say, anyway. But to me, it seemed like all these devices were designed for urban and suburban settings where you’re never more than a couple of minutes from a charging point. That doesn’t work for people like me.
A few years ago, Scott Engel was working as an electrician in Stony Brook, New York. His wife, Annette, often had to remind him to charge his phone before going on bike rides or hikes. Even when he managed to remember, he tended to charge it for such a short time that it would die while he was on the road.
Scott had never been the type to remember things like charging cell phones. His logic was that if he had to remember to charge his phone before a long bike ride, there was something wrong with its design.
“If there’s something wrong with it,” said Annette, “why don’t you fix it?”
That’s when Scott hit on the idea of creating a charger that would be powered by his spinning bicycle wheels.
…
Worker Safety Regulations
The Occupational Safety and Health Administration (OSHA) sets strict worker safety rules. Workers have two basic rights under OSHA. First, they can complain to OSHA about safety or health issues without being penalized. Second, they can refuse to work if they feel they are in immediate risk of serious injury or death.
The best way to meet your legal responsibilities for keeping your workplace safe is to involve your workers. You and your employees should regularly conduct a worksite analysis to identify and eliminate hazardous conditions. You should also schedule regular safety meetings at which you ask your employees to identify problems and suggest solutions. If workers know they can voice their concerns to you, they’re less likely to complain to the authorities. (Organizing a worker’s safety committee can also earn you a break on workers’ compensation premiums.) Safety codes are another way to let employees know you take their safety seriously.
OSHA inspectors can enter your workplace at any time—with no warning—and can issue citations or impose penalties if unsafe or unhealthy conditions exist. If you have 10 employees or fewer, and are in a business with a low injury rate—a shoe store, for instance—you may be exempt from OSHA inspections and recordkeeping requirements. To see if your business is exempt, contact your state OSHA office.
Penalties imposed by OSHA depend on the seriousness of the violation. For willful or repeated violations, your business may be fined thousands of dollars. If a worker dies because you ignored OSHA rules, you could even be sent to prison.
In assessing penalties, OSHA looks at the size of your business; the seriousness of the hazard; and whether you’ve made a good-faith effort at compliance.
Penalties aside, it makes good business sense to provide a safe, healthy workplace. Healthy workers are happier, more productive and less prone to absenteeism. They can also lower your insurance and workers’ compensation costs. Furthermore, a noncompliant workplace provides disgruntled workers with a means of causing you considerable trouble.
Safety Training
Under OSHA, you’re responsible for safety training. Make sure your employees understand all workplace hazards, and provide Material Safety Data Sheets (MSDS) for any chemicals they work with.
Don’t let an employee begin a job until he has been instructed in how to do it safely. You must maintain records of your safety training procedures; it’s a good idea to have employees sign a form each time they receive training. Be prepared to show these records to OSHA inspectors.
You’re also required to establish a system for reporting injuries and illnesses, and to train employees in how to use it. If your state has a health and safety law, the state OSHA can take over enforcement of these standards from its federal counterpart. State rules and enforcement actions may be stricter than federal standards.
OSHA offers a free, confidential consultation program that helps small businesses maintain a safe workplace. The consultants are contractors with no enforcement power; they will not cite or penalize you for infractions. To learn more, visit www.osha.gov/dcsp/smallbusiness/consult.html.
Civil Rights and Nondiscrimination Laws
Various federal laws prohibit businesses from discriminating on the basis of race, ethnicity, color, sex, national origin, disability or age. Although federal antidiscrimination laws usually apply only to businesses with 15 or more employees, city and state laws may apply to smaller businesses. They may also forbid other types of discrimination, such as firing people based on sexual orientation. Important federal laws include:
The Equal Pay Act requires virtually all U.S. employers to pay men and women the same amount for equal work, meaning work that entails “equal skill, effort and responsibility...performed under similar working conditions.” It’s legal to pay men and women different amounts based on seniority, merit, productivity and other work-related factors. To learn more, visit www.eeoc.gov.
The Immigration Reform And Control Act prohibits private employers with four or more employees from discriminating against job seekers or employees based on citizenship or national origin. It also forbids employers from knowingly hiring or retaining employees who are not authorized to work in the United States. The act requires employers to check employee documents and to maintain records proving that their employees are legally authorized to work.
The Americans with Disabilities Act (ADA) prohibits employers from discriminating against people with disabilities in the workforce or in public facilities.
Check with your state to find out which antidiscrimination laws you must follow.
Antidiscrimination laws also target workplace harassment, from unfair job placement to sexual harassment. The best way to avoid these problems is to adopt and enforce an employee manual detailing behavior your company won’t tolerate.
Consumer Protection Laws
Federal and state consumer protection laws affect everything from consumer credit to warranties. The Federal Trade Commission (FTC) is the main agency that oversees consumer protection efforts.
Consumer Privacy
If you collect personal data about your customers, you have a legal obligation to keep it secure and to dispose of it properly.
It’s a good idea to post a privacy policy that explains how you will use customer data. Such policies typically state that the business will not give or sell customer data to a third party without the customer’s permission. If you need to change this policy, alert customers well ahead of time.
Because e-commerce often happens across state lines, data collection laws in a customer’s state can affect your business. For example, California’s Online Privacy Protection Act requires commercial websites that collect data from Californian consumers to post their privacy policy.
The Children’s Online Privacy Protection Act
This federal law requires commercial websites and online services to obtain verifiable parental consent before collecting, using or disclosing personal information from children under 13. This law applies to sites and services that target children, as well as general sites that children may visit. The FTC offers compliance guidelines at www.ftc.gov/privacy/privacyinitiatives/childrens.html.
The Fair Credit Reporting Act
The FCRA imposes guidelines for the use and disposal of consumer report information, which includes credit reports, credit scores and background checks. Although the law applies specifically to consumer reports, it makes sense to apply the same security standards to all sensitive customer and employee data. The FTC offers compliance tips at www.ftc.gov/tips-advice/business-center.
Telephone Solicitation
Federal regulations governing telemarketing include the Telephone Consumer Protection Act (TCPA) and the FTC’s Telemarketing Sales Rule (TSR). Provisions include:
Telemarketers may not call residences before 8 a.m. or after 9 p.m. local time.
Telemarketers must provide their name, the name of the business they represent, and a valid telephone number or address for that business.
Telemarketers cannot use artificial voices or prerecorded messages (i.e., robocalls) without a signed, written statement from the recipient agreeing to receive such calls from that specific seller.
The Do-Not-Call Implementation Act of 2003 created a National Do Not Call Registry for residential phone lines and stipulated that telemarketers must:
Pay a subscription fee for online access to the Do Not Call Registry.
Scrub their call lists every 31 days to remove consumers listed in the Do Not Call Registry.
Remove consumers from their internal call lists on request, whether or not the consumer is listed in the Registry.
Telemarketing abusers may be fined up to $16,000 for each violation. In one high-profile case, a telemarketer was fined $500,000 for breaking federal rules.
