Global reach of the Internet means that sellers of counterfeit goods can reach consumers like never before. For this reason, you will want to protect your goods with patents and/or trademarks in those countries you will be selling, manufacturing or developing your products or services. The biggest violators are based in China, Indonesia, Taiwan and Mexico; with cheaper labor available, they are manufacturing knock-offs and selling to customers in your most lucrative markets.

Even if you’ve taken every precaution to file trademarks and patents…what happens when you find out your goods have been counterfeited or your trademark has been misappropriated?

I represented a company whose goods were being knocked off by a manufacturer in China. The freight forwarder erroneously sent us a copy of the counterfeiter’s bill of lading– identifying the goods under my client’s trademarked name. The bill of lading revealed that over $100,000 of pirated goods were being shipped F.O.B. Hong Kong to several international destinations.

As this product was both patented and trademarked, I contacted Customs in Hong Kong and reported the infringing activity — I thought we could easily have the pirated goods seized at the port. It turns out that even with proof in hand, in order to seize goods, a deposit of over $250,000 would be required for Customs to take any action – more than the value of the shipment! If the goods were found to be non-infringing, a portion of that money would go back to the owner of the goods to pay for his damages and inconvenience.

In any event, this money would be tied up for months, if not longer, while an investigation would be conducted – comparing the goods with the patent claims to determine whether they infringed upon my client’s patents. Comparatively, we learned that it would be easier to claim trademark infringement because a trademark could be visually evaluated (though damages for trademark infringement are significantly less than for patents).

After several weeks of haggling with Hong Kong Customs with no results, I decided to take a drastic measure and contact the Hong Kong police to report a theft and, at the same time hired local counsel to file an injunction (an order issued by a court that forces someone to do something or stop doing something  — in this instance, it stopped the agent from shipping out the goods to his customers).  This method proved most effective; we were able to successfully seize the goods and the Police notified the manufacturer’s local representative that the goods would be held (at a hefty daily storage charge) until the matter was decided.

I contacted the local agent and, in the style of Vito Corleone, made him an offer he couldn’t refuse:
“Tell your boss that we are willing to release all claims provided:                                                          —all profits on this shipment get paid directly to us.                                                                          –we will release the goods to you so you can forward them on to your customers in order for you to get paid.  However, we will require your company to sign a manufacturing/distribution agreement with monthly guaranteed minimums under a long-term contract commitment .”

 Note: We had to assume they were still making the goods and had new orders to fill; since the goods were of high quality, we decided to take the approach that if you can’t beat ’em, join ’em — as a result of this relationship, over the next few years, my client grew his profits significantly.

While not everyone is so lucky as to be handed information that leads them directly to their counterfeiters, by monitoring the Internet (particularly wholesale sites) you may be able to uncover proof that unauthorized sellers are pirating your goods. In some cases you may want to stop the counterfeiting and sue for damages —  in others, you may want to negotiate. Contact a lawyer to help you strategize and take action – sometimes they will work on a success-fee basis.

Take-aways:
1. While patents are more valuable than trademarks, it’s easier to catch a thief based on appearance (trademark/packaging) rather than functionality.
2. Trademark filings are more nuanced that many people think. In addition to performing a trademark similarly search, classifying goods and services and determining where to file are other important considerations.
3. Don’t spend the money until you need to – start with a single trademark/patent and file in other countries when you start doing business there; you can still claim the date of first use based on your original trademark filing.
4. Ballpark costs

  • Trademarks: $1,200 to $1,800 to hire a lawyer to handle the initial filing
  • Provisional Patents: Approx. $1,500-$2,500 depending on complexity (gives you 1 year to market your product/service before filing a full blown patent application)
  • Patents: Costs up to $10,000 for a utility patent and $5,000 for a design patent

Note: Ask your lawyer to prepare an international patent/ trademark strategy that coincides with your rollout schedule for your budgeting purposes.   

