“Merely Descriptive” Trademarks

I am often asked by clients if they can register a trademark for what they think is a great domain name that they have been offered and which would undoubtedly drive search results to their website. Sometimes the client has already swallowed the hook and purchased the domain, perhaps for many thousands of dollars.

If it looks too good to be true, of course, it probably is. When an especially catchy domain name suddenly becomes available to you, while it is conceivable that it may be a great and rare opportunity, often the corresponding trademark has not been snapped up already because it would infringe on the rights of a prior trademark owner—sometimes a powerful one—and the seller, usually a domain broker, often in a foreign country, is banking on the buyer making an impulse purchase before considering that they may have paid a lot of money for an unusable piece of virtual property.

Other times, a domain name may be a combination of a couple of words that perfectly describe your business. I get emails all the time offering to sell me domains like “AtlantaLitigationAttorney.com” or “GeorgiaTrademarkAttorney.com.” Many of these domain names have been scooped up and packaged by domain brokers hoping to turn a quick profit.  Of course, while using a domain like this might help to drive web traffic to your business (since they do contain common search terms), it will do little to help you brand your business—who would want to be called “Internet Search Engine” when they could be called “Google,” “Bing,” or “Yahoo”? When developing a name for your business, product, or service, remember that the strongest brands are usually those that come to associate your products and services with a unique set of qualities, not just to describe or name those products. Consumers think of Bud Light, Nike, or Chanel, for example, as a complete identity, even a set of lifestyle choices, not just the name of a product or company.

So I can’t register a descriptive name as a trademark?

Well, sometimes you can. But unless you have already been using and have become widely and exclusively known by a descriptive mark for at least five years, even if there were nothing preventing you from registering such a name, you still won’t be able to claim exclusive rights nationwide to a “merely descriptive” name simply through local use and federal trademark registration. “California Juice Co,” and “Saratoga Juice Bar,” for example, have both registered successfully on the Supplemental Register, a secondary trademark list for “merely descriptive” marks and which provides some, though not all, of the protections of the Principal Register.

While the Supplemental Register is sometimes seen as a stepping stone to later registration on the Principal Register, there are drawbacks to putting all of your marketing eggs into a basket you don’t yet fully own.  For example, it can be difficult to prove infringement of a mark registered on the Supplemental Register. Why? Because infringement occurs when there is a likelihood that consumers will be confused as to the source of goods or services uniquely identified under a particular mark, and registration on the Supplemental Register is by its very nature an admission that the mark is not strong enough to uniquely identify (and it therefore merely describes) the products or services in question or their source… and “mere description” is not something you can protect.

Of course, there are plenty of well-known marks that began life on the Supplemental Register and then moved on: “Five Hour Energy Drink” and “Chapstick,” for example. Such marks may be re-registered in the Principal Register in five years if they have come to identify the product or service exclusively in the marketplace and have thus achieved what trademark law calls “secondary meaning”; i.e., a unique brand identification in addition to the self-evident, descriptive meaning.

How can I create a unique trademark and describe my product at the same time?

Many companies bridge the gap between completely unique marks (which take a lot of energy and marketing expenditure to associate the mark with the product or service) and “merely descriptive” marks by opting for something of a hybrid. “Tiger Energy Drink,” “Longhorn Consulting Co.,” “Falcon Performance Products,” and “Frozen Pints Craft Beer Ice Cream” are all registered marks which are highly descriptive but have arbitrary and therefore “unique” elements grafted onto the descriptive portion of the mark to create a mark that is much more easily registrable and yet still describes the product.

Working with an experienced trademark attorney at Briskin, Cross & Sanford can help you to identify the likelihood that your proposed brand can be successfully registered as a trademark and, since the Trademark Office may take a year or more ultimately to reject an application for a mark that is not registrable, can save you a great deal of time and money as you seek to launch a successful company, product, or marketing campaign.

Arbitration – not boilerplate, and not necessarily quick, easy, or inexpensive!

If you have basic familiarity with contracts, you’ve likely heard the term “boilerplate,” which is often used to mean standard language that the contract writer uses in many of its contracts or even that you may find in contracts across the board.  Of course, just because language might be “standard,” that does not mean that it is innocuous or that you can safely ignore it!

So-called boilerplate language, it it exists, is often found near the end of the contract.  Some contracts stipulate that if a dispute arises from the contract the parties agree to submit the dispute to binding arbitration.  While this clause may be brief and, coming at the end of a contract, may appear almost like an afterthought, it is important to understand that agreeing to arbitrate has very real consequences.