The act permits calls relating to an “established business relationship,” which means you may contact anyone with whom your company has done business in the last 18 months, even if that person is listed in the Registry. You can also contact people who have expressed interest in your business, provided you do so no more than three months from the prospect’s inquiry. If such a person asks to be taken off your call list, you must honor that request.
Commercial emails
The Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM) applies to businesses that send commercial emails. Provisions include:
The email must be clearly identified as an advertisement and include your valid physical postal address.
The email’s subject line can’t mislead recipients about the content (e.g., by representing it as a personal message from a friend).
The email must explain how to unsubscribe from the mailing list. The method must work within 10 days and be functional for at least 30 days after you send the email.
Once a recipient has opted out of receiving emails, you cannot sell or transfer that person’s address to another entity, whether that entity intends to send the recipient email or not.
As of this writing, each violation of these provisions is subject to fines of up to $16,000 per incident. Additional penalties—including imprisonment—may apply to the following activities:
Unauthorized use of someone else’s computer to send spam
Relaying or retransmitting spam to mislead recipients or service providers about the origin of the message.
Using false information to register multiple accounts or domain names
Online, Phone & Mail Orders
The FTC has strict rules for businesses that take orders online, by phone or by mail. These rules guide shipping times, refunds and communication with customers.
Most reputable businesses will have no problem following these rules. For example, businesses must ship merchandise within 30 days of receiving an order, unless they clearly state that order fulfillment will take longer. To learn more, visit www.ftc.gov/tips-advice/business-center.
Refunds and Returns
All businesses must give refunds for defective goods or services. Businesses that post a return policy are legally required to follow that policy, and most states also require businesses to post their return policy clearly. For instance, if you accept returns within 14 days for store credit only, this information must be posted clearly.
If your business doesn’t have an official return policy, the state’s default refund law will apply. For example, if your state says that consumers who return an unopened item within seven days are entitled to a cash refund, you must follow that law.
Advertising and Labeling
The FTC states that advertisements must be truthful, fair and nondeceptive. When assessing ads, the FTC looks at both express and implied claims. In the case of a company that advertises a “100%-natural” product, the FTC might look at the express claim that the product is natural, and the implied claim that this confers some benefit.
The FTC also looks at what the ads don’t say. For instance, if a company advertises a “solar lamp” without revealing that the lamp needs to be plugged in to work, that would probably be considered deceptive.
The law requires advertisers to back up certain claims with evidence. A claim like “Kids love Abner’s Ice Cream” wouldn’t need evidence. But claims like “Abner’s Ice Cream cures athlete’s foot” or “Abner’s Ice Cream is made from organic ingredients” must have a reasonable basis in fact.
The FTC’s Bureau of Consumer Protection is a good source of information on unfair, deceptive and fraudulent business practices. You can learn more at www.ftc.gov/bcp. Individual states have their own laws, some of which may be stricter than federal laws. Contact your state department of consumer affairs for more information.
Food Safety
If you plan to run a food-service business—such as a restaurant, food cart or packaged food business—you must consult your city, county and state health regulations. Failing to follow health department rules for your type of business can lead to very serious penalties. Packaged food businesses must also obey Food and Drug Administration (FDA) labeling requirements.
Warranties
The federal government has established minimum requirements for written warranties in consumer transactions. This is essentially a disclosure requirement; it is not a requirement that you provide a warranty. Using the sale of a used car as an example, the seller is required to disclose any defects in the car to a prospective buyer, but doesn’t have to provide any type of warranty that the car will work next month.
Shipping and Transportation
U.S. and international laws regulate what you can ship, how you can ship it, and where it can go. Some of these laws reflect national security concerns. Others protect U.S. agriculture; ensure safe shipping of hazardous materials; or regulate transport of alcohol, tobacco and firearms.
The U.S. Postal Service has strict shipping rules with which you should become familiar, as do commercial carriers such as UPS and FedEx. If you ship internationally, you may face additional regulations. For example, it’s illegal to send artificial flowers, bells, clocks, shoes, handkerchiefs, scarves, hats, leather goods, nutmeg, playing cards, coffee or non-wooden toys to Italy. Your carrier or international freight forwarder can help you follow these rules.
…
The principle was simple. I already had a headlight that was powered by my wheels. Figuring out how to make a charger was easy. I had no problem drawing up a circuit diagram.
But from there on out, things got difficult. I knew nothing at all about prototypes, or manufacturing, or patents, or design, or marketing. It felt like there was no end to the stuff I didn’t know about!
I needed help, and plenty of it.
Scott called up an acquaintance of his named John Franz, who was a mechanical engineer. After asking John to sign a nondisclosure agreement, Scott explained what he wanted to do.
John liked the idea, and couldn’t see any reason it wouldn’t work. They’d need a small dynamo unit like the one that powered Scott’s headlight. There’d also have to be a cord that would fit a cell phone’s charging port. It was pretty straightforward.
They messed around in John’s garage for a few weeks, and—after destroying several cell phones they’d bought cheap on eBay—finally made a working charger.
The next step was to build a prototype.
…
Environmental Laws
Environmental laws regulate how your business and its employees use, store and dispose of hazardous materials. You don’t have to be working with high explosives to be regulated. Batteries, oil, cleaning supplies and solvents may also count as hazardous materials. If you work with such materials, consult your state’s environmental protection agency to make sure you’re complying with current regulations.
Clean Air Act (CAA). This act regulates emissions from various sources. It also requires state and local governments to provide small businesses with a Technical and Environmental Compliance Assistance Program. Whether the CAA affects your business depends on its size, the amount of its emissions, and your local air quality.
Clean Water Act (CWA). The CWA makes it unlawful to discharge pollutants (including wastewater and stormwater) without a permit. It also mandates the protection of wetlands, which may include areas that are seasonally inundated with groundwater. Before starting a cut or fill project, check your state and local regulations, which may be more strict than federal rules.
Safe Drinking Water Act (SDWA). This act authorizes the EPA and state governments to establish purity standards for aboveground and underground sources—or potential sources—of drinking water. SDWA concerns include health issues like bacteria and industrial pollution, as well as quality issues like smell and taste.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Under CERCLA and its equivalent state laws, parties responsible for releasing hazardous substances are identified and required to pay for cleanup. The act also created a federal “Superfund” that allows the EPA to clean hazardous sites and seek reimbursement from responsible parties.
Resource Conservation and Recovery Act (RCRA). This act and its equivalent state laws regulate hazardous materials from creation to disposal. All facilities that treat, store or dispose of hazardous wastes are subject to RCRA. It also regulates the underground storage of petroleum and related products. If you buy a business with an existing storage tank, check your state’s rules; you may be required to buy a new tank.
Toxic Substances Control Act (TSCA). This act mandates the testing and regulation of all chemicals produced in or imported into the United States. It also regulates the manufacture and importation of chemicals that are not on the TSCA Inventory. Businesses that intend to manufacture or import such chemicals normally have to notify the EPA before proceeding.
