June 20, 2016

New Federal Protections for Trade Secrets

Filed under: Business Practices,Intellectual Property — John V Robinson, P.C. @ 4:40 pm

 

Last month President Obama signed the Defend Trade Secrets Act into law, creating the first federal civil trade secret protections. While this law is too new to have seen the inside of a courtroom yet, and thus has not had a chance to be poked and prodded by attorneys or clarified and restated by judges, certain aspects of the new law are worthy of note.

The DTSA was passed in response to a generational shift in the importance of intangible assets.  Intangible assets, including all forms of intellectual property, now make up more than 80% of the value of companies currently trading on the S&P 500. Forty years ago that figure was roughly 17%. Despite the ubiquity of patents, everyone’s familiarity with copyrights, and being surrounded by trademarks, trade secrets are the most common form of intellectual property: in 2012 it was estimated that trade secrets were more than twice as numerous as patents (and that was before the Supreme Court up-ended business method and software patents in 2014). The fact that trade secrets cover such a wide range of information (most patents are trade secrets at some point in their pre-registration days) makes them both very flexible, and well suited to simple, general rules (unlike patents, which come with a number of specific, narrow rules, guidelines, and requirements).

Unfortunately, trade secrets are also fairly nebulous and are vulnerable to misappropriation and inadvertent disclosure. In 2014 one in ten companies reported theft or attempted theft of their trade secrets, often through cyberattacks, and trade secret theft is estimated to cost American businesses roughly 3% of the GDP of the United States. The rate is similar across all advanced industrial economies.

Not only has the United States adapted to this evolution in the value of intangible assets, but other governments are doing the same. The European Union is working on finalizing the EU Trade Secret Directive, which has already been approved by the European Parliament and the EU Council and should go into effect sometime this summer.

Prior to the passage of the DTSA trade secrets were protected almost entirely by state laws, and that protection grew largely out of common law and was only later enshrined in state statutes. Federally, the Economic Espionage Ace of 1996 provided criminal penalties for the theft of trade secrets in some circumstances, but no federal protection existed for the more common forms of trade secret misappropriation.

Under the DTSA there now exists federal protection for trade secrets “related to goods and services used, or intended to be used, in interstate commerce.” And as many different areas of the law have shown us, “interstate commerce” is a fairly easy standard to meet. Exactly how this provision will be interpreted by the courts will not be clear for some time, as even the most eager claims under the new law are months away from their day in court, but some questions that will need to be answered include just how far “related to” is stretched, and whether the Act will apply to negative-know-how (ie, knowing what NOT to do).

The DTSA has not preempted state trade secret laws, all of which are still in effect. What the DTSA did do, however, was to create an additional avenue of enforcement by giving federal courts original, but not exclusive, jurisdiction over trade secret claims that involve interstate commerce.

In many respects, the DTSA is in line with the Uniform Trade Secrets Act, and most state laws.  The definition of a trade secret is fairly standardized, and the DTSA kept the same definition of misappropriation, the same remedies for misappropriation, and the same three-year statute of limitations. One major difference is that in addition to monetary penalties for trade secret misappropriation (actual damages, exemplary damages, and the possible recovery of legal fees) the DTSA also has a provision that allows for the seizure of assets through civil proceedings. This is limited to “extraordinary” cases, but provides a significant additional penalty.

The DTSA also contains an added requirement for employers: a “whistleblower” notice must be included in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This means non-disclosure/confidentiality agreement, or similar agreements will need to have the required notice. The Act also defines “employee” to include independent contractors and consultants as well as actual employees. If an employer fails to provide the required notice, the employee may recover exemplary damages and/or attorney’s fees in any action against the employee relating to trade secret misappropriation. What is unclear, and potentially of significant impact, is whether the language in the Act creates a stand-alone right to make a claim for unfair business practices if he or she is not provided with notice of the whistleblower protection, regardless of whether their employer has brought a claim against them.

One other significant difference is that the DTSA will not apply to cases involving “inevitable disclosure.” While non-compete agreements may still be enforced as a matter of contract law, the DTSA will not support a claim of trade secret misappropriation based on the theory that the employees duties will inevitably lead to the disclosure of protected information.