Arbitration clauses are most often seen by consumers in credit card agreements and service agreements with large companies (e.g., “Any dispute in connection with this Agreement shall be subject to binding arbitration in Chicago, Illinois”), but they are also sometimes poorly understood features of contracts between small businesses who somehow heard from an uncle that arbitration was easier or cheaper than going to court.

In  November 2013, a long and expensive arbitration proceeding concerning a Gwinnett County software company came to a conclusion.  The process took three (3) years and cost $3.5 million in legal fees in addition to approximately $150,000 in arbitration costs.

The victors, Kenneth Shumard and Kenneth Shumard Jr. won the right to control the use of medical billing software that is anticipated to be highly valuable.  The Shumards also won $800,000 in attorneys’ fees.  Initially, the Shumards sought a restraining order from the Gwinnett County Superior Court preventing their other partners from making certain use of the software.  Judge Ronnie Batchelor referred the dispute to arbitration, because the partnership agreement between the Shumards and their partners required that disputes go to arbitration.

As such, the Shumards did not have the option to seek judicial process, but instead, were forced to go to arbitration.

Arbitration is conducted under its own standards and is a creature of state law.  In some ways arbitration resembles court proceedings.  For example, in the above-mentioned dispute, the arbitrator received briefs on the matter and received testimony from witnesses.  The arbitrator then required post-trial briefs and issued a written decision.

In other ways, however, arbitration is an animal unto itself.  Arbitrators are not bound the same rules as judges and their decisions are often final.  Their decisions are not subject to normal appellate court review, and only subject to attack in specific instances, such as when the arbitrator is not impartial, failed to make a final determination of the issues, or manifestly disregarded the law.  Basically, arbitration is like “private court.”

A court rarely finds that an arbitrator has committed such failings, and thus, it is best to plan on any arbitration award being the final word.  Case in point, in the above-referenced dispute, the Shumards’ partners, who were unsuccessful in arbitration, went back to Gwinnett County Superior Court Judge Batchelor seeking to have the arbitration award vacated.  Judge Batchelor denied those motions and confirmed the arbitration award.

In Georgia, Chapter 9 of Title 9 of Georgia Statutes sets out the standards for arbitration (the “Georgia Arbitration Code,” O.C.G.A. § 9-9-1 et seq.).  In Georgia, the contract controls.  If a contract that requires disputes be arbitrated is enforceable, the dispute cannot be heard by the courts and must be submitted to arbitration.  The courts do have power, however, to determine whether the contract with the arbitration clause is valid, to compel arbitration, and to validate and enforce an arbitration award.

From partnership agreements and operating agreements to construction deals and a variety of other contracts, a seemingly innocuous arbitration clause can be but a brief paragraph nestled neatly in the final pages of the contract, but nonetheless has great importance.  Before entering into a contract, seek the counsel of a contract attorney to ensure you understand the implications of every section of the agreement.

The Fair Labor Standards Act: A Primer

The Fair Labor Standards Act (FLSA) is a federal law that governs minimum wage and overtime, record keeping, and youth employment laws.

Since July, 2009, the federal minimum wage for “covered,” “non-exempt” workers has been $7.25 per hour.  In addition, unless they are “exempt employees,” workers covered by the Act must receive overtime pay equal to at least time-and-a-half for hours worked in excess of 40 in a workweek.  Kids younger than 14 can only usually be employed by their parents, as actors or performers, as casual babysitters, or delivering newspapers.  Older kids have fewer restrictions, but are still usually restricted as to hours and prevented from working in certain hazardous occupations.  Employers of non-exempt workers are generally required to keep accurate (though not particularly extensive) records containing identifying information about the employee and data about the hours worked and the wages earned.

Sound simple?

If only it were.

Let’s start with a short quiz.

• How many employees does a company have to have before it is required to offer health care under the Affordable Care Act?

If you said 50, you would be correct, for the time being anyway.

• How many employees do you have to have to be liable for Title VII discrimination based on race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information?

Are you up on your anti-discrimination law?  If you said at least 15, you are probably right (though the Immigration Reform and Control Act of 1986 (IRCA) prohibits discrimination on the basis of national origin by smaller employers with 4 to 14 employees).

Ok, let’s get back to the FLSA.

• How many employees do you have to have to be subject to the minimum wage and overtime, recordkeeping, and youth employment laws of the FLSA?

50?  No.

15?  No again.

Well, it’s a trick question, really.  The answer is that it really doesn’t matter how many employees you have.  All you have to be to be subject to the FLSA is to be engaged in a “covered enterprise.”