Emergency Planning & Community Right-to-Know Act (EPCRA). This act requires each state to provide citizens with information on local chemical hazards, and to prepare local communities for spills, terrorist attacks and other disasters. It also requires businesses to have emergency plans, report on the quantity and type of chemicals they store, and notify authorities in the event of a toxic release.
Pollution Prevention Act. This act encourages businesses to cut pollution by changing the way they buy, produce, use, store and dispose of raw materials. Learn more at www.epa.gov/p2.
Endangered Species Act (ESA). The ESA protects endangered species, as well as the health of their ecosystems. It is enforced by the United States Fish and Wildlife Service (FWS) and the National Oceanic and Atmospheric Administration (NOAA). Individual states also maintain their own ESA lists. Violations can result in severe penalties.
Takeback laws. Some cities and states have mandatory takeback requirements for specific products or packaging types. Contact your local waste management authority for more information.
Water rights. Depending on where you live, special laws may apply to water access. In Nevada, for instance, you may face stiff penalties for violating surface or underground water rights. Check with local government to see what permits you need, what rights they provide, and what restrictions are in effect.
Enforcement
Because environmental problems often require special understanding of local issues, responsibility for enforcing federal environmental laws rests largely with state and local governments.
To find out who’s obeying the law, the EPA generally relies on the following methods:
Self-monitoring. Regulated facilities may be required to monitor their compliance status and report it to the responsible agency.
Inspections. This is the EPA’s primary means of officially assessing compliance.
Area monitoring looks at environmental conditions in the vicinity of a facility. Methods include overflights, ambient monitoring and remote sensing.
How regulators respond to violations usually depends on your willingness to cooperate, the severity of the offense, and any mitigating factors. Possibilities include:
Civil action. Most environmental laws authorize civil penalties and injunctions against violators. Often, penalties may be equal to the costs your company saved by not complying. They may be imposed per day or per violation.
Criminal prosecution is usually reserved for flagrant violations, such as illegal dumping of hazardous waste or falsification of records. These violations may be misdemeanors or felonies, punishable by fines or imprisonment.
Administrative enforcement actions involve only the administrative agency, not the courts, and can range from advisory notices or warnings to a formal order mandating corrective action.
It Pays to Cooperate!
The EPA’s Small Business Compliance Policy may waive penalties if your business:
Employs 100 or fewer individuals
Detected the violation through onsite compliance assistance, or conducted a voluntary audit and reported the violation in writing within 21 days
Has not used the Small Business Compliance Policy for a similar violation in the past three years, and has not been subject to two or more enforcement actions in the past five years
Fixes the violation and any associated harm within six months of discovery
Did not cause serious harm or present a significant threat to public health, safety or the environment; and is not guilty of criminal conduct
Businesses that use pollution prevention technologies to fix the violation receive an additional six months to comply.
If your business meets these criteria, the EPA will waive up to 100 percent of the penalty. However, if your business earned a major economic benefit from the violation, the EPA may fine you the full amount of this benefit. For more information, visit www2.epa.gov/enforcement.
Site Remediation
Cleanup of environmental contamination is supposed to be paid for by all those who are responsible. If multiple parties are responsible, they bear a proportionate share of the costs. If negotiations fail, the EPA can either require “potentially responsible parties” (PRPs) to clean up the contamination, or conduct the cleanup itself and sue the PRPs to recover its costs. The state can also sue the responsible parties.
PRPs can be current and previous owners of a property, and the EPA holds them jointly and severally liable. This means you may be liable for cleanup even if you weren’t aware of the problem. If EPA cleanup increases the property’s market value, the EPA can also put a “windfall lien” on the property.
Under the Small Business Liability Relief and Brownfields Revitalization Act of 2002, you can avoid these liabilities if:
The contamination occurred before you bought the property.
You made a diligent attempt to research the prior use and owners of the property.
You have not tried to impede cleanup.
If you unwittingly buy contaminated property, consult your attorney immediately.
Contracts and Leases
No matter what type of business you run, you need a basic understanding of contract law. You’ll also need expert legal help to ensure that your contracts are smart, safe, and enforceable.
What Makes a Contract Legal?
Common law recognizes four elements to an enforceable contract:
Mutual assent
Consideration
Capacity
Legality
Suppose you walk into your local grocery store and pick up a bottle of milk. At the counter, you realize you forgot your wallet. The grocer makes a note that you’ll pay for it the next time you come in, and lets you leave with the milk.
Although this is an informal transaction, it has all the elements of a contract. There’s mutual assent, because the grocer offered the milk for sale and you agreed to buy it. There’s consideration, because value was exchanged when you got the milk and the grocer recorded an account receivable. There’s capacity, because you both had the mental capacity to understand the terms of your agreement. And there’s legality, because the sale of milk is legal.
Let’s look at each of these elements in a little more detail.
Mutual Assent
Suppose a car salesman points to a brand-new Ferrari and says, “Wouldn’t you like to have one of these?” The fact that you answer “yes” doesn’t mean you’ve reached mutual assent. There must be a valid offer and acceptance at an agreed-upon price. Also, the offer must set forth the basic terms of the contract: the price, the date of performance or delivery, and the place of performance or delivery.
If the buyer proposes an adjustment to the contract terms, this counteroffer terminates the original offer and is then subject to the seller’s acceptance or rejection. At this point, the seller isn’t required to agree to the counteroffer or the original offer.
Consideration
In our grocery store example, you received the milk as consideration, and the grocer received your promise to pay. However, consideration can consist of many other kinds of value. If you promise to design computer software for a company within six months, and they promise to ship you a new laptop two months after delivery, this constitutes an enforceable contract.
Forbearance, or giving up a right, can also be a form of consideration. For instance, if you had the right to buy shares of stock under an option, you could give up that right as consideration for the company performing some other duty, such as sending you two boxes of parts you need.
Capacity
Both parties must have the mental capacity to enter into a contract. For this reason, most states rule that contracts with minors are unenforceable against the minor. Likewise, you cannot contract with a person who lacks the mental capacity to understand the terms, regardless of his age (e.g., someone who has Alzheimer’s disease or is under the influence of legal or illegal drugs).
Legality
The terms of a contract must be legal. In most states, one could not enforce a contract based upon prostitution, drug trafficking, child labor or other illegal transactions.
Types of Contracts
A contract can either be express or implied. An express contract is stated in words (preferably in writing), while an implied contract is demonstrated by conduct.
Implied Contracts
Suppose you call your office goods supplier and ask for 500 padded envelopes, and then you hang up without making any verbal commitment to pay. Even without that verbal commitment, your promise to pay is implied by the fact of your order. Such contracts are implied-in-fact.
If your supplier mailed you an extra 500 envelopes by mistake, and you used them but refused to pay for them, a court might find that a contract was implied-in-law (this is also known as a quasi-contract). Although you didn’t order the envelopes, the court recognizes that if you use them, you should pay for them.