While there are more than a few aspects of the DTSA that will have to be clarified in the courts it is a virtual certainty that the courts will get the opportunity to apply the Act soon. Over 70% of attorneys surveyed by the ABA stated that they would prefer to file trade secret claims in federal court if given the option. So, review your trade secret policies, consider updating your NDAs and Confidentiality Agreements, and get ready for the exciting world of trade secret lawsuits in federal court.

 

May 2, 2016

RVA’s Entrepreneurial Ecosystem

Filed under: Small Business — John V Robinson, P.C. @ 10:47 am

In honor of National Small Business Week we decided to offer a brief overview of the entrepreneurial ecosystem here in Central Virginia. Business both small and large play a role in supporting this dynamic group of individuals and companies who embody the spirit Small Business Week is intended to honor.

Richmond is in a prime location to foster the growth and development of entrepreneurs across the Central Virginia region from Tidewater to Charlottesville and beyond. However, becoming the next entrepreneurial hub takes more than just prime geographical location. Richmond can take advantage of our location by coming together as a community and fostering entrepreneurial development through 1) collaboration between both community and university resources, 2) growth of the entire entrepreneurial ecosystem including not just the archetypal entrepreneurs but “Main-Street/Broad Street” entrepreneurs as well, and 3) closing the gap in the funding available to start-ups.

Venture Forum RVA recently hosted the Virginia Venture Summit event bringing together entrepreneurs and stakeholders all across central Virginia. This event on April 7th highlighted successful start-up companies in the area and provided several panels of veteran entrepreneurs and industry experts covering various aspects of growing and improving the entrepreneurship ecosystem in the community. Dozens of panelists provided valuable insight and advice to individual entrepreneurs and those working to strengthen the entire entrepreneurial ecosystem in Central Virginia.

In just the past few years Richmond has greatly increased the resources, support, and, perhaps most importantly, the culture of entrepreneurship in Central Virginia, from the introduction and growth of co-working spaces to start-up accelerators and business incubators, to sources of funding and access to venture capital investors. As pointed out by panelist Dave Neal (co-founder and director of the Startup Factory in Durham, NC), an entrepreneurial ecosystem works best, and grows best, when everyone involved can share their vision and add to the available resources: collaboration, he said, is the key to success. In the world of entrepreneurship human capital is just as important as monetary capital, and Central Virginia is fortunate to have a wealth of human capital.

Richmond is home to many universities with the largest two being University of Richmond and Virginia Commonwealth University. Virginia Commonwealth University (VCU) has been leading the way for involvement in the entrepreneurial community and is the main neighborhood for start-up resources. VCU recruited Jay Markiewicz to oversee and drive forward the advancement of its undergraduate entrepreneurship program.

This year’s graduating entrepreneurship class has been actively involved in the development of Richmond’s entrepreneur ecosystem. For example, the senior class worked with VA BioTech Park in creating a pathway to help connect local entrepreneurs with key stakeholders and resources in the area. Additionally, this year’s capstone class divided into teams and entered the DaVinci Center’s Venture Creation Competition for a chance to win up to $4,000 and a summer spot in an incubator for the businesses the students had created. Lastly, the class worked to develop business plans to present to local venture capitalist and angel investors with hopes of winning $5,000 and another opportunity to land a spot in an incubator. Near campus, many other resources such as Lighthouse Labs, 804RVA, RVA Works, Biz Work and a large number of professionals provide a wide range of services that entrepreneurs and start-up companies rely on for their success.

In addition to VCU, the University of Richmond (UR) offers helpful resources to the growth of the entrepreneur ecosystem, as well. For instance, UR offers the only law school in the Richmond area. The law school has a growing number of students focusing in intellectual property and corporate law and even provides a practical experience for students through the newly revived Intellectual Property and Transactional Law Clinic. This clinic provides no-cost legal services to entrepreneurs in the community at the very early stages of their business on issues ranging from entity selection and formation to contracting to branding to copyright and trademark protections and is sure to be an invaluable resource to the small business community. If UR and VCU were able to find more ways to collaborate it would connect the community, lead to greater involvement across the board, and increase availability of resources to entrepreneurs. For example, UR Law has an International Business Practicum that partners with the VCU and UR MBA students to combine legal and business resources for local businesses growing internationally. This is a great way to get the universities working together to combine resources and assist local businesses. The universities should work together to establish more courses and programs fostering collaboration between universities and with the rest of the entrepreneurial community.