5. Having a registered trademark can help you take control over bad actors that register a domain name using your trademarked name (e.g. .net, .biz, .cn, etc) more on this later…                                   6. Remember to use the ™ symbol next to your trademark while it is pending approval and the ® symbol after you have registered it.

In my next blog, “Davy vs. Goliath” I’ll share my experience from the other side of the table – defending a trademark owner against threatened litigation. Thoughts? Comments?

This article is not intended to constitute legal advice or to take the place of conferring with your own attorney.

©2012 Paula Brillson. All Rights Reserved

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Founders may operate on a handshake and the best of intentions but a lot can go wrong between the visionary process and when a business is actually launched. The press coverage on trending startups makes it sound as if success happens overnight but, in most cases, you will struggle for a long time before your business (or partnership) will either thrive or fold so it is important to minimize risks upfront by setting up your partnership relationships for long term success.

While it may be uncomfortable for founders of a new business to talk about issues such as compensation, day-to-day responsibilities, management roles or what happens if one partner wants out, this is one area of responsibility you don’t want to procrastinate. A friendly relationship can quickly sour when the business booms or busts – partners either get greedy or they point fingers at the other when the business doesn’t do as well as planned. For this reason, many attorneys refer to founders agreements as pre-nups for startups though, if that were the case, I would refer you to a good divorce lawyer….

The reality is that a founders agreement is simply written proof of all the things you and your partner discussed and agreed and maybe even wrote down on a napkin but haven’t properly documented and put your signatures to.

I caution startups from using free agreements from the internet. I’ve reviewed a number of these online documents and they are filled with confusing and sometimes irrelevant language that only serves to complicate the relationship.They also tend to be too broad to address the unique needs of each startup relationship and in most instances, it is also helpful to have an attorney walk you through various alternatives with respect to compensation (which is often deferred during startup phase), equity distribution or vesting periods for founders.

The costs for hiring a lawyer to draft your startup agreements range from $500 – $2500 depending on whether you are already incorporated, the complexity of the issues, number of co-founders and how much negotiation will be needed to reach an understanding; another $1000 for having a lawyer set up your corporation. If you are hiring employees, independent contractors or appointing an advisory board, standard templates tailored for your business — once drafted — can serve the needs of most of your new hires and appointees. Try to negotiate a project fee basis with your lawyer to lock down the costs.

Securing your Assets

Founders agreements are also used to ensure that all intellectual property is assigned and transferred to the company. This can include anything from protecting inventions, trademarks, logos, marketing materials to customer and supplier lists, pricing and so forth). This way, should the partnership break down, you have safeguarded your business assets from future hassles.

 It sounds simple –so, why do so many startup teams go without these essential agreements?

First, no one really wants to rock the boat – and, if you didn’t establish working terms from day one, you may be afraid to bring up critical issues for fear that it could cause the relationship to break down before the company gets off the ground.  Second, founders tend to focus on external threats and don’t make it a priority to spend the money on drafting internal agreements.  Third, you may be unsure of your commitment level and prefer to keep things loose until the business gains traction. Whatever the reason, if these agreements haven’t been put in place, consider the benefits of doing so now.

Asking the Difficult Questions: Are you and your Partner on the same page?

Does one founder see the company as his long-term employer, while another sees the company as a short-term liquidity event?

Is one partner devoting full time while the other is working another job until the business is funded? Is one partner putting in money while the other is putting in time?

Do you have the same or different vision re: the types services or products the company will provide, the company’s growth plan or the role of each founder?

As you can see, critical issues to be addressed are unique as the individuals involved. To get the dialogue rolling, here is an outline of some of the things that should be discussed:

  • The goals each of you have for the startup and for yourselves
  • Duties, job descriptions, and hour commitments
  • Who pays for what? Who gets paid first?
  • Spending authority; budgets; bank account signing authority
  • What happens if one of you wants out; what happens if one of you wants to sell the company, raise capital, or end it?
  • Whether launching other startups, i.e. is “moonlighting,” is ok?