Implied contracts are a common source of trouble in employment law, where such things as orientation materials and verbal assurances may imply a contract. Be careful about making any employment promises or statements that can be interpreted as being promises. Employment contracts often state that employees may be fired at will, and that nothing in employee manuals or other company materials constitutes a contract.
Oral Contracts
Although oral contracts are valid and binding, their terms can be hard to prove in court. Of course, it’s possible to come up with a very detailed oral contract and agree to it in front of witnesses. But if you’re prepared to go to that much trouble, you may as well just put it in writing!
Written Contracts
Some types of contracts must be in writing. Examples include:
Contracts for the sale of goods costing $500 or more
Contracts for the sale of real estate
Contracts that can’t be performed within one year (such as an employment agreement with a three-year term)
The UCC allows a contract to be any type of written communication between the parties, such as a series of emails that collectively define contract terms. In the case of custom-made goods, the UCC recognizes goods made to the buyer’s specifications as evidence of an agreement.
Get Legal Advice
If you ask your lawyer to draft a contract for you, outlining the basic terms ahead of time will save money. If possible, look at other agreements that people in your industry use.
You may want to have your lawyer prepare a template contract you can reuse as needed. Alternatively, you can find templates in books and online. But remember that the circumstances surrounding every contract are unique: Always have your lawyer review your contracts before you sign them.
The Contracts and Leases Worksheet will help you decide which legal agreements your business requires.
…
John knew a machine shop up in Bridgeport, Connecticut, that he figured could do a fast turnaround on our prototype.
At that point, I was feeling reasonably confident. I had a workable idea. I had an engineer I knew and respected for the design and drafting. And now I had a shop, too. The pieces were all falling into place.
Still, Scott couldn’t help feeling worried. He knew his idea was a good one, and that it could earn him a lot of money. At the same time, he knew that it wasn’t a stroke of genius. If he’d had the idea, maybe someone else had, too. What if someone else beat him to the punch?
All the same, there was nothing he could do but wait for John to finish up his drafting. A few weeks later, Scott and John met with Walt Kelly at Bridgeport Tool and Die, and presented him with the plans.
…
Common Contract Terms
When you receive a contract, make sure you understand all terms and conditions. The boilerplate (also known as fine print) found in most contracts can be very important in the event of a dispute. If a contract contains unacceptable boilerplate, you can cross out or change a term, initial the change, and have the other party initial it too.
A good contract should be written so that someone who is not in your industry can understand it. If you have to submit a contract to arbitration or litigation, it’s very helpful if the judge can understand it.
Most business contracts include the following terms.
Parties. With whom are you dealing? Is it the parent corporation, or a shell with no assets? Consider requiring a personal guaranty if the party turns out to be Blackheart, Inc., rather than Joe Blackheart. A guaranty by Mr. Blackheart makes him responsible if his corporation defaults.
Price. Your contract must state the unit and total price for your goods. It should also specify whether the price is in U.S., Canadian or some other currency. In the case of barter arrangements, the form of consideration should be clearly specified. Also, specify when payment is due and what carrying charges apply.
Performance means the things you must do according to the contract. For instance, you might be required to deliver 10 desks to an office by May 15.
Time to perform. The UCC allows a “reasonable” time for performance. The parties may disagree on what’s “reasonable,” so be sure to specify when performance is due from the delivery and payment side of the transaction.
Performance standards. Are you manufacturing the product to the buyer’s specifications? Do you need to deliver a sample? Do specific quality standards apply (e.g., AS9000)? Are any tolerances allowed? Does “class A goods” mean the same thing to the buyer and the seller? Has your prior business with this party established performance standards?
Warranty. A warranty is a promise that the goods delivered will match the description of the goods. A warranty can be created by a sample or model, or by a verbal or written statement. Obviously, it’s best to put warranties in writing so there’s no confusion. Note that you may have made a warranty by sending a sample unless you disclaim any implied warranties. Consult your lawyer before offering a warranty or disclaiming a UCC-implied warranty.
Place of delivery. Where will the goods be delivered? Who pays for shipment? Who bears the risk of loss during transit? Are travel time and expenses covered? Failing to review the delivery terms of a contract can result in your profits being used to pay for these costs.
Notice. Are you required to provide notice when you’ve reached a certain production level, or before beginning your performance? Whom do you notify, and what constitutes legal notification?
Nonconforming goods. Usually, the seller must deliver exactly what the contract specifies or the buyer doesn’t have to accept the goods. However, if the seller ships goods reasonably believed to be acceptable—even if they don’t exactly match the contract terms—and the buyer doesn’t reject those goods within a reasonable amount of time, the law recognizes the deal as complete.
Delegation. You can usually delegate (i.e., turn over) your contractual duties to someone else unless the contract terms forbid it. However, certain personal services, such as singing, can’t be delegated without the customer’s consent, because the customer bargained for that particular person’s services.
Assignment is a transfer of contractual rights. If you’re expecting $5,000 from a contract partner, you can normally assign that payment to someone else. But if doing so would lead to unexpected burdens or risks for your contract partner, the right may not be assignable.
Good faith. The UCC provides that every contract has an implied obligation of good faith. If a court finds any clause of a contract to be “unconscionable,” it can either refuse to enforce the contract, or it can enforce the contract minus the unconscionable clause. The UCC doesn’t define the term “unconscionable”; rather, it looks to the prevention of exploitation, unfair surprise, and abuse of power.
Right to inspect books and records. A contract may give either or both parties the right to inspect the other party’s relevant business records.
Renewal options give one party the right to renew the contract after it expires. This can be dangerous unless it’s negotiated carefully and fairly.
Early termination. This clause may allow one or both parties to terminate an agreement under specified conditions or—in some cases—at will. Alternatively, it may specify penalties for early termination (e.g., of a lease).
Merger clause. This affirms that the contract terms are the only valid description of the agreement. Before signing a contract that contains this clause (which is also known as an integration clause), make sure the contract is accurate and complete.
Modifications. Does the contract require that any modifications be in writing, and does it exclude all other prior agreements? Both common law and the UCC state that if the parties intend the written contract to be their final agreement, it cannot be contradicted by oral terms. There are exceptions to this rule, which also varies by state. But courts are more likely to enforce it when a contract specifically requires all changes to be in writing.
Partial invalidity. If a judge decides a clause is invalid, that clause can be removed from the contract without invalidating the entire agreement.
Professional fees and expenses. Most contracts provide for the winning party to recover all fees and court costs from the losing party. You should make sure that this term also covers arbitration and other such fees and costs.
Choice of law/choice of forum. A choice of law clause specifies which state’s law governs the contract, while a choice of forum clause specifies where legal disputes will be settled. Note that these choices must have some relevance to the contract. For example, a Colorado seller and a Michigan buyer could not choose to be governed by Hawaiian law.
