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Entries tagged “Startups And Emerging Companies”

The Top 5 IP Mistakes Tech Startups Make

Insight June 02, 2011

It’s not easy being a technology startup. There are many challenges, including racing towards product and business development milestones, recruitment and management of employees, funding goals and restraints, fierce competition from big and small competitors, changing legal and regulatory landscapes – just to name a few.

One of the costliest mistakes a startup can make is mismanaging intellectual property rights.  A company needs to not only manage its own IP rights, but also avoid those of third parties, including competitors. To be on the safe side, therefore, intellectual property management should include efficiently protecting the startup’s IP rights while also avoiding the IP rights of others.

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Supreme Court Upholds Employer’s Right to Read Employee Text Messages

Insight June 21, 2010

The Supreme Court recently held in City of Ontario v. Quon that in certain circumstances an employer has the right to read text messages sent from and delivered to a pager issued by the employer to one of its employees. While reading employee text messages may generally violate the Fourth Amendment's guarantee against "unreasonable searches and seizures," the Court held in this case that since the employer conducted its review for a noninvestigatory, work-related purpose, it was withing its rights.

The source of the litigation arose in 2001 when the City of Ontario, CA, issued pagers to its employees, among them Jeff Quon who was working for the Ontario Police Department. Under the wireless service plan, monthly text allowances were limited and excess usage was charged. Quon was told by his supervisor that his text messages would not be monitored as long as Quon paid the overage fees. However, before acquiring his pager, Quon and others accepted the City's "Computer Usage, Internet and E-Mail Policy" under which the City "reserve[d] the right to monitor and log all network activity including e-mail and Internet use, with or without notice. Users should have no expectation of privacy or confidentiality when using these resources." Although texts were not explicitly included in this policy, the City made clear that texts would be treated the same as e-mails. When Quon and other officers incurred overage charges numerous times, it was proposed that perhaps the text allowance was too low and that the department should determine whether the excessive texting was work-related, and if so, to expand the monthly text allowances. In fact, the vast majority of Quon's texts sent and received while at work were not work related, and he was disciplined. However, Quon and others felt the review had violated their Fourth Amendment rights and filed this action. The Court upheld the City's right to review the texts.

This opinion is an important reminder to employers to ensure that their personnel policies convey a clear message to employees regarding privacy issues related to use of company communication systems. Also, employers should make sure that their managers are aware of company policy and are not making misrepresentations to employees.

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House Passes Changes to Carried Interest Taxation

Insight June 10, 2010

On May 28th, the House passed H.R. 4213, the "American Jobs and Closing Tax Loopholes Act." The Act addresses an array of issues, but has particular signficance for certain partnership and LLC "carried interests" for investment fund managers. If it goes through, the Act would prevent investment fund managers of venture capital, private equity, hedge and real estate funds from paying taxes at capital gain rates on investment management services income received as carried interest in an investment fund.

Under the proposed changes, return on invested capital in the form of carried interest would continue to be taxed at capital gain tax rates. But to the extent that carried interest does not reflect a return on invested capital, investment fund managers would eventually be required to treat seventy-five percent of the remaining carried interest as ordinary income.

The proposed changes would not take effect until 2011. However, for the bill to become effective it must also be passed by the Senate, an outcome which is not certain to occur.

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Class Action For 1.5 Million Wal-Mart Employees Affirmed By Ninth Circuit

Insight June 08, 2010

In the recently decided case of Dukes v. Wal-Mart Stores, the Ninth Circuit upheld a 2004 district court's decision to certify a class that could potentially consist of 1.5 million women employed by Wal-Mart since 1997. Through this gender discrimination class action, the employees seek back pay, declaratory relief, and injunctive relief.

The plaintiffs allege that Wal-Mart engaged in discriminatory pay and promotion practices in violation of Title VII by paying female employees less than their male counterparts and giving fewer promotions to women than to men.

In 2005, after the district court held that class certification was appropriate under Federal Rule of Civil Procedure 23, Wal-Mart appealed that decision claiming that the class did not satisfy Rule 23(a)'s class requirements and that the potential size and cost of the claim violated Rule 23(b)(2). While the Ninth Circuit did not comment on the merits of the case, it held that there was no violation of Rule 23 that would prevent the class action. Wal-Mart plans to appeal the case to the Supreme Court.

The Ninth Circuit also held that when a district court is determining class status under Rule 23, it must apply a "rigorous analysis." It will be interesting to see whether this standard benefits parties opposing or advocating class certification in the future.

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FINRA Regulatory Notice Regarding Regulation D Offerings

Insight June 07, 2010

The Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-22 on April 20, 2010. The notice, which came in light of recent abuses in Regulation D offerings, was intended to be a reminder to broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Security and Exchange Commission's Regulation D under the Securities Act of 1933 (also known as private placements).

This obligation arises from the broker-dealer's "special relationship" to the customer and the representation, in recommending the security, that the broker-dealer has conducted a reasonable investigation and is basing the recommendation on conclusions drawn from the investigation.

If such a reasonable investigation is lacking, the broker-dealer must make that fact and the risks that arise from the lack of information known when making a recommendation.