Looking beyond Broad Street and the Near West End we find that Richmond offers a wealth of other academic resources without having to cross I-295. Local colleges, both two and four-year serve tens of thousands of students, many of whom intend to call Richmond home after graduation. Their skills range from the trades to the arts, and from advanced professional degrees to technical fields; all of which are vital to the success of start-up companies.

Within an hour of downtown Richmond we’re fortunate to have two more world-class universities, UVA and William & Mary, both with the sort of talented faculties and student bodies that would be the envy of any hub of entrepreneurship.

Outside of the academic offerings in the Richmond area, our community offers a rich cultural environment that is ideal for the young professional looking to grow an idea into a thriving business. Richmond itself has a neighborhood for everyone from “the Fan” and “Carytown” to “Shockoe Slip” to “Short Pump.” Each neighborhood is unique yet inviting and offers great food, shopping, and of course breweries and wineries. Richmond offers a metro-urban environment and quaint neighborhoods for the city-sleeker along with a raging river and extensive park system for the outdoor seeker and the beach and mountains are only a short drive away. Richmond offers something for everyone and is full of opportunity.

Young professionals can take advantage of the opportunities in Richmond through the environments for creatives. Richmond has a vast market for restaurants and is known as a “foodie” town. The focus on the growth of the restaurant and craft brewing scene in Richmond, just as an example, tends to be criticized by some who take the view that restaurants and breweries are not an actual source of entrepreneurial growth. This is both right and wrong. New restaurants alone do not actually add many new companies, or jobs, to the local economy; many of the new restaurants are opening up in locations that, only a few months before, were other restaurants. And many of those were “new” just a few years before. The expansion of the market has slowed, but the revitalization of that particular industry is an ongoing process. And make no mistake, those entrepreneurs who are starting a new venture in the restaurant business are real entrepreneurs. They may not be high-grown, venture capital seeking businesses, which tends to be the definition of “entrepreneur” used by many in the industry, but they are entering and capturing, and they are creating.

Why is this important in a discussion of an entrepreneurial ecosystem from the perspective of a high-growth company? Because an ecosystem includes the environment, not just the active participants, and as the active participants in the entrepreneurial ecosystem work to develop the resources and encourage grown of all types of entrepreneurs it is the environment of Richmond and Central Virginia in which those participants will operate. Restaurants alone may not serve as the key industry for an entrepreneurial ecosystem, but they, along with a wide range of other types of businesses, play a key role in creating an environment favorable to the grown of the ecosystem.

The whole, or ecosystem in this case, can be greater than the sum of its parts when the other participants are not seen as rivals, but as resources. The more success each individual group has the more the ecosystem as a whole is strengthened, and the more attractive it becomes to new entrepreneurs, investors, companies, and service providers. Restaurants and craft breweries, while they are also entrepreneurs, are also a beneficial part of the system the region must rely on if it wants to foster growth and development of the entrepreneurial ecosystem.

As we celebrate National Small Business Week it is our hope that we recognize the contributions of all manner of small businesses to both the entrepreneurial ecosystem of Central Virginia and to the broader community itself. Small businesses, traditional entrepreneurs, Main Street entrepreneurs alike, have a great deal to offer, both in an economic and cultural sense. They support many of the activities we all enjoy, and services on which we rely. So please take a moment this week to show your support for local small businesses, and for the continued growth of the emerging entrepreneurial ecosystem right here in Central Virginia.

__________________________________________________________________________________________

Mike McCollum: Mike is an attorney with the Westhampton law firm, John V. Robinson, P.C. A graduate of the University of Richmond School of Law and went on to earn his advanced law degree from the Duke University School of Law’s Entrepreneurship Program before returning to Richmond. His practice focuses on intellectual property issues and working with entrepreneurs and early stage companies on a wide range of corporate law issues. Mike also teaches Entertainment Law and Intellectual Property Drafting at the University of Richmond School of Law.

Brooke Taylor: Brooke is a second year law student at the University of Richmond School of Law with a focus in intellectual property and corporate law. In 2014, Brooke received a Bachelor degree in Entrepreneurship and a Master of Business Administration from Missouri State University (her hometown university). Brooke is currently a legal intern at John v. Robinson, P.C. developing her knowledge and skills in entrepreneurial advising and corporate law.