• So, what’s a covered enterprise?

One that has at least 500,000k in annual revenue; OR one that runs a hospital, old-age home, home caring for the sick or mentally ill or a school; OR one that carries out the work of a public agency.

At this point you may be asking yourself why, under this definition of a covered enterprise, are minimum wage and the rest of the FLSA requirements are such a big deal?

Oh, yes… even if your business is not a “covered enterprise,” your employees will be likely still subject to the FLSA if they are (1) engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely-related process or occupation directly essential to such production; (2) if they work in communications or transportation; regularly use the mails, telephones, or telegraph for interstate communication, or keep records of interstate transactions; handle, ship, or receive goods moving in interstate commerce; regularly cross State lines in the course of employment; or work for independent employers who contract to do clerical, custodial, maintenance, or other work for firms engaged in interstate commerce or in the production of goods for interstate commerce.

As you probably suspected, if that’s not quite everyone, it’s certainly a fairly large segment of the 155,613,000 or so members of the US workforce.

Of course there are a few wrinkles.

You may have heard that salaried employees are exempt from the FLSA, but just because an employee is paid a salary, this does not necessarily mean the employee is automatically exempt from the requirement to pay overtime, otherwise employers could simply pay all hourly employees an equivalent weekly salary and get around the law.

In fact, exemption from the wage and hour laws is only gained under one of these specific exemptions, each of which requires a salary of at least $455 per week :

• Executive Exemption (requires that the employee be engaged primarily in managing the business or a business subdivision, directing at least two full-time employees and have authority to hire and fire or at least recommend hiring and firing).
• Administrative Exemption  (requires that the employee be engaged in the performance of office or nonmanual work directly related to the business and the performance of tasks that include discretion and independent judgment in matters of significance).
• Professional Exemption  (requires that the employee be required to use advanced knowledge,intellectual in character, requiring the consistent exercise of discretion and judgment–sometimes called the “learned professions” exemption).
• Creative Professional Exemption  (requires that the employee be engaged in work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor).
• Computer Employee Exemption  (requires that the employee be a computer systems analyst, computer programmer, software engineer or other similarly skilled worker making the equivalent of at least $27.63 an hour).
• Outside Sales Exemption  (requires that the employee engaged in sales away from the employer’s place of business).
• Highly Compensated Employees. (requires that the employee performs at least one other duty of an exempt employee).

So what sorts of jobs are typically non-exempt?

• Blue collar workers, NO MATTER HOW HIGHLY PAID, in production, maintenance, construction and similar positions, trades such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers.
• Public Safety, police, fire, first responders, paramedics, prison officers, park rangers, EMTs, ambulance personnel, hazmat workers, parole officers, probation officers… all regardless of rank or pay.

Other frequently asked questions:

What is Georgia’s minimum wage?

• $5.15/hour.  In fact, only Minnesota, Arkansas, Georgia and Wyoming have minimums below the federal level at the moment.

If the Federal minimum wage is $7.25/hour, does it really matter if Georgia’s minimum is $5.15/hour?

• Generall, no.  Federal law will trump state law in most if not all cases.

What about wait staff and bar tenders?  Do they have to earn minimum wage?  Are there any other exceptions?

• The Georgia minimum wage for tipped employees is $2.13 per hour, the same as the federal minimum wage for tipped employees. The Georgia tipped wage applies to employees like waitresses, waiters, bartenders, valets, and other service employees who earn more than $30 in tips a month, BUT they must still earn at least minimum wage for the number of hours worked.
• “Youth Minimum Wage Program” allows Kids under 20 to be paid a special minimum wage of $4.25 per hour for the first 90 days of employment with any employer. After the first 90 days have passed (or when the employee turns 20, whichever comes first) the employee must be given a raise to the full minimum wage.
• There are certain exceptions for which employers have to obtain special certificates from the DOL (e.g., full time student program, student learner program, certain employees with disabilities).
• Certain nonprofits apply for permission to hire at 85% of minimum wage.
• There is also a range of special exceptions to minimum wage, overtime, and child labor laws that relate to specific jobs or professions, some of which are exempt from some parts of the law but not other parts, e.g., Airline employees (exempt from overtime requirements); Amusement/recreational employees in national parks/forests/Wildlife Refuge System (overtime); Babysitters on a casual basis (exempt from minimum wage and overtime requirements if employed on a casual basis); companions for the elderly; certain domestic employees who live-in; firefighters working in small (less than 5 firefighters) public fire departments; local delivery drivers and driver’s helpers; motion picture theater employees; newspaper delivery (minimum wage, overtime, and child labor laws); youth employed by their parents; and a range of others.

