Archive for the ‘Business Law’ Category

Risk of Refinancing Your Home Loan: Refi Means Recourse!

Monday, December 12th, 2011

With interest rates and home values dropping, many homeowners are refinancing their mortgages. Many banks have found that the refinancing market is a good way to keep their loan production up. These refinancing packages can look quite attractive to homeowners as, in some instances, they can reduce their interest rate by 2% or more. That being said, the biggest, and mostly unknown, drawback is that refinancing your home loan will likely expose you to personal liability in the event of default.

If the only debt on your home currently is the loan you used to buy it (a “purchase money mortgage”), then, at least in California, the lender cannot sue you personally in the event of default. For instance, if you walk away from your mortgage with $300,000 still owing, and the foreclosure sale price is only $200,000, the lender must absorb that $100,000 “deficiency.” The reason for this is that California Code of Civil Procedure §§ 580b and 580eshield homeowners from deficiency judgments if they default on their purchase money mortgage. 580b applies if your home is sold through a foreclosure sale (also known as a “trustee’s sale”); 580e applies if you short sell your home (please note that §580e is a relatively new law; short sales historically opened the borrower up to being sued personally for the deficiency). It is important to note that this protection applies narrowly to homes…you can’t bootstrap the 580b or 580e shield by arguing you live next to the Quiznos in your 8,000 square foot commercial building.

Because 580b and 580e apply to purchase money mortgages only, if the nature of the loan changes, the protection offered by these statutes is lost. In other words, refinancing turns your home loan from nonrecourse to recourse. If you default on your refinanced loan, the bank can now pursue a “judicial foreclosure,” which is essentially a court supervised and administered foreclosure proceeding. Judicial foreclosures are more time consuming and expensive for the bank, but they give the bank the ability to sue you personally for the difference between that amount you owe and the price for which the property sold (a “deficiency judgment”). When borrowers obtain a purchase-money loan, the California Civil Code requires an initial disclosure of the details of the code, but it does not necessitate disclosure of the potential loss of that protection through refinancing.

The take home point is not that you should avoid refinancing, but simply that you should be fully advised of all of the risks prior to making the decision. On occasion, you can negotiate with banks during the refinancing process for them to include nonrecourse language in the new financing agreement. If you need any assistance with this complicated area of the law, please contact our law offices.

Posted in Business Law, General | 2 Comments »

SHARING YOUR IP: THE SIMPLICITY AND BEAUTY OF THE NONDISCLOSURE AGREEMENT.

Thursday, November 17th, 2011

One of the most exciting things about developing a new idea or business model is sharing your inspiration with others. Sharing your idea and the way it is implemented, will probably be necessary to turn your idea into a profitable business. After all, you will have to contract with employees, contractors, and vendors to develop and produce your idea; and, you will have to market your idea to consumers in order to get paid! While these disclosures can feel like a moment of triumph, particularly when others validate the importance and uniqueness of your ingenuity, but it is fraught with same danger and fear felt by every entrepreneur: How do I prevent the party with whom I share my idea from stealing it!?

This is a real and serious concern. Unfortunately, the risk of someone stealing your idea cannot be completely eliminated. What you can do, however, is take steps to impose legal penalties for those who steal your ideas, and to preserve your ability to file a patent application or claim trade secret protection. All of these goals can be accomplished in large part thanks to the nondisclosure agreement. A nondisclosure agreement is intended to contractually bind the recipient of your information to keep such information secret. If the recipient feels plucky enough to steal your secrets anyway, you have legal remedies available to you because of the agreement. You can sue the purloiner for liquidated damages (a pre-agreed amount of money) or possibly enjoin him or her from disclosing the idea further.

The other function a nondisclosure agreement performs is that it preserves your intellectual property rights. For instance, if you wish to apply for patent, one of the elements you must show is that the invention is “new.” If you disclosed the invention more than a year prior to filing the application and did not protect that disclosure with a nondisclosure agreement, you are in danger of losing your ability to patent the invention. The reason is because your year-old disclosure has made the invention not “new”. If you used a nondisclosure agreement, however, you should be able to preserve the newness element. Similarly, for trade secrets, the nondisclosure agreement preserves your ability to enforce trade secret rights. The law will not assist you to protect your trade secret if you do not care enough to keep it secret yourself.