Zain Hartman: Zain is a senior at Virginia Commonwealth University studying entrepreneurship. Zain serves as a student representative for the Entrepreneurship Advisory Board at VCU and has participated in venture creation competitions with his start-up business idea, Stall Wall Advertising. Zain is currently the VP of Marketing for a start-up property management firm out of NYC, while studying to take the CPA exam to provide start-ups with tax and accounting advice.

July 28, 2015

Survival Tips for Businesses and Professionals

Filed under: Small Business — John V Robinson, P.C. @ 5:32 pm

For any business or professional practice to survive, it must continually focus on

4 elements:  (1) its products or services; (2) the marketing and/or public relations function (your business will not survive if you are the best in the world but your phone never rings); (3) the often neglected, related administrative requirements of running your business (your business will fail if you are the best in the world, your phone is ringing off the hook but you don’t get your bills out or you don’t pay your withholding taxes); and (4) the ethical component which is essential, as demonstrated by the demise of Enron.

Any business person or professional needs to continually focus on and address each of the above four elements because neglecting any one will cause your business potential to suffer and can cause businesses ultimately to fail.

This article will briefly address some issues, typically handled by an attorney, in conjunction with your accountant, concerning the choice of the best form of entity to provide your business services.

SOLE PROPRIETORSHIP

The vast majority of businesses in the United States are operated as sole proprietorships.  The sole proprietorship is, of course, available as a form of business entity to businesses such as restaurants, contractors, and others, as well as professionals, including physicians and attorneys.  In fact, many businesses operate successfully as sole proprietorships.

The sole proprietorship is the simplest and least structured form of entity with basically no differentiation between the proprietor and the business.  I practiced law as a sole proprietor for about four years when I started my own business some time ago.

Most businesses can, through their choice of business entity, insulate their personal assets from their business assets. While insurance is still important, the choice of business entity may be more meaningful as a personal risk avoidance and asset preservation mechanism.

Professionals like doctors and attorneys cannot through their choice of business entity insulate themselves from their own professional malpractice.  Accordingly, this risk must be addressed through other measures like insurance.  Professionals can, however, insulate their personal assets from the professional malpractice of fellow professionals in their business.  Accordingly, when one associates with other professionals in one’s business, the situation changes.  While insurance is still important, the choice of business entity may be more meaningful as a personal risk avoidance and asset preservation mechanism.

Sole proprietors have few legal formation requirements, e.g., they are required by Virginia law to file fictitious name certificates if they trade under a name other than, or in addition to, their legal name, and most Virginia cities/counties require business licenses.  Bookkeeping and accounting are simple and, of course, sole proprietorships pay taxes on their income at the individual tax rates and file Schedule C of individual IRS Form 1040.

Currently, individual tax rates can exceed corporate rates at certain levels, such as at the highest tax rates.  However, the main disadvantage to being a sole proprietorship is probably still perceived to be the personal/unlimited liability of the sole proprietor for all debts and liabilities of the business.

As a sole proprietor, in signing a lease with a landlord, buying real estate from which to operate your business, signing an onerous contract with a third party, etc., there is no differentiation between the proprietor and the business.  Accordingly, generally, creditors (including both trade and judgment creditors) can have full recourse to the sole proprietor’s personal assets.

S-CORPS AND LLCS

It is precisely because corporations and limited liability companies allow business owners to insulate their personal assets from the vagaries and risks of running a business that they have become so popular as a choice of entity.  Generally, the company is the only entity responsible for business debts and liabilities unless the debts and liabilities have been guaranteed, in which case the guarantors are also liable.

Professional corporations or professional limited liability companies are an exception to the general rule because professionals cannot insulate themselves from their own professional malpractice to their clientele.  However, personal assets of professionals can, of course, be protected in many other ways by choice of the corporate or limited liability company form of entity e.g., leases, onerous indemnification provisions in third party contracts, slip-and-falls, etc.