It is also important to note that minimum wage, overtime, and child labor laws apply equally to documented and undocumented workers alike.  Not only this, but the FLSA has specific record keeping requirements that are often violated by businesses who fail to keep proper records regarding undocumented workers, subjecting the business to greater penalties for violation when they are caught.

Penalties under the FLSA may include payment of all back wages or unpaid overtime, plus an equal amount as liquidated damages, plus, frequently, attorneys’ fees and court costs.  If the secretary of labor brings suit, willful violators can be assessed a fine of up to $10,000 plus imprisonment.  Additionally, employers who violate child labor provisions can be fined $11,000 per employee, increased to $50,000 per employee for death or serious injury, and doubled when violations are willful or repeated.  Moreover, not only the company itself, but owners, officers, even supervisors can be held personally responsible. 

The bottom line is that the FLSA applies to almost everyone, its complexity means that it is frequently misunderstood, and, unlike most federal laws governing employment relationships, it applies to both large and small businesses.

If you are in any doubt as to whether or not you, as an employer, are in compliance with the FLSA (which, it has to be said, involves far more than this brief summary could possibly suggest), speak to an employment lawyer at Briskin, Cross & Sanford, LLC.

The End of the “Pomegranate Blueberry Flavored Blend of 5 Juices”

Imagine this…

You are sitting poolside, enjoying a bottle of Minute Maid’s “Pomegranate Blueberry Flavored Blend of 5 Juices” when you happen to look at the ingredients.

It slowly dawns on you the the self-described “Pomegranate Blueberry Flavored Blend of 5 Juices” only in fact contains about 0.3% pomegranate juice and 0.2% blueberry juice.

You are outraged!

How can Minute Maid and its owner, Coca-Cola, get away with such misleading labels?

The good news is that they no longer can, thanks to POM Wonderful, LLC and a unanimous U.S. Supreme Court.

It begins (as it always does) with a lawsuit. POM Wonderful sued Coca-Cola, alleging that Coke’s label for its “Pomegranate Blueberry” juice deceives buyers into believing that the juice primarily contains both pomegranate and blueberry, thus violating Section 43(a) of the Lanham Act (which addresses situations where one company’s false advertising is causing harm to another competing business).

Coke’s response to the lawsuit was simple: its “Pomegranate Blueberry Flavored Blend of 5 Juices” label complied with the Food, Drug and Cosmetic Act (the “FDCA”) regulations, which trump the Lanham Act. Thus, Coke argued, if its label complies with the FDCA, it cannot be liable under the Lanham Act.

In a rare, and, dare we say, juicy unanimous decision, the U.S. Supreme Court sided with POM Wonderful (interestingly, it has been reported that Justice Kennedy stated during oral arguments that he was also misled by Minute Maid’s “Pomegranate Blueberry” label).

Now, a company harmed by a competitor’s false or misleading marketing of a food or beverage product can file a lawsuit under the Lanham Act, even if the marketing labels are regulated by the Food and Drug Administration and comply with the Food, Drug and Cosmetic Act.

The U.S. Supreme Court’s recent decision will have companies in the food and beverage industry scrambling to review, and possibly revise, their labels and marketing materials. Of course, this decision has farther reaching implications than just for Minute Maid and its competitors since the Supreme Court’s decision could conceivably apply to other businesses regulated by federal laws… like alcoholic beverages, transportation, even pharmaceuticals.

If you are concerned that your product label does not properly describe your product, or perhaps a competitor’s label falsely describes your competitor’s product and puts you and other honest businesses at a disadvantage, consult a trademark attorney at Briskin Cross and Sanford… before, not after, someone squeezes your juciebox for you.

A Primer on Business Opportunities (“Biz Ops”), Part II: disclosure and filing requirements

In the first part of this blog series on business opportunities, I explored the definition of “business opportunity” (or “Biz Op”) to determine what type of enterprises may fall under federal and state law and thereby trigger compliance issues.

After conducting this initial inquiry to determine whether or not a seller’s offering qualifies as a business opportunity, the seller can then determine what is required, both federally and in each state the Biz Op is sold. Of course if a seller is not marketing a Biz Op, there are no special business opportunity requirements with which it must comply (keep in mind, however, that even if a seller is not selling a “business opportunity,” it must still comply with other state and federal laws concerning fraud and unfair or deceptive business practices or the sale of securities) .