The nondisclosure agreement does come with some limitations, however. It cannot protect you if your idea is already something that is commonly known and/or available to the public. It also may not protect you against the unscrupulous person who believes in the “efficient breach” theory. In other words, if the recipient of your information decides that the amount they will profit from stealing your idea will outweigh all the costs of breaching the agreement, you have yourself a very serious problem. The best advice I can give is that while you should always use a nondisclosure agreement in these situations, you should do your best to share your profitable information with people you trust. If you have any more questions, please contact the Law Offices of Aaron Stewart in Chico, California.

Posted in Business Law, General, Intellectual Property Law | 3 Comments »

Stolen and Infringing Domain Names: The Law of Cybersquatting

Tuesday, August 16th, 2011

As most business owners know, it takes consistent effort to protect the trademark from being infringed by other individuals and businesses. While trademark law can afford you a set of rules and a mechanism through which to enforce your rights, the impetus is always on you, as the trademark owner, to defend what is yours. This can be especially difficult in an online word considering (1) the relative anonymity the Internet can afford, and (2) the ease with which domain names can be purchased and registered.

Cybersquatting and cyberpiracy are buzzwords that are becoming more well-known in our day to day lives as business people. The term cybersquatting originated from the situation where a person or business who knowingly and in bad faith reserves a domain name consisting of the trademark or name of a company with the intent of selling the right to that domain name back to the legitimate owner.”

The Anticybersquatting Consumer Protection Act, now embodied in 15 USC §1125, is a federal law that took effect in 1999. This domain name protection law is intended to give trademark and service mark owners a new way to fight cybersquatters.

For example, Nintendo of America Inc. was awarded $560,000 and a recovered 48 Internet domain names in a domain infringement suit in October of 2000. It was one of the first massive domain name lawsuits that resulted from the 1999 Act. The Court awarded the company statutory damages ranging from $2,000 to $30,000 per name for 48 names—for a total award of $560,000.

The major drawback to using the ACPA to enforce your rights, is that you must sue in federal court to do so. Even with a successful outcome, the process to get there can cost you a lot of time and money. Fortunately, the Internet Corporation of Assigned Names and Numbers (ICANN) has established a cheaper, faster, and more user-friendly way to enforce your rights in a domain name. ICANN is a not for profit public benefit corporation that is responsible for administering and overseeing all Internet domain name registrars and their underlying policies.

If someone has taken a domain name similar to your domain name, trademark, or trade name, you may be able to use ICANN’s Uniform Domain-Name Dispute-Resolution Policy (UDRP) to request a binding Administrative Proceeding. Such a proceeding is initiated by filing a complaint online, and following through with the administrative procedures provided by the UDRP. If you prevail, the only remedy is transfer of the infringing domain name to you; monetary damages are not allowed under the UDRP’s Administrative Proceeding.

If you think that someone has registered a domain name that may infringe on your trademark or service mark, please contact our law offices to determine if you would be able to file an ACPA or UDRP action to acquire the domain name or avert the domain name registrant from future use of the domain name.

Posted in Business Law, General, Intellectual Property Law, Internet Law | 2 Comments »

California Passes New Affiliate Nexus Tax

Wednesday, July 13th, 2011

At the end of last month, Governor Jerry Brown signed a bill into law that will establish a sales tax nexus in the State of California for online retailers who use in-state affiliates to market and sell their products. These marketers are essentially independent contractors who market for the online retail business. The affiliate nexus tax, or as some call it, the “Amazon Tax,” after the company Amazon.com, which uses quite a number of affiliate marketers, is a way for states to collect taxes on internet transactions from online retailers operating out of state. This tax is sweeping because it will establish sales-tax nexus in the State of California for non-California businesses based solely on in-state affiliate marketers, who are not employees for the non-California business!

By way of background, the U.S. Supreme ruled in 1992, in the case of Quill vs. North Dakota, that retailers do not have to collect sales tax unless the retailer has a physical presence in the state, known as a “nexus.” The nexus can be established by a physical office or even a single employee in a state. What the new tax does is to create another basis for establishing nexus. The law states that any online merchant must charge sales taxes on any buyer’s purchases, if the purchase occurred through an online California affiliate marketer. This law is an attempt at creating a level playing field between brick and mortar businesses in California—who must collect sales tax—and out-of-state online retailers who, until now, could sell to California residents and/or through California affiliates while still avoid paying sales tax. Needless to say, this law has created a huge backlash by online retailers. For instance, news story report that Amazon.com immediately severed all dealings with its affiliate marketers in California.