Indemnification clause. This clause transfers the risk of damages or loss from one party to another. If that sounds serious, it is! Certain types of indemnification clauses can make you financially responsible for damage you didn’t cause. Get legal advice before agreeing to such clauses.
Default or breach. Failure to meet contractual obligations, and the legal consequences and remedies, should always be spelled out in the contract.
Limitation of damages. Parties to a contract may agree to limit the amount and types of losses the wronged party can recover in the event of default (e.g., a contract for the sale of goods could limit damages to the cost of replacing those goods). The law may also limit the amount of damages you can receive.
Alternative Dispute Resolution
Businesses are increasingly using alternative dispute resolution (ADR) to settle contract disputes. There are three types of ADR:
Negotiation. The parties try to work out their differences between themselves.
Mediation. A neutral mediator helps the parties arrive at a fair settlement
Arbitration. A neutral arbitrator determines how to resolve the conflict.
ADR is usually faster and less expensive than court proceedings. Also, the mediator or arbitrator may be an expert in the field, as opposed to a judge who may be a generalist in legal matters. Many contracts provide for mediation or arbitration in place of a party’s right to sue. Consider whether this will benefit you before specifying that ADR will apply to the contract.
Breach of Contract
A breach of contract occurs if either party fails to perform as promised or makes it impossible for the other party to perform. If you lose money or property because someone breaches a contract, you’re usually entitled to compensatory damages. These may include money or property, as well as the actual value of any services you rendered and any business you lost.
Two other forms of damages are less commonly awarded:
Consequential and incidental damages cover expenses incurred as a direct result of a breached contract. Suppose you’re a caterer, and you contract with a baker to have 300 muffins delivered. The baker calls the night before you need the muffins and says they won’t be ready. As a result, you’re forced to buy the muffins from a different baker at a much higher price. In this situation, you may be entitled to the difference between the amount you contracted to pay and the amount you were forced to pay.
Liquidated damages cover the costs expected to be incurred if one party breaches the contract. Courts will not allow recovery of liquidated damages if they are a penalty rather than a reasonable forecast of expected costs. However, you should review these provisions very carefully. If enforceable, they can be severe.
Note that the amount of damages you can receive may be limited by law. For instance, the concept of substantial performance means that you can’t consider a contract breached if the other party falls slightly short of her obligations. In other words, if you order 300 muffins from a baker, and you get 297, you can’t consider it a breach of contract (though you can seek compensation for the three missing desserts).
Also, when someone breaches a contract with you, you’re obligated to try to mitigate the loss you suffer. Suppose you paid a bakery $1,500 for 500 desserts, to be delivered in one month’s time, and the baker informs you three weeks in advance that the desserts won’t be ready on time. If you wait until the last minute to find another source, and end up paying $2,500 to a gourmet food store, you’re not entitled to the extra $1,000, because you didn’t try to find a baker who could do the job in advance at a lower price.
Specific Performance
Another remedy sometimes available for a breach of contract is specific performance, where the court orders the breaching party to perform as promised. This remedy is most often used in transactions involving a unique item for which money isn’t an adequate substitute, such as a specific piece of real estate or artwork.
Rescission and Reform
In some cases, a court may rescind a contract, which effectively dissolves it. Rescission often happens because of mistakes in the contract, but it may also come about through one party’s breach of contract or a finding of fraud.
Alternatively, a court may reform the contract by rewriting it to reflect the court’s understanding of what the parties intended.
Email and Contracts
Email exchanges between a business and its customers can constitute a contract, so save all emails to and from your customers. By law, it’s the final email offer that, when accepted, creates a binding contract. Therefore, your final email should contain all contract terms. A judge can try to figure out both parties’ intent by looking at the entire email exchange. But if he finds there was no mutual assent, he will rule that no contract was formed.
Anyone engaged in e-commerce should keep printable records of online orders and email. Hard copies will carry more legal weight if the data are stored by a third party and physically protected from alteration.
Checklist for E-Commerce Contracts Terms and conditions should be clear, simple and straightforward. The contract should state that the online display is the sole, exclusive and final agreement between the parties. You should have a system for capturing complete, accurate, printable records of all negotiations and agreements. Agreements that involve transactions in excess of $500, or that cannot be performed within one year, require a fax-back or digital signature.
Electronic Signatures
Electronic signatures are electronic tokens that represent your consent to the terms of a contract. Methods of creating an electronic signature range from the familiar “I Accept” buttons used by many software providers, to the electronic signature pads used by many retailers.
By contrast, digital signatures are a cryptographically protected method of authenticating a person’s identity. To put it very simply, the signing software uses an algorithm to generate a “signature” that’s unique to the user and to the document being signed. If the document is later amended or altered, the algorithm will automatically invalidate the signature. Digital signature systems often include time stamps to certify the precise moment at which the document was signed.
Similarly, mobile signatures allow you to sign documents from phones and other mobile devices after entering a secret code. This feature can also confirm your identity during phone conversations.
Two laws govern electronic signatures:
Uniform Electronic Transactions Act (UETA) gives electronic signatures and records the same enforceability as paper-based transactions. Almost all U.S. states have adopted UETA, usually without making significant changes.
Electronic Signatures in Global and National Commerce Act (E-Sign). E-Sign governs electronic contracts in states that either don’t have an electronic contract law or have adopted changes to UETA that conflict with E-Sign. Research the terms of this act thoroughly before engaging in e-commerce.
Note that written signatures may be required for certain types of documents, including wills, trusts, notices of default, and shipping forms for hazardous materials. If you’re not sure whether an electronic signature will be legally binding for a specific contract, consult your attorney.
Leases
A lease is an agreement giving one party possession of another party’s land or property for a stated period in return for a stated amount of money. A lease differs from a sale in that a lease transfers possession of property, while a sale transfers both possession and ownership.
…
As we moved forward, we realized that no matter how many precautions we tried to take, there was no substitute for patent protection. Finally, we knuckled under and hired a patent attorney. It wasn’t cheap, but we wanted everything in place once the prototype was done.
Also, we had to weigh the cost against the time and frustration of handling things ourselves. And above all, the risk of messing something up. It was one of those decisions that’s hard to make until you look at all your other options and realize that they’re a lot riskier and a lot more stressful. In hindsight, getting help—especially with filing a provisional application—gave us a head start that we really needed. It was money well spent.
Even with this head start, the patent process was long, hard and expensive. But after 18 months, they did get it. Now, Scott and John had the sole rights to the charger. But they still had to find a way to manufacture it, market it, and protect it against infringement.
…
Commercial Leases
Commercial real estate leases fall under three basic headings:
Gross lease. You pay a single amount that includes all or most services (e.g., utilities, maintenance, and janitorial services). Such leases usually have escalation clauses that allow the lessor to raise rates when operating costs exceed a predetermined level, which is usually equal to the base year operating costs.
Net lease. You are responsible for a base payment as well as a share of property taxes. When property taxes rise, your payments rise, usually based on the percentage of the property you’re leasing. For example, if you’re leasing 25 percent of a facility, you would cover 25 percent of the tax increase. Double net leases include a share of insurance premiums, while triple net leases include the cost of common area maintenance (CAM). An absolute triple net lease includes all costs.