Once you have answered these questions, documenting your understanding is the only sensible way to maintain a healthy working relationship, establish fair ownership and reduce the likelihood of disputes or litigation down the road. If you have comments or questions, please feel free to contact me.

Advisory Boards are Key

The issues an entrepreneur will deal with during the visionary process are vastly different from those they face when commercializing the business and therefore, down the line, partners can disagree on decisions such pricing or distribution strategy, choosing whether to operate the business or license it to a third party.  For this reason, most seasoned entrepreneurs put an advisory board in place. Trusted advisors that you and your partner agree would add value to your business can be called upon throughout the course of growing your business to mediate any disputes amongst founders. You can offer to compensate them in equity or options (depending on their level of involvement, these advisors receive anywhere from 1%-5%) and/or offer payment for each board meeting they attend.

In addition, once you set up your corporation, you will also need to put in place an operating agreement. An operating agreement ensures your LLC is governed by your own rules — not the default rules of your state of incorporation. An operating agreement addresses critical points such as where, when and how often board meetings are held, how many members should be on the board of directors, how profits will be distributed and other rights and responsibilities of those involved in your corporation.

The first 12 months can be make it or break it so– set yourself up for success by promoting a culture of clear communication: address, resolve, document and continue to revisit agreements as roles or commitment levels change.

If you have questions about founder or operating agreements or other startup documentation, send me an email (info@paulabrillson.com) or leave a comment.  I’m happy to answer any questions you have.

Want to read more tips on what co-founders should consider in startup phase, take a look at Deb McAlister’s Blog @ http://debmcalister.com/2012/11/25/5-legal-traps-start-up-founders-should-avoid/

Entrepreneurs face many threats that can affect the timing and the success of their businesses.  The most obvious threats are external ones – the economy, changes in regulations that directly affect your industry, the threat of competition, or worse yet, someone stealing your ideas.   For this reason, most entrepreneurs that come to me for the first time are looking to protect themselves from external threats – a standard non-disclosure agreement, a trademark or patent filing – as it is generally believed that having NDAs in place and IP pending approvals demonstrates the company has created value and is protecting it diligently.

But consider this: most investors would cite as the most compelling reason they invest in a company is the management team yet, strangely enough, these relationships are usually the least protected of all the company’s assets.

According to the National Venture Capital Association, you and your partner will have a falling out within a month of working together and it is commonly known that 9 out of 10 startups fail within the first 2 years.  (as per Forbes Invest In Startups, if You Dare, to Balance Your Portfolio, Sept. 21, 2012).

Over the years, I’ve been asked to intervene on a variety of disputes – worst of which include: one Founder emptying out bank accounts, changing office locks or another taking company equipment to use as negotiation leverage. Fortunately, there are laws to deal with these situations but no one really wants to go there when starting up a new business.

A Founders Agreement is akin to a prenuptial agreement for startups. Without them, points of contention with respect to management responsibilities, share ownership, terminating of employees (or cofounders), contract details, and personal investments can disintegrate great partnerships.

 
To bring home the point of why Founder’s Agreements are so critical to any new venture, I will share with you my experience when I was just the proverbial babe in the entrepreneurial woods.

In spite of precautions – NDAs, trademarks, privacy and disclaimer statements, the founders of my Start up didn’t have any formal agreement that addressed the issue of termination (or break-up of the Founders). We simply assumed we’d address these critical issues at the time of funding (a/k/a let the investor decide).

So clearly, a Co-Founder falling out on the eve of signing a Term Sheet with an Investor is probably the worst thing any entrepreneur could imagine.  Yet, this is exactly what happened.

After many months of investor presentations and continuing to personally bootstrap the company, my partner lost faith and patience.  So instead of shaking hands and parting ways, unbeknownst to me, he began to circumvent our business relationships for his own personal gain. He began contacting a couple of my longstanding clients to handle their business directly.  I had just gotten off a phone call with a trusted colleague advising me of this offensive behavior, when a fax came in from an investor I had previously met, setting forth terms of a very attractive offer to fund our company.