What are the consequences of the affiliate nexus tax for your business? If you are or could be considered an affiliate for a larger website, your contact with California might present negative tax consequences for the business you serve. As we saw with Amazon, you might be dropped as an affiliate marketer. Until there are national laws on the books allowing or disallowing an affiliate nexus tax, online businesses will simply forum shop to find affiliates in states that will not tax them. Please contact our law offices at 530-345-2212 to learn more about this law, how it affects your business, and what you can do to remedy the situation.

Posted in Business Law, General, Internet Law | 6 Comments »

Securities Regulations: How These Laws Affect Your Business

Friday, August 6th, 2010

Having a firm understanding of securities regulations is necessary when forming a corporation or an LLC. This is because shares of corporate stock are always securities, and membership interests in an LLC are sometimes classified as securities. A “security” is an ownership interest in a company or venture over which you have no control or management authority. Both state and federal securities laws govern the sale and management of securities. These laws prohibit a business—known as an “issuer” in this context—from selling or offering to sell any security without first registering with 1) the relevant authority of the state in which the business was formed, 2) the federal Securities and Exchange Commission (“SEC”), and 3) any other state in which a given purchaser of the stock resides (this is what is meant by “blue sky laws”).

The purpose of these registration requirements is somewhat paternalistic. The relevant governmental authorities want to protect those individuals who have an ownership interest in a given enterprise, but have limited power over or knowledge of how that enterprise is managed. Notifying the federal authority—the SEC—is called registration; whereas in California, such notification is known as qualification. At both the federal and state level, this process is quite complex, expensive, and time-consuming. Both federal and state law, fortunately, recognize several exemptions from these registration/notification requirements.

The most common federal exemptions are as follows:

1) §4(2) of the Securities Act of 1933 (15 USC 77d(2)): this is a “self-executing” exemption for private offerings. What qualifies for this exemption is a moving target as there are several factors that determine when this exemption is available. Relying on this exemption alone can sometimes be risky.

2) §4(6) of the Securities Act (15 USC 77d(6)): this exemption is available for “Accredited Investors.” It is not self-executing, as you must file a “Form D Notice.” Accredited Investors are defined under the Regulation D regulations, below.

3) Regulation D Offerings (embodied in 17 CFR 230.501–508): Regulation D covers three possible exemptions, all of which require a Form D Notice to be filed with the SEC. The three exemptions are as follows:

a) 17 CFR 230.504: the offering must be limited to under $1 Million in value, the number of investors is unlimited, and there are no information disclosure requirements for the issuer to give to investors.

b) 17 CFR 230.505: the offering must be limited to under $5 Million, the number of non-accredited investors is limited to 35 (with no limit as to accredited investors), and there are detailed information disclosure requirements for the issuer to give to non-accredited investors, if any.

c) 17 CFR 230.506: the offering has not dollar value limit, the number of non-accredited investors is limited to 35, even non-accredited investors must a “sophistication requirement,” and there are detailed information disclosure requirements for the issuer to give to non-accredited investors, if any.

California State law has a number of exemptions from qualification of securities, most of which are embodied in Corporations Code §25102.

Even if you are forming a closely held corporation (the owner(s) are just you or you and your spouse or family member), your ownership interest is still a security. This means you must use an exemption or else you have to register and qualify your securities. If you are forming an LLC, and someone other than yourself is managing its operations, your membership interest is likely a security.

The take home point for all of this is that regardless of the type of entity you are forming, you need to be careful that you are complying with the relevant securities laws and regulations. If you need any assistance or simply have a question about how securities regulations affect your business, please contact our law firm. We are proud to serve clients throughout the North State, from Sacramento up to Eureka and the Oregon Boarder.

Posted in Business Law, General | 2 Comments »

U.S. Privacy Laws—Cloud Computing, Transparency, and the European Union—Are We Behind the Times?