Percentage lease. You pay a base rate as well as a percentage of your gross revenues. This arrangement is most common in shopping centers and malls. The percentage of revenue demanded, and the frequency of payments, can vary considerably. The terms can be harsh, so research these leases carefully before signing. In particular, watch out for leases that overstate your gross revenue: You shouldn’t have to pay a percentage of money that isn’t going into your pocket, such as sales tax or delivery charges.
Within these broad categories, there are countless possible terms and arrangements. As you can imagine, negotiation skills are very important when leasing commercial property. For this reason, many small businesses hire brokers to negotiate lease terms. Whichever method you choose, you should understand these basic issues:
Area. What is the address of the property? What space are you leasing? What is the total square footage, in what area of the building? What common areas are included (e.g., lobbies, restrooms, elevators, parking lot, lawns)?
Term. When does the lease begin and when does it end? Is it by the month or by the year?
Renewal. Is your right to renew the lease clearly stated? Is the mechanism for renewal clearly defined? Do you have to earn a certain level of revenue to renew?
Rent. When is rent due and how should it be paid? Do late charges or other penalties apply? How does the rent change over time? Can you withhold rent if the landlord breaches its obligations?
Improvements. If you need to make improvements, who pays? You may be able to get improvements made as a condition of signing, especially if you agree to a longer term.
Sublets. Can you sublet or assign the premises to another tenant?
Taxes and fees. These may include association dues as well as property tax.
Termination. In what situations can you or the lessor terminate the lease?
Notice. How many days before expiration of the lease term must you or the lessor give notice of termination?
Utilities. Which utilities do you pay, and which does the lessor pay? Who pays for repairs, under what circumstances?
Maintenance and cleaning. Who pays for maintenance and repairs on the premises? Who pays for common area maintenance? What are the amount and terms of security and cleaning deposits?
Signage. Are there signage requirements or restrictions? Who pays for upkeep, lighting and related issues?
Liability. Who is liable for damage to the premises? Who is liable for damage to your property while it’s on the premises? What insurance is required, and who pays?
Permitted uses. Do you want your Christian bookstore to operate next to a body-piercing salon? Is your assembly facility sensitive to vibrations or noise? You often need to consider such issues when leasing in a mall, business park or other multi-use complex.
Parking. How many spots do you get, and what is the cost per month? Can the landlord develop an additional building in what was formerly your parking area, leaving you with inadequate parking? Can the landlord lease the parking lot to a Christmas tree vendor or food carts?
Purchase rights. Do you have an option to buy the property? If so, under what terms? Do you have a first right of refusal to buy the property?
Exclusivity. Does your lease state that yours will be the only paint store in the complex, or can other paint stores come in and compete against you?
Equipment leases
Equipment leases can be a good deal, because the down payment is usually lower than that of a credit purchase. Also, leases may let you trade in old equipment for new.
Often, a lease will give the lessee an option to purchase the equipment at the end of the term. Make sure you receive this commitment from the leasing company itself, and that the terms of the offer are clearly set forth in the contract.
If a leasing company doesn’t choose, sell or service the equipment it leases, it naturally doesn’t want to be held liable for equipment failures. For this reason, equipment leases often include a warranty disclaimer, which states that the leasing company makes no warranties or representations about the equipment, and that defects are not an excuse to stop making lease payments.
Courts routinely uphold such provisions, provided the leasing company really is independent from the seller. Remember, the leasing company is just a financing tool, just as a bank might be on a sale of a car. Could you stop making car payments if the transmission failed? Probably not!
Cost. How much is each payment? When are payments due? Are there security deposits? Installation charges? Licensing fees? Taxes? Early cancelation fees? What is the total amount you will pay over the lifetime of the lease?
Lease flexibility. What are the provisions for skipped or late payments?
Service. What maintenance and service will be provided, and by whom? Who pays for servicing? Will you get a refund for downtime if the equipment fails?
Insurance. What level of insurance coverage is included? Will you be assessed an insurance fee or be billed separately by the insurance provider?
Equipment upgrades. What are the provisions for upgrading or replacing equipment? How much will it cost?
Residual value. What will the equipment be worth at the end of the lease period? This directly affects your lease payments.
Consignments
In a consignment arrangement, one party (the consignor) provides goods to another (the consignee) for sale. No money changes hands until the goods actually sell, at which point the consignee takes a percentage of the purchase price and pays the remainder to the consignor. Because the consignor has agreed to wait for payment until the goods sell, the consignee usually agrees to take a smaller percentage of each sale. Consignment contracts should include:
Names and addresses of both parties
The value and selling price of the product
The percentage and due date for payment
Any requirement that the consignee’s insurance must cover the product
The duration of the consignment
Who pays to return unsold products?
Who markets the product? Who pays marketing expenses?
Does the consignee have exclusive rights? Can the consignor terminate the agreement if the consignee doesn’t meet a specified sales level?
A right to inspect the consignee’s books as they relate to the consigned product
A statement that the consignee holds the product and proceeds from its sale in a trust relationship, and that proceeds will be kept in an account separate from the consignee’s general business funds.
Intellectual Property
Understanding intellectual property rights is one of the most important things you can do as a small-business owner. The Intellectual Property Worksheet will help you determine which of your intellectual property rights need protection, so that you’ll be prepared to seek help from an experienced IPR attorney.
You don’t have to be engaged in biotech or computer research to have methods or processes that are not commonly known. Who your customers are, and what they order, is important information to protect.
The most obvious reason to protect your intellectual property is that if you don’t, you can lose it to dishonest employees or to competitors. Further, if you create ideas while employed by your own corporation, but you don’t reserve the rights to them, the corporation may own those ideas. If the corporation sells its assets—or its assets are seized by the court or creditors—your copyrights, patents, trade secrets and other intellectual property will belong to a third party. This is why it’s important to identify the ownership of intellectual property in your employment agreement, even if you’re a single-shareholder corporation.
Trademarks
A trademark is a word, phrase, slogan, symbol, color or design that identifies the source of a consumer product and distinguishes it from products made by other businesses. The more distinctive it is, the more legal protection it has.
Fanciful marks are abstract, made-up words or designs. This is the strongest type of trademark.
Arbitrary marks consist of actual words or designs that do not relate to the product or service being sold. “Grey Goose Vodka” is a good example.
Suggestive marks reflect the nature of the product. “Comedy Dungeon” would be a suggestive mark for a comedy club.
Descriptive marks are not entitled to protection under trademark law. If a mark merely describes the good or service, the mark is not distinctive. An exception, however, involves the concept of secondary meaning. If a descriptive mark has acquired secondary meaning, the mark is entitled to trademark protection. Secondary meaning is proven by showing that the mark is now identified not just as a description of the product, but as indicative of its source.