Both the S-Corp and the limited liability company allow for flow-through or conduit tax treatment and can avoid double taxation issues upon sales of businesses and upon distributions of profit from business operations.  In certain circumstances, self-employment taxes may be reduced.  Whether a new form of business entity provides asset preservation, administrative, tax and other benefits can be a complex analysis, which should be undertaken periodically by the business owner, in conjunction with their professional advisers, typically their attorneys and accountants.

Virginia law allows for the same person to serve as sole shareholder, sole director and sole officer in a corporation.  Virginia law also allows for single-member limited liability companies.  While there are more formalities associated with operating one’s own business as a corporation or a limited liability company than as a sole proprietorship, Virginia law has greatly reduced the inconvenience and hassle factor so that it should not present a major impediment in the decision of most business owners.

Limited liability companies and corporations can also be formed for minimal expense.  For example, the filing fee for a limited liability company payable to the State Corporation Commission (the “SCC”) is $100 and for a corporation (assuming the usual 5,000 authorized shares) is $75.  Typically, our firm charges only $300 in legal fees to organize an S-Corp or limited liability company.  On this issue a word of caution:  An accountant recently told a professional whom we ultimately assisted, just to go down to the SCC and fill in the SCC’s pre-printed form to organize his entity.  Several issues/problems arise.  For example, for professionals there are certain extra requirements to address in the Articles of Organization or Articles of Incorporation.  Additionally, even for non-professionals, the pre-printed forms may not address other possible provisions which could have a significant effect on the entity, e.g., preemptive rights, indemnification provisions, etc.  A mistake often made by persons forming their own corporations is assuming that receipt of the Certificate of Incorporation completes the organization of the corporation.  Not so, the corporation has now been “incorporated” but further steps must be taken to complete the organization of the corporation.  Virginia Code Section 13.1-623 describes how the organization of the corporation is completed.  It is important that these remaining steps be taken to assure limited liability.

Of course, there are other entities available to businesses such as the limited liability partnership and business trust.

Several years ago, I presented a series of numerous articles, in much greater detail, to the Virginia Society of CPAs newsletter for publication.  The scope of this article has been greatly reduced to cover what I consider the most salient choice of entity issues facing businesses.  Accordingly, this column is intended for informational and educational purposes only and not as legal advice.  Readers needing legal advice should retain competent legal counsel.

 

  © 2003, John V. Robinson, P.C.

Qualification to do Business In Virginia

Filed under: Business Practices,Small Business — John V Robinson, P.C. @ 1:56 pm

To apply for a certificate of authority in Virginia, a foreign corporation must apply with the SCC using the prescribed forms. Virginia Code section 13.1-759 specifies the application procedure requiring such information as the name of the corporation, where the corporation is incorporated, the date and duration of incorporation, the address of the corporation’s office and directors, stock information, and information pertaining to the corporation’s registered agent in Virginia required by Va. Code Ann. § 13.1-763. If the SCC finds that the application complies with all legal requirements and requisite fees have been paid, then it will issue a certificate of authority to conduct business within the state.

Once a foreign entity receives a certificate of authority from the State Corporation Commission, it has the authority to conduct business within the state, but will have no greater rights than a domestic corporation. The Commission nevertheless retains the authority to revoke this certificate. See Va. Code. Ann. § 13.1-761 (2003).

If a foreign entity does not seek qualification in Virginia, and it is found to be doing business in the state, serious consequences may result. For instance, an entity transacting business without a certificate of authority may not maintain proceedings to enforce its rights in the Commonwealth until it obtains such certificate. This means that the entity may not bring any affirmative claim, either as plaintiff or as a defendant asserting a counterclaim in any suit. This applies equally to successors to foreign corporations that were found to be transacting unauthorized business. A court may also stay a proceeding commenced by a foreign corporation, its successor, or assignee until it determines whether it needs a certificate. Those officers, directors, and employees of foreign entities who transact business without a certificate, knowing that such qualification is required, may be fined penalties between $500 and $5000 per person. Such foreign entities are also deemed to have appointed the clerk of the SCC its agent for service of process. See Va. Code. Ann. § 13.1-758 (2003). However, fortunately, and unlike certain other states, the failure of a foreign entity to obtain a certificate of authority does not impair the validity of the corporate acts or prevent the entity from defending proceedings in the Commonwealth. See Va. Code. Ann. § 13.1-758(E) (2003). Also, once the business entity has qualified and paid all penalty fines and fees, any prohibitions against enforcement of its rights in Virginia courts would be eliminated.