Tuesday, June 22nd, 2010

At a roundtable discussion yesterday, June 21, 2010, an attorney and representative for the U.S. Federal Trade Commission descried the current patchwork of U.S. privacy laws. Unlike our neighbors across the pond in the European Union, the U.S. approach to privacy protection is arguably lacking in terms of uniformity and effectiveness.

As I described in a previous blog, the U.S. Congress has yet to adopt a federal statutory scheme that would hopefully provide uniformity. The FTC representative echoed the often-heard concern in privacy law circles that the U.S. law needs to adapt to new methods of business data transfer and record retention—in particular, cloud computing. A popular buzzword at present, cloud computing promises to streamline a business’s data processing, record retention, and provide lightning-quick methods of collaboration in a business climate that is seeing a rapid increase in “telecommuting.” At the same time, cloud computing also threatens to expose the personal information of a business’s consumers, customers, and/or website users. Although security measures are available to help make cloud computing secure against intrusions into or inadvertent disclosures of personal information, the retention and transfer of such sensitive information in an online environment certainly raises the specter of increased risk to privacy breaches.

One of the major concerns of the FTC is to require notice and disclosure of privacy breaches. The FTC and most consumers understand that data breaches are inevitable, whether data is stored in a brick-and-mortar building or in on the cloud. The FTC wants to ensure, however, that whenever such a breach occurs, the consumer will be notified of the breach. California already requires businesses to notify California residents of such breaches, but many other states do not. The House of Representatives approved a bill to require such notification for all U.S. consumers, see http://bit.ly/dnmBUr, but it has yet to be approved by the Senate.

In contrast to the U.S., the European Union nearly 15 years ago promulgated a Data Protection Directive; see http://bit.ly/9e4eDt, which provides considerably more protection to its residents. Although many consider this directive to be too onerous on businesses, it does address the notice or “transparency” issue as described above. Beyond just reporting breaches into a consumer’s personal data, the Directive requires notice, and sometimes consent, every time “personal data” is “processed”—which means just about anything you can do with data: transfer, store, etc. Furthermore, such data can be processed only if it meets certain criteria regarding business necessity.

As a U.S. business owner, the important thing to be aware of is that you will become subject to the data privacy laws of whatever jurisdiction in which your customers, clients, or website users reside. For example, if you have customers who reside in Nevada or Massachusetts, and your business is based in California, you will have to comply with stricter privacy laws than you normally would in your home state.

More surprisingly, if you have operations in any country in the European Union or have personal data from an individual who resides in the European Union, the EU Directive could potentially apply to your business operations. Most often, problems occur when such data is transferred “offshore” from the EU country into the U.S., because the EU does not consider U.S. law to be sufficiently protective of its residents. That being said, the EU has certain, limited “safe harbor” exceptions so that U.S. businesses do not have to comply with all of the onerous provisions in the Directive. See http://www.export.gov/safeharbor.

For more information on how what laws apply to your business and how to comply with them, you can contact our law firm at info@chicolawfirm.com.

Posted in Business Law, General, Internet Law | 7 Comments »

Insurance Issues for the Growing Business

Thursday, February 18th, 2010

If you, like many of today’s growing business owners, plan on taking advantage of the Internet to develop e-commerce traffic for your business, there are important insurance issues that you should consider. Many business owners who make the transition to the online world do not realize that traditional insurance policies may not cover the most common risks associated with operating a business on the Internet.

Although each policy is different, the traditional Commercial General Liability policy can fall short of covering the following sources of Internet liability: 1) liability for business interruption; 2) liability for lost data; 3) liability for loss of economic value of data and/or breach of privacy; 4) liability for passing viruses and the like; 5) liability for infringing intellectual property; and 6) liability for non-physical torts, such as defamation.

The standard CGL policy typically covers only “physical” damage to a third parties “tangible” property. As a result, data losses and losses of the economic value of data are ordinarily not covered by such a policy. Data loss or business interruption can occur if your clients or customers are storing information on your website or your server, and your website or server slowed or crashed to the point it damages your client’s business. Your client or customer can also lose the economic value of their data in the event you inadvertently disclose their trade secret (the idea being that the data itself is not lost, but its value as a secret is).

One of the most common sources of website liability stems from the (often unintentional) infringement of someone else’s intellectual property. The surprising fact is that liability for the breach of someone else’s intellectual property is usually covered by standard CGL policies only to the extent that the infringement occurred because of “advertising” activities. This results in extremely limited coverage, which can be of little value, especially for websites where users are posting copyrighted images.