Generic marks are never entitled to trademark protection. A generic mark does not describe the product or service; it is the product or service. For instance, “aspirin” is a generic mark.
Trade dress refers to the overall packaging and appearance of a product or business, insofar as they communicate the source of the product to the public. Coca-Cola’s fluted bottle is one example of trade dress; McDonald’s golden arches are another. Trade dress can be a combination of many elements—from colors to fonts to shapes and sizes—that work together to create customer recognition and goodwill.
Trademark protection is a constantly evolving field of law, and companies are defending trademarks more aggressively than ever. Colors, sounds and scents have all been registered as trademarks in recent years. Consider, for example, T-Mobile’s trademark of the specific shade of magenta in its logo. The upside of this trend is that it may be easier to create and defend a unique brand identity. The downside is that your product may infringe a trademark simply because it’s a certain shade of green.
Business Names
Most businesses operate under a fictitious business name, sometimes signified by the phrase “Doing Business As” or “DBA.” These names are protected by state and federal trademark law. Courts usually rule that the first business to use or register a business name has the right to keep using it, so it’s important to register your name as soon as possible.
Your business name should be easy to spell, say and remember. Above all, it should distinguish you from other businesses. If you choose a name that’s too similar to that of another business, that business can legally force you to change it. For this reason, it’s a good idea to come up with a list of names and look them up online.
After this initial search, check the list of fictitious business names at your county clerk’s office, as well as the corporation and LLC names in your state’s business registry database. You can also search for business names registered with the U.S. Patent and Trademark Office (USPTO) by visiting www.uspto.gov.
If you find a business name that’s similar or identical to yours, find out where the business is located and what products it offers. If it’s in your county or state and offers similar products, choose a different name. If it’s a large business with a strong online presence, you should probably avoid the name even if you sell different products.
Registering Your Trademark
You don’t need to register your trademark to own exclusive rights to it; the commercial use of a trademark establishes your rights under common law. However, these rights are often regional. If your music store is named “Sax and Violins,” and you register this name in your county, it may be available for use by a business in another county. Even if you register your name statewide, the court may allow another business to use it, provided it operates in a different region or industry.
By contrast, federal registration provides:
Legal presumption of ownership and exclusive nationwide rights
The right to have federal courts hear claims of infringement, unfair competition and counterfeiting
The ability to record your trademark with U.S. Customs, which will forbid the importation of infringing goods
A basis for obtaining protections in foreign countries
To qualify for registration, a trademark must be unique. When you apply for a trademark, an examining attorney searches the records of the USPTO for conflicting marks. This may take several months.
That’s why it’s a good idea to do your own search of the USPTO database before submitting your trademark. Alternatively, you can visit a Patent and Trademark Depository Library in your area; the USPTO website has a list of addresses.
If this sounds like too much work, you can hire a private firm to do the search.
…
After spending 23 months and thousands of dollars, we had one working charger and lots of tough questions. Can we get financing? Are we in a position to market and distribute the charger? Can we handle patent monitoring?
The more we thought about it, the more we realized we weren’t up to the job. We needed to license the charger to someone who had the expertise and resources to do the job right.
In the end, Scott and John licensed the charger to Solarise, a small but very successful firm in Cleveland, Ohio, that manufactured and sold energy-efficient products all over the world. They negotiated a 15-percent royalty rate, with a stipulation that Solarise would enforce the patent.
Once Solarise offered the charger on its website, consumer response was enormous. Orders flooded in not just from the United States, but from Europe, South America, Australia...almost everywhere. They also found an unexpected but very lucrative market among aid organizations working in area that lacked a reliable electrical grid.
Scott hadn’t just solved his own problem. He’d made life easier for everyone who rode a bike and owned a cell phone, from New York to Nigeria.
…
Protecting Trademarks
Many trademark owners prefer federal to state registration. Note, however, that you can only register a trademark federally if you’re using it in interstate commerce.
Trademark registration lasts for 10 years and can be renewed for an indefinite number of 10-year periods. Every five years, you must file a declaration that the mark is still being used in interstate commerce. Otherwise, the registration will be canceled.
Intent to Use
Federal trademark law includes an “intent to use” provision that gives your mark a six-month period of nationwide protection. To get this protection, you must file an “Allegation of Use” asserting your intent to use the mark. If you need more than six months, you can get a number of extensions. But if you don’t use it within three years, you won’t be allowed to register it.
Trademark Symbols
Once a trademark is registered, the symbol ® must follow the trademark (usually in superscript). Failure to use an ® after a registered trademark may cost you your ability to seek damages from an infringer.
If you wish to assert your right to a trademark you haven’t yet registered—or one for which registration is pending—you may use the ™ symbol. Although the symbol has no legal force, it may warn other businesses to choose another mark.
Maintaining Your Trademark
Unless you carefully monitor the use of your mark, the mark may lose its distinctiveness and become generic. Also, if a mark becomes associated not with the source of the product, but merely with the product itself, it becomes generic.
Protecting Trade Dress
To receive legal protection, trade dress must be nonfunctional. As an example, the shape of your sign, and the fonts and colors used on it, could be protected as trade dress. The brackets holding it to the wall could not.
Trade dress must also be distinctive, either in and of itself (e.g., the Coke bottle) or because it has acquired a strong association with your company over time.
Like trademarks, trade dress doesn’t have to be registered to enjoy legal protection. However, registration gives you a presumption of legal right that competitors will find it difficult to challenge. After five years, this right becomes incontestable.
Because this is an evolving area of law, standards may not be applied consistently. The application of trade dress protections to websites and other electronic interfaces is an especially murky area of IP law.
Copyright
Copyright protection applies to original works of authorship in tangible form. “Tangible” means it can’t simply be in your head; it must be physically available to other people, like a book or a DVD.
“Original” doesn’t necessarily mean that the idea behind the work is original. Ideas aren’t protected by copyright law. What’s protected is a specific expression of the idea. For example, the authors of this book can’t stop another author from writing a book about entrepreneurship, but they can stop him from publishing the text in this book as his own work.
Like ideas, objects that are “intrinsically utilitarian” can’t be copyrighted. For instance, a lamp with a base in the shape of an owl is not copyrightable, although the base itself may—when separated from the lamp—be copyrightable as a work of art.
Works Made for Hire
If a copyrighted work is a work made for hire, the hiring party is considered to be the owner of the copyright to it.
The Copyright Act of 1976 specifies the circumstances under which such works are created. Absent these circumstances, the copyright is owned by the person who actually created the work.
The first way of creating a work made for hire is through an employer/employee relationship. The person hired to do the work must legally be an employee, and the work must be created during the scope of that person’s employment.
The second way is through a commission or special order. Only certain types of commissions qualify as works made for hire, and then only if the parties agree in writing.
Generally speaking, if a worker is an independent contractor, she will own the copyright to a commissioned work unless there is a written agreement to the contrary.
Registering Copyrights
A copyright exists as soon as an original work is put in tangible form. Copyright registration is not required.