© 2003, John V. Robinson

What Does it Mean to “Do Business” Outside of the State of Incorporation?

Filed under: Business Practices,Small Business — John V Robinson, P.C. @ 1:55 pm

In order for a corporation to lawfully conduct business outside of its state of incorporation, it must first qualify to do business within each foreign state. Usually, this involves as a preliminary matter, the securing of a certificate of authority to transact business from the state after completing an application and paying a fee to the state. As part of this process, the entity is usually required to appoint a registered agent/registered office within the state.

This rule applies not only to corporations, but may apply to limited liability companies, limited partnerships, and business trusts, etc., cumulatively referred to as “business entities,” or “entities” for the purpose of this article. While qualification to do business is a relatively simple and inexpensive process in most states, the failure to qualify may have serious repercussions for the entity. So what then does it mean to be “doing business” within a state?

As might be expected, there is no hard and fast answer to this question. The answer will vary depending on the laws of the forum state in which the foreign entity wishes to conduct business. Accordingly, the advice of a lawyer experienced in such matters in the forum state is often desirable or necessary. To further complicate matters, there are at least three different meanings of the terms “transacting” or “doing” business: (1) transacting business which would require a foreign corporation to qualify, i.e., obtain a certificate of authority; (2) transacting business which would subject a foreign person or entity to service of process; and (3) transacting business which would subject a foreign person or entity to state taxation. The legal tests for determining whether or not a foreign corporation is transacting business in Virginia differ as the situation falls within one or the other of these classifications. This article focuses on qualification.

While the laws and qualified attorneys of each foreign state must be referenced in order to reach a valid legal conclusion for each entity, there are broad areas into which a court may look. For instance, a business must have a “presence” (but not necessarily a physical presence) within a foreign state for it to be subject to that state court’s jurisdiction. Occasional isolated acts will generally not amount to presence, but regular business activities will. Incidental activities that do not constitute a business entity’s main business purpose, may also typically not rise to the level of “doing business.” Frequently, courts will use a “sliding scale” approach to ascertain whether a foreign entity is conducting business in a state at a level requiring qualification.

© 2003, John V. Robinson

What Does it Mean to Be “Doing Business” in Virginia?

Filed under: Business Practices,Small Business — John V Robinson, P.C. @ 1:53 pm

In Virginia, section 13.1-757 of the Code requires a foreign entity to obtain a certificate of authority from the State Corporation Commission (“SCC” or “Commission”) before it is permitted to conduct business. While the Code does not give specific examples of what may constitute “doing business” in the Commonwealth, section 13.1-757 (B) provides a non-exhaustive list of activities that will not be considered such. These activities are: (1) maintaining, defending, or settling a proceeding; (2) holding board of directors or shareholder meetings, or carrying on other activities concerning internal corporate affairs; (3) maintaining bank accounts; (4) maintaining offices or agencies for transfer, exchange, and registration of corporation’s own securities or maintaining trustees or depositories for such; (5) selling through independent contractors; (6) soliciting or obtaining orders via mail, employees, or agents, if orders must be accepted outside the Commonwealth; (7) creating or acquiring indebtedness, deeds of trusts, and security interests in real or personal property; (8) securing or collecting debts or enforcing deeds of trust, and security interests in property securing debts; (9) owning, without more, real or personal property; (10) conducting isolated transactions finished within thirty days that are not part of a course of repeated transactions of similar kind; (11) for a period of less than ninety consecutive days producing, directing, filming, crewing or acting in any film, television program, commercial, or promotional film to be sent outside of the state for processing, editing, marketing and distribution; or (12) serving, without more, as a general partner, or as a partner in a partnership which is a general partner of, a domestic or foreign limited partnership which does not otherwise transact business in the Commonwealth.

The Fourth Circuit in Moore-McCormack Lines v. Bunge Corp., 307 F.2d 910 (1962) explained that in order to determine if a foreign entity is “doing business” within Virginia, “that each case must be decided on its own facts.” Id. at 914. Since it is not always simple to determine precisely what constitutes “doing business,” it is advisable for foreign entities to consult qualified attorneys in each state in which they wish to have any business contacts.

© 2003, John V. Robinson