The Law Offices of Aaron J. Stewart understands the various, and sometimes unusual, sources of liability with running an online business. Our goal is not only to protect you and your business to the maximum extent provided by the law, but also to help you to identify any gaps in your insurance coverage. The insurance industry has taken strides to catch up with the changing e-commerce landscape, and there are policies and riders that can cover your unique business model. While we are by no stretch of the imagination insurance brokers, we can identify those risks that should be covered so that you can work with your insurance agents to ensure that you are protected.

For more information from the California State Bar, see the following: http://tinyurl.com/ylxzwfe. You can also contact us at info@chicolawfirm.com!

Posted in Business Law | No Comments »

Do You Know Which Laws Apply to Your New Business Venture?

Thursday, February 11th, 2010

Starting a business can be very exciting! You’ve got a great idea and can’t wait to get underway. But have you considered which state laws may apply to your type of business? What about local regulations? These are questions that must be addressed during the planning phase so that there are no unpleasant surprises down the road.

We would like to share some information about some laws, regulations, and ordinances that may affect you and your business based on the nature and location of your business‘s operations. Please consider the following during the initial planning stage of any business venture:

• Zoning – Cities and counties often have strict zoning laws that govern what types of businesses are permitted in specific areas. In addition, there are often restrictions governing whether and what kind of businesses are permissible to operate from your home.

• Licensing and Permits – Depending on the nature of your business, a special license may be needed. If sales are made, a resale permit may be required. It is crucial to be properly licensed prior to commencing business activities of any kind.

• Taxes – As one of the two certainties in life, your business venture will invariably be subjected to taxes of some kind. Common taxes include those for sales, income, and employment. Cities or counties often assess tax on business property, as well.

• Employees – There are many additional laws that apply to businesses with employees that govern everything from worksite safety to hiring and firing practices. The laws and regulations governing the employment relationship are complicated, numerous, and ever-changing

• Health, Safety, and the Environment – Again, depending on the type of business, a variety of inspectors may be stopping by periodically to ensure that you are complying with all applicable laws and regulations. This is especially true for any business that deals with food or that produces any type of potentially hazardous waste products.

• Intellectual Property – Copyrights, patents, trademarks, and trade secrets are various ways in which intellectual property can be protected. Although the laws governing these areas of law can be confusing and cumbersome, having the proper protection in place is essential.

To ensure that you are complying with all applicable laws from the beginning, we advise that you consult with a business law attorney during the planning stage for your business. Please give us a call at 530-345-2212 or e-mail us at info@calventurelaw.com if you would like more information or to set up an appointment. We would be happy to help you ensure that your business venture starts off on the right track.

Zoning – Cities and counties often have strict zoning laws that govern what types of businesses are permitted in specific areas. In addition, there are often restrictions governing whether and what kind of businesses are permissible to operate from your home.
Licensing and Permits – Depending on the nature of your business, a special license may be needed. If sales are made, a resale permit may be required. It is crucial to be properly licensed prior to commencing business activities of any kind.
Taxes – As one of the two certainties in life, your business venture will invariably be subjected to taxes of some kind. Common taxes include those for sales, income, and employment. Cities or counties often assess tax on business property, as well.
Employees– There are many additional laws that apply to businesses with employees that govern everything from worksite safety to hiring and firing practices. The laws and regulations governing the employment relationship are complicated, numerous, and ever-changing.
Health, Safety, and the Environment – Again, depending on the type of business, a variety of inspectors may be stopping by periodically to ensure that you are complying with all applicable laws and regulations. This is especially true for any business that deals with food or that produces any type of potentially hazardous waste products.
Intellectual Property – Copyrights, patents, trademarks, and trade secrets are various ways in which intellectual property can be protected. Although the laws governing these areas of law can be confusing and cumbersome, having the proper protection in place is essential.

To ensure that you are complying with all applicable laws from the beginning, we advise that you consult with a business law attorney during the planning stage for your business. Please give us a call at 530-345-2212 or e-mail us at info@chicolawfirm.com if you would like more information or to set up an appointment. We would be happy to help you ensure that your business venture starts off on the right track.

Posted in Business Law | 4 Comments »

Law Offices of Aaron J. Stewart