Still, registration has its advantages. First, if you wish to sue someone for copyright infringement, you must have a registered copyright. Second, registration proves the copyright is valid. Last, it gives you more flexibility in seeking damages, and also gives you the right to seek an award of attorney’s fees if you win your case.
You can register your copyright with the Register of Copyrights in Washington, DC. Copyright notices and registration are both very inexpensive and will remain in force for up to 50 years after your death.
Notice of copyright ownership
Notice of copyright ownership makes the public aware that a copyright exists and that the copyright owner claims exclusive rights. It has three elements:
The symbol ©, the word “Copyright,” or the abbreviation “Copr.”
The year of first publication of the work (when copies were first offered to the public by sale, rental, lease or lending)
The name of the copyright owner
Respecting Copyrights
The importance of respecting other people’s copyright is widely overlooked, especially online. Many business owners casually use copyrighted text, photos, music, recipes or patterns without asking permission or (in many cases) giving credit.
Regardless, using other people’s work without permission is illegal. Always get permission before using other people’s work, whether it’s a drawing on a product label, a song in a YouTube video or a photo on your website. To save time, you can create a copyright permission template and fill it in as necessary. This form should detail all intended uses, because permission for one use may not imply permission for others.
Can you get away with copyright infringement? Perhaps. But consider this: The goal of a business is long-term profitability. Usually, success means more visibility and more money. The more visible you are, and the more money you make, the less likely you are to get away with copyright infringement. If you don’t want to end up as a case study in a copyright law class, commit yourself to respecting copyrights and to protecting your own.
Stock Images
Many sites offer stock photographs for free or by subscription. This can be a good way to get the photos you need, but remember that there may still be restrictions on their use. Paying for a stock photograph doesn’t mean you own it. It just means you can use it under specific terms. These terms vary greatly, so always read the fine print.
Also, note that using a copyrighted image as the basis for a new work (e.g., by altering it) counts as copyright infringement. There are many software tools that allow copyright holders to find altered images online.
If you do buy stock photos, be sure to keep invoices and other account information on file to prove you have the right to use them.
Patents
Suppose you just discovered a new way to remove wine stains from fabric and you want to keep competitors from copying it. How do you do this? By obtaining a patent.
A patent grants its owner the right to exclude others from making, using, offering, importing or selling an invention in the United States. Patents fall into two types:
Utility patents protect a new and useful process, machine, product or material, or a new and useful improvement to any of these. They usually last for 20 years.
Design patents protect an original, novel, ornamental design for a functional item (e.g., the shape of Apple’s iPhone). They last for 15 years.
To be eligible for patent protection, your invention must be new as defined by patent law. An invention is not patentable if it has ever been sold or used publicly in the United States, or if it has ever been described in a printed publication in any country. If the inventor herself described the invention in a printed publication, used it publicly, or placed it on sale, she must apply for a patent within a year or lose her right to protection.
Getting a Patent
Filing patents is the most difficult, time-consuming and costly aspect of IPR protection. A patent can’t be a mere idea. You must submit a full technical description of the actual device, design or process.
This can cost thousands of dollars because of research and attorneys’ fees. You’ll need legal help to determine if your invention is patentable. Successful filing may also require the services of a patent attorney.
Before you go to all this trouble, you should search the USPTO website to see if someone has already patented your idea. If no patent is listed, you’ve passed the first hurdle. Next, you need to decide whether to opt for U.S. or international registration; the latter is usually preferable unless you’re sure you won’t be selling overseas.
Depending on your time, resources and needs, you have two application options:
Provisional applications are relatively inexpensive and last for 12 months from the filing date. This establishes a provisional early filing date for your patent and entitles you to use the phrase “patent pending.” You must file a nonprovisional application during the 12-month period to benefit from the early filing date. Otherwise, the application will simply expire. Provisional patents are most often sought by inventors who want to protect their idea while seeking investors.
Nonprovisional applications are formal patent applications containing all required documents, oaths and fees. The USPTO favors electronic filing of applications through its EFS-Web system; non-electronic applications may be subject to a hefty surcharge. Small businesses may qualify for a discount; visit the USPTO to see if you qualify.
Depending on your product type, the size of your business, and your age and health status, you may be able to file for an accelerated examination, which can speed up the issuance of your patent.
Once you receive your patent, you have the right to exclude others from using, selling or manufacturing your product. To retain this right, you must mark your product with its patent number.
Although the government registers your patent, it doesn’t enforce it. It’s up to you to monitor the marketplace for infringers. If you allow infringement to go unchallenged, you lose your protection. Be aware that it can be very complicated and expensive to launch a legal defense of a patent.
One solution is to license your product to a manufacturer with a stipulation that the licensee must enforce the patent or face legal penalties. Usually, only exclusive licensees will agree to this provision.
Trade Secrets
Trade secrets are the primary intellectual property of most small businesses. To qualify as a trade secret, business information has to meet these criteria:
It is not generally known to the public.
The secrecy of the information confers an economic benefit or competitive advantage that you would lose if the information were no longer secret.
You have made a reasonable effort to hide the information from competitors.
Unlike patent protection, trade secret protection has no expiration date. As long as it stays secret, it’s protected. On the other hand, it doesn’t offer a minimum period of protection wherein you have exclusive rights. Also, patent protection gives you legal recourse if a competitor reverse-engineers your product. Trade secret protection usually does not.
In most states, trade secrets and customer lists are protected against theft or misuse under the Uniform Trade Secrets Act, provided you take reasonable steps to maintain their secrecy. Even if an invention is not eligible for a patent, it may still be a protected trade secret under state law.
Misappropriation of trade secrets typically occurs when an employee has left your employment and attempts to use your secrets to compete against you. The usual remedy for such actions is an injunction, but damages may also be awarded.
One of the best ways to protect your trade secrets is to secure your computer network and files. Use password protection or encryption for all sensitive files, and be careful about emailing them. Shredding important documents can also keep your secrets out of the wrong hands.
Last, many entrepreneurs find it useful to operate under the “need to know” principle. If people inside or outside your company don’t need to know a trade secret in order to do their jobs, don’t tell them about it.
Noncompetition and Nondisclosure
Noncompetition agreements are typically used to prevent former employees from opening a competing business. Your lawyer can help you draft enforceable agreements.
Nondisclosure agreements stipulate that employees and other parties receiving information about your business—such as a company that reviews your financial records—can’t disclose it to any third party or use it for themselves.
You should have such an agreement in place before you allow an outsider to have access to any of your books or records, trade secrets, ideas, customer lists, or even to inspect your premises. Your lawyer can advise you on this matter.
Conclusion
Virtually every aspect of business faces some degree of regulation, so it’s essential to educate yourself about the regulations that apply to your business.
Although laws and regulations may seem like a maze, there are plenty of people who can help you not just to comply with these laws, but also to benefit from them.

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| NxLeveL® TECH TIP BUSINESS RESOURCES AND THE WEB
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