If a seller is in fact marketing a Biz Op, it must comply with the following regulations.

Federal law requires the business opportunity seller to provide prospective purchasers with a one page form disclosure document disclosing the seller’s name, address, and phone number; whether the seller had been the subject of a civil or criminal action; whether the seller offers a cancellation or refund policy; whether the seller makes any earnings claims (earnings claims can be express {“you’ll make a million dollars”} or implied {purchasers of this business opportunity drive Ferraris]); and the name and phone number of ten (10) other purchasers closest in distance to the prospective purchaser. If the seller has litigation history or makes earning claims it will have to attach these to the disclosure documents as additional pages.

All things considered, this disclosure document is much simpler and more streamlined than it once was. Prior to March 2012, the business opportunity rules were contained along with the franchise rules under one code section, 16 CFR § 436. This rule required extensive disclosures, as is still the case with regard to franchises.  The Federal Trade Commission (“FTC”), which promulgates business opportunity and franchise regulations, ultimately determined that while franchises involved complex contractual licensing relationships and substantial investment costs, business opportunities often involved simple contracts and significantly lower investments. As such, the extensive disclosure requirements of the franchise rule imposed unnecessary compliance costs on both business opportunity sellers and buyers.

Therefore, the FTC decided to split the franchise rule into two separate code sections, one governing franchises and the other governing Biz Ops. The first business opportunity rule was set out in new code section 16 CFR § 437 as an “interim rule.” The interim rule was identical to the previous franchise rule, requiring the same detailed disclosures. Finally, however, in March 2012, the new and much-simplified business opportunity rule went into effect. As stated, the new rule requires the seller to disclose a one-page form disclosure document to prospective purchasers. This disclosure must be given to each prospective purchaser 7 days before the purchaser gives the seller any consideration or enters into a contract. This must be given to every prospective purchaser in every state, whether or not the state has its own law on point, and cannot be combined with other information that may confuse or obscure the disclosures required by federal law.

In addition to the federal disclosure requirement, many state laws not only require disclosure to the prospective purchaser, but also require registration with the state. Typically this means that the seller sends a copy of the state-specific disclosure and any required attachments (typically a copy of the contract the seller uses with purchasers; financial statements of the seller) along with a required payment (typically a couple hundred dollars) to the state’s regulating department (often the secretary of state, the attorney general, or the securities commission). If a state requires the seller to register the disclosure document with the state, it is critical the seller does so before soliciting sales in that state.

Each year the seller is required to file a renewal and pay the renewal fee. Throughout the course of a year, a seller is required to file an amendment if any material changes in the required information occur.

A number of state laws, however, were created to mirror the former federal business opportunity law, which required much more extensive disclosures. Despite the fact that the federal rule has since changed and become more simplistic, many such states have retained the more extensive disclosure requirements and have not amended their disclosure requirements. As such, these state disclosures may require the seller to disclose additional information such as the name and address of each of the seller’s salespersons, the business and education background of the seller’s principals and officers, as well as their personal litigation and bankruptcy histories; the terms and conditions of the offer and any training provided; statistical figures regarding the amount of business opportunities sold, failed, terminated, refunded, and still operating; audited financial statements; proof that the seller has obtained a bond; certain disclaimers or mandatory refund periods required by state law, or even copies of advertisements used by the seller. The disclosure document often also requires the seller to attach a copy of the proposed contract, which also must include certain content required by state law.

States have varying requirements for the timing of disclosure documents to prospective purchasers. A number of states require that the seller give disclosure documents to prospective purchasers no less than 48 hours prior to the time the purchaser signs a contract or gives any consideration (typically, the whole or a part of the purchase price). Some states, however, require disclosures be made 10 business days prior. It is critical that the seller have a clear guide to follow when marketing to prospective purchasers to ensure it does not run afoul of state-specific disclosure requirements.

Some states also require the seller to secure a bond, against which aggrieved purchasers can recover. Not all sellers must secure a bond, but only those that make certain representations, such as a guaranty that the purchaser will derive income from the business opportunity that exceeds the price paid, or a representation by the seller that it buy back from purchaser any unsold products.

Based on the foregoing it is not difficult to see why a Biz Op seller may seek to negotiate a balance between the representations it makes in courting prospective purchasers and the corresponding compliance required under state law. This nuanced dance is explored in greater detail in Part III of this blog series, which explores business opportunities as a growth strategy.