Additionally, broker-dealers recommending securities offered under Regulation D must meet its suitability requirement under NASD Rule 2310, and must comply with the advertising and supervisory rules of FINRA and the SEC. That is, a broker-dealer must conduct a suitability analysis when recommending securities to both accredited and non-accredited investors that will take into account the investor's knowledge and experience.

While the notice admits that no list of reasonable investigation practices would suffice since each investigation must be tailored to the specific facts of the Regulation D offering in question, it does provide a list of sample investigative practices. A few of those include:

  • Examining the issuer's governing documents, noting particularly the amount of its authorized stock and any restriction on its activities.
  • Looking for any trends indicated by the financial statements.
  • Inquiring about internal audit controls of the issuer.
  • Contacting customers and suppliers regarding their dealing with the issuer.

The full notice is available at FINRA.org.

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Ninth Circuit Broadens Definition of “Copyright Registration” for Litigation Purposes

Insight June 02, 2010

In order to initiate an infringement action in federal court, the Copyright Act requires the litigating party to hold a copyright registration. While the circuits are split on what constitutes a copyright registration, the Ninth Circuit recently joined the Fifth and Seventh Circuits in Cosmetic Ideas v. IAC in holding that anapplication for copyright registration suffices for a registration for litigation purposes.

In this case, Cosmetic Ideas developed, manufactured, and sold a unique piece of costume jewelry starting in 1999. Sometime thereafter, another company, HSN, started manufacturing and distributing a "virtually identical" piece of jewelry. Cosmetic applied for copyright registration of its jewelry on March 6, 2008 and received confirmation from the Copyright Office of receipt of the application on March 12. Cosmetic filed its infringement action on March 27, before the Copyright Office had issued a registration certificate for the jewelry (which it subsequently did). Despite that fact, the Ninth Circuit held that the application sufficed for the purposes of initiating an action in court.

This decision by the Ninth Circuit is beneficial to plaintiffs who can now proceed with infringement actions without worrying about their cases being dismissed or impeded for lack of subject-matter jurisdiction if they have not yet been granted a copyright registration from the Copyright Office.

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New Employee Rights Poster Issued Under National Labor Relations Act

Insight May 27, 2010

The Department of Labor recently published a poster listing employees'; rights under the National Relations Labor Act (NRLA). The notice, which Federal contractors and subcontractors are required to display in a conspicuous location, informs employees that under the NRLA they are guaranteed:

  • the right to organize and bargain collectively with their employers;
  • the right to engage in other protected concerted activity; and
  • protection from certain types of employer and union misconduct.

The notice is required to be posted all places where notices to employees are normally displayed, whether physical or electronic. It is available in both a one-page 11 x 17 in. format and a two-page 8.5 x 11 in. format. There is a fact sheet provided which lists, among other things, exceptions to the posting requirements and information on posting the notices and acquiring translated posters. More information is available at the Office of Labor-Management Standards website.

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How to Maintain Corporations and LLCs

Insight Michael Moradzadeh Michael Moradzadeh · March 19, 2010

Forming an LLC or a corporation is an important first step to achieving tax benefits and protection from liability.  In order to preserve these important benefits, however,  it is very important that your company is maintained properly. Otherwise, you run the risk that the separate nature of your company will be ignored by the IRS or a court of law.   While there is no substitution for the sound advice of experienced counsel, a few simple steps will help ensure that you reap the benefits of your LLC or corporation for as long as they exist. The minimum requirements for maintaining corporations and LLCs is that they must:  1) maintain adequate capitalization; 2) keep clean financial and legal records; and 3) be treated as separate and distinct from its owners.

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An LLC Can be Treated as an S-Corporation for Tax Purposes

Insight Michael Moradzadeh Michael Moradzadeh · February 02, 2010

An LLC can be treated as an S-Corporation for tax purposes if it makes an S-Corporation election as long as the entity meets the IRS criteria to be taxed as an S-Corp, files an S-Corp election and gets approved by the IRS to be taxed as an S-Corporation. Without an S-Corporation election, single member LLCs default to be taxed as sole proprietors and a multi-member LLCs defaults to be taxes as partnership since they are considered “disregarded entities”. However, if a single or multiple member LLC agreement meets the IRS criteria to be classified as a small business corporation, the S-corporation election is filed and gets approved by the IRS, then for tax purposes, not legal purposes the entity is an S Corp not a LLC.

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The Criteria for Being Classified as an S-Corporation

Insight Michael Moradzadeh Michael Moradzadeh · February 01, 2010

In order to be classified as an S-Corporation, a company must: be domestic, have no more than 100 shareholders, have one class of stock, all shareholders must be individuals, decedents’ estates, bankruptcy estates, trusts or tax-exempt charitable organizations, or wholly owned by another S corporation, and all shareholders must be residents of the United States (as defined by the tax code not immigration laws). Shareholders of an S-Corporation can not be financial institutions that use a reserve method of accounting for bad debts, companies taxable as insurance companies, taxable mortgage pools, or domestic international sales corporations. So, if a business entity meets these criteria it can be considered an S corporation by the IRS and taxed as an S corporation as long as the S corporation election forms are properly filled-out and approved by the IRS. Many states including California automatically give business entities an S-corporations tax status if it was approved by the IRS.

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