 

 

 

Unemployment benefits and domestic violence victims: an unlikely duo

Pay attention, Georgia employers. In an unexpected turn of events, the Georgia Court of Appeals in Scott vs. Butler, et. al. (June 4, 2014) recently decided that Georgia employees who are also domestic violence victims may receive unemployment benefits if the employee quits because the attacker contacts or seeks the employee at work.

This is true even if the employer did not create or contribute to the dangers affecting the employee.

Employees in Georgia are generally denied unemployment compensation if the employee, without good cause, voluntarily quits or leaves employment. Georgia law does allow unemployment benefits when the former employee becomes unemployed through no fault of their own.

This new basis for unemployment benefits started with a claim filed by Latresha Scott against Variety Stores, Inc. Ms. Scott had a violent history with her ex-boyfriend, who had been arrested on multiple occasions for physically attacking Ms. Scott (including kicking her in the stomach during her pregnancy) and even attempting to strangle Ms. Scott with a belt shortly after she delivered their younger child.

Despite myriad restraining orders, the ex-boyfriend found Ms. Scott’s place of employment with Variety Stores, Inc. and began contacting her there. Ms. Scott ultimately resigned from Variety Stores, Inc. because she did not feel safe coming to work, and filed for unemployment compensation.

Scott’s employer opposed the claim, citing the fact that Scott had resigned voluntarily from her position at no fault of the employer.  A hearing officer found in favor of the employer and denied Scott’s application, ruling that, while Scott “may have considered the work environment to have been difficult,” she had “the burden to do whatever a reasonable person would do to retain her employment.”  Hence, since her resignation was based upon “personal reasons” and not a good, work-connected cause, she was not entitled to unemployment compensation.  The Board affirmed the ruling, and the Superior Court of Fulton County subsequently affirmed the Board’s decision.

The Georgia Court of Appeals, however, reversed the Board’s finding on the basis that, even though the employer did not create or contribute to the dangers Scott faced, to deny someone benefits in such circumstances as Scott’s would effectively be to force her to work in a dangerous environment and would place her and others at risk of violence due to circumstances that beyond their control.

The bottom line for employers is this: if a domestic violence victim quits because her or his attacker seeks out the victim at work, the employer will most likely be on the hook for unemployment benefits.

If you are ever in doubt as to whether or not you are liable for unemployment benefits when one of your employees leaves, take the time to speak with an employment lawyer at Briskin, Cross & Sanford to see what both your rights and your obligations may be under this ever changing area of law.

The importance of timing in the sale of your franchise: when to say “No” to a prospective franchisee

Your franchise is up and running and generating a buzz.  You are getting inquiries from across the US, some of which are clearly qualified buyers itching to get into this new franchise opportunity.

It’s difficult to turn away a prospective buyer, but sometimes that’s exactly what you need to do, at least temporarily.

Say, you get an inquiry from a prospective franchisee in New York. You are aware that New York is one of the states that requires franchise registration–in fact, you have already begun the process of registration with the state. Is now a good time to enter preliminary conversations with the prospective buyer? What if you fully disclose to the buyer the fact that you are still waiting on approval from the State of New York and cannot consummate any deal until such time as you are approved, are you in the clear now?

The answer, as you may have suspected, is no.

The previous summary is based on Reed v. Oakley, 661 N.Y.S. 2d 757 (1996). In Reed, a franchisor began negotiating with a prospective buyer after the franchisor had registered with the state of New York, but before receiving approval. The franchisor informed the buyer it was not able to close the deal until it was approved by New York, and the initial agreement of the parties even specified that the buyer was to receive disclosure documents and have the required time to review them before any deal would close.

When the relationship between buyer and franchisor later soured, the buyer cried foul, claiming that the franchisor violated New York’s Franchise Sales Act by soliciting and negotiating the sale of a franchise prior to receiving approval to sell franchises in the state of New York. The court agreed with the buyer, finding that New York’s Franchise Sales clearly prohibits solicitation or negotiation of a franchise sale prior to registration approval. The fact that franchisor appears to have acted in good faith and did in fact give the buyer all the relevant disclosures plus time to review them prior to closing the deal appeared to have no influence on the court’s decision.

The real rub in this case for the franchisor is the loss it sustained. Typically, the remedy for violation of the New York Franchise Sales Act is the amount of damages the buyer can prove were sustained by the franchisor’s violation of the law. If, however, the franchisor has “willfully” violated New York’s Franchise Sales Act, then the franchisee may rescind the contract, get all his money back, plus 6% interest, plus attorneys fees, and court costs.

Ouch!

Sometimes the word “willfull” is associated with conduct you would think of as knowingly wrong, but in Reed v. Oakley, the court determined that the word “willful” means simply “voluntary and intentional, as opposed to inadvertent.” The franchisor had, in fact, voluntarily and intentionally negotiated with Reed, and in so doing it “willfully” violated New York law, subjecting it to all of the penalties.

In the world of franchise and business opportunity sales, it is almost unavoidable that a few buyers will feel that the business they have bought does not quite meet their expectations. If this happens to you, you want to be sure that you have fully complied with all state disclosure laws.

Compliance can be challenging, given the fact that there are both federal and state requirements, state franchise laws vary from state to state, and franchise requirements can be rather complex. Sometimes franchisors are tempted to do it all themselves, but like an attempted home haircut that winds up back in the barber’s chair, a do-it-yourself approach all too often results in franchisee complaints, state action, wasted money, and worst of all, wasted time. A franchise attorney can help you avoid the disclosure pitfalls, protect your intellectual property, and bolster your contracts and agreements, freeing you up to focus on the job you should be doing, growing your business.

Before you begin soliciting franchisees or advertising in a state, make sure you are informed of the law. Develop a registration roll-out game plan, follow it, and avoid the pitfalls.  A franchise attorney at Briskin, Cross and Sanford can help you do this.

New Facebook Message: You’ve Been Sued!

Does service of a civil lawsuit count if the defendant is personally handed the legal papers? Absolutely, as long as the person serving the papers is permitted to do so (different courts have different rules).

Does service count if the legal papers are handed to the defendant’s 27 year-old brother who lives with the defendant? Maybe.

But what about legal papers served on the defendant through the defendant’s personal Facebook account?

The answer is some countries is yes, a defendant can be served through a personal Facebook page.

Until quite recently, courts in the United States have refused to allow service through Facebook, citing concerns that doing so would deny defendants due process and actual notice of the lawsuit, which is required by the Constitution and related federal and state laws.

But in March 2013, a court in the Southern District of New York addressed the Federal Trade Commission’s request to serve non-U.S. defendants through email and Facebook after struggling to serve the foreign defendants personally. The judge ultimately granted the request, noting that while service through email alone satisfied the due process and notice requirements, service only through Facebook may not.

The U.S. is not the first country to tiptoe into the land of service via social media. In 2008, Australia allowed service on defendant debtors through Facebook when the attorneys were able to match the defendants’ birth dates, friends, and email addresses on the Facebook pages to their loan applications.

A year later a Canadian court allowed service on the defendant through the HR department of the defendant’s former employer and through the defendant’s private Facebook page. A New Zealand court also approved this method. The United Kingdom’s High Court has allowed service of an injunction on an anonymous blogger through a Twitter account, and Australia has allowed service through text message. All of these countries have similar due process and notice requirements as the United States.

Service of process can be tricky.  It can vary not only from country to country, but from state to state, county to county, and even court to court.  However, just because some courts have shown a willingness to move the law in new directions with the proliferation of social media, this does not mean that they have yet come to anything like a clear consensus.  Since service of process is one of the initial steps in asserting your rights in court, be sure you get it right.  Talk to a litigation attorney at Briskin, Cross and Sanford if you are in any doubt.

The neverending cycle: bankruptcy and homeowner/condominium association dues

When the economy took a dive in 2007 taking the housing market with it, hundreds of thousands of Americans, walked away from homes and condominiums and declared bankruptcy to get out from under unmanageable debt.

But what about those homeowner association and condominium dues? Who is responsible for those? Common sense might lead you to think that the bank that holds the mortgage would be on the hook for association dues, too.  After all, the home was “given back” to the bank… wasn’t it?

Well… Not so fast. Under bankruptcy law, the owner of the house or condo remains personally liable for all homeowner association and condominium dues that accrue after the bankruptcy was filed and before legal title passes from the owner to the bank.  Due to a glut in inventory, many banks have been slow to actually take title to the property from the former borrower, and until they do, condominium association dues and fees owed continue to tick up.

To make matters worse, the homeowner or condominium association has four years to file a lawsuit against the owner under Georgia law, O.C.G.A. §9-3-29. If the association files the lawsuit before the expiration of those four years, the dues and fees continue to accrue during the lawsuit, assuming the bank does not successfully foreclose on or sell the property, causing legal title to transfer from the owner.

The result can be a perfect storm for a property owner, who, after discharge from bankruptcy, may once more be facing a judge with thousands of dollars in past-due association fees and dues and very limited options for relief, if any, from a potentially unbearable debt.

A Primer on Business Opportunities. Part I: “Business Opportunity” defined.

The term “business opportunity” is sometimes used in a generic sense to mean a variety of things related to purchasing and/or starting a business. Much like a “franchise,” however, a “business opportunity” (or “Biz Op”) has specific meaning under state and federal law. This blog is the first in a series of short articles discussing business opportunities. This part is dedicated to defining a business opportunity, an important threshold issue in determining whether the particular business is subject to regulation.

Since the term “franchise” is familiar to most people, it may be helpful to understand what a business opportunity is in terms of how it is different from a franchise. Purchasers of a franchise (franchisees) sell goods or services that are associated with the franchisor’s trademark, and the franchisee is subject to significant control by, or receives significant assistance from, the franchisor. By contrast, purchasers of business opportunities do not operate under the seller’s trademark, and the biz op purchaser has substantially more flexibility to run the business as he or she sees fit. Where the franchise typically becomes part of a “system,” the biz op purchaser is typically given the tools to operate his own business and then does so with a greater degree of freedom.  For further discussion on how a biz op platform can be used to grow your business, see the next blog in this series.

While this is a general definition of a business opportunity, the definition as prescribed by law is more particular and varies somewhat from state to state.  Nonetheless, it is essential to understand whether an enterprise qualifies as a business opportunity as defined by relevant law, because, if it does, the seller of the business opportunity must then comply with certain disclosure and registration requirements. Like securities laws, this is the ultimate purpose of business opportunity and franchise law – to promote transparency and accountability on the part of the seller and to give prospective purchasers enough information to make educated investment decisions. With that in mind, let’s take a loot at the specific definition of business opportunity under federal and state law.

Under the Federal Trade Commission (FTC) Trade Regulation Rules, 16 CFR § 437 et seq., a business opportunity is defined as a commercial arrangement in which a seller solicits a prospective purchaser to enter into a new business in exchange for a required payment, where the seller represents one of the following: (i) that the seller will provide locations at which the purchaser may operate vending machines or similar devices, (ii) that the seller will provide outlets, accounts, or customers for the purchaser’s goods or services (which includes providing sales leads for purchasers or recommending a source for sales leads), OR (iii) that the seller will buy back goods or services made by the purchaser. Vending machine or display routes, envelope stuffing or craft-building enterprises, and other opportunities that promise refund or buy-back are the traditional concerns of business opportunity law because these are some of the original business opportunities and those which have been the subject of the most abuse and deception.

Twenty-eight states have laws regarding business opportunities. The definition of a business opportunity varies on a state-by-state basis. Many states define business opportunities as the sale of products or services to a purchaser for a payment of $500 or more that enable the purchaser to start a business in which the seller represents one of the following: that the seller will provide locations for vending machines (mirroring federal law), that the seller will buy back products made by the purchaser (also mirroring federal law), that the seller guarantees that the purchaser will derive income from the opportunity that exceeds the price paid for the opportunity, or that the seller provides a marketing plan.

As you can see, while some state definitions of a business opportunity mirror those of federal law, some are more encompassing. For example, simply by offering a “marketing plan” along with the business, a seller may be providing a biz op. A marketing plan often is broadly defined, and includes a situation in which the seller provides know-how to help the purchaser get the business up and running. Suddenly, the representations made by the seller are of critical importance. While it is surely a compelling sales pitch to guarantee that purchasers of a business opportunity will make a certain amount of money, or at least make enough to cover the purchase price, doing so may cause the seller to be a biz op as defined by relevant state law, triggering duties of registration and disclosure.  What’s more, certain marketing representations can trigger a seller’s duty to obtain a bond to protect purchasers, which is costly and time-consuming.  If the seller does not comply with disclosure and registration requirements (explored further in a future blog), there can be serious consequences, including misdemeanor charges, right to full refund, and perhaps most damaging, a ban from selling in that state in the future (penalties will be explored further in a future blog).

To avoid the consequences of non-compliance, it is critical to identify the states in which compliance is required before selling in those  states.  For my clients, I suggest creating a roll-out plan.  I highly recommend this practice.  The offering will most likely be on the Internet, and it is tempting for the seller to begin expanding as quickly as interest develops and the market will bear, but doing so is certain to run afoul of state law.  Picture a map of the United States where all the states are red.  When a state turns green, you can begin selling there.  The roll-out plan determines the order in which states will turn from red to green, and ensures that compliance always precedes sales.  If you are considering growing your business by leveraging your knowledge, concept, or name, contact the business opportunity and franchise attorneys at Briskin, Cross & Sanford to learn more.