The following day I was scheduled to speak at a conference. Afterwards, a banquet was planned and there sat the traitor wearing a name badge with my company’s name. He was smiling and had no idea I knew of the wrong he had done our little company.

As I looked over at his goofy, crooked toothed-smile I felt my blood pressure rise.  I wish I could remember the exact words that set this Entrepreneur into a psycho tailspin but all I can recall is reaching down for the Crème Brulee at my place setting and without so much as a blink, dumping it directly over his head. Seeing his look of astonishment (and the startled expressions of those who witnessed this display of assault).

There was no way we were going to resolve our co-founder disputes.

So that left me with 2 choices:

  1.  Fight him in court to enforce the NDA (putting company business on hold and likely losing the investor);
  2.  Make him a buyout offer and move on.

I decided to be candid with our investor about our falling out (which, by the way is always good business practice). Turns out, not only were they willing to invest, but they also agreed to buyout his shares.

(On principle, the lawyer in me really wanted to take him to court but the CEO in me had to be commercial and do what was best for the company and the rest of the staff.  All in all, was not an easy pill to swallow).

The take away from all this:
 

The most commonly overlooked area in need of protection is the co-founder relationships.

A Founders Agreement is the single most important thing to do up front. The first year is make it or break it so– set yourself up for success by promoting a culture of clear communication. Otherwise, disputes can often lead to litigation or otherwise, as in my case, tossing Crème Brulee.  
 
It sounds so simple – so, why do so many startup teams go without internal agreements? Subscribe to my blog to receive next week’s installment on this topic.

Want to read more about Startup Agreements? Here is a blog I like from Simeon Simeonov that talks in more detail about Founders roles and agreements. I also like this book The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton University Press, 2012).

Thanks for stopping by!

 

                        Brillson’s Law on Non-Disclosure Agreements (a/k/a Neurotic Delusional Approach)

Since mere ideas cannot be protected with patents, trademarks or copyrights, to get a concept off the ground with the support of others involves a certain degree of risk. You may need to share your ideas with vendors, investors and maybe a partner or a mentor. So how do you protect your ideas at this critical stage of development? Most would reply:  sign an NDA.

Yet, the NDA is the most overrated document in today’s business. Its purpose is to discourage someone from sharing or using your ideas under “penalty of law” but it does not prevent unlawful disclosure.  Indeed, in the age of digital communication where we can easily email, post or tweet, it may be nearly impossible to track (or prove) the source of the information leak. Yet lawyers continue to encourage the use of NDAs as a precautionary measure, in spite of its questionable effectiveness.

Protecting Information Internally. As far as Employees, directors, attorneys, accountants and other individuals that have been placed in a position of trust, state law imposes upon them a duty of loyalty — an implied obligation to keep your trade secrets and internal communications confidential and to not take actions that will cause your company harm. While confidentiality agreements are useful insofar as they specifically spell out the obligations of confidentiality and/or non-compete, even without a signed NDA, you take legal action against them to enforce their obligations.

Protecting Information Externally (e.g. contractors, potential investors, suppliers and other third parties). While there are limited state laws that impose obligations on third parties, An NDA is only as valuable as your ability to enforce it. For example, if you can’t afford to hire a lawyer to sue someone in court, chances are, you won’t be able to stop their unauthorized disclosure or theft of your ideas. And even so, can you prove it? The most common defense is that the information was developed independently. Let’s assume for a moment that you were to win your case, while you may be able to stop them from exploiting your ideas, damages may be hard to calculate – particularly if the information leak at issue is a plan or a concept that has no value other than the idea itself.

In short, NDAs are the equivalent of a handshake in documented format. It may have the effect of deterring someone from sharing your confidential information but it does not prevent it.

In my opinion, the main value of an NDA is to act as a starting point for new business discussions. It also provides verification of each party’s identity (corporate details, state of incorporation, the name and signature of an authorized representative.

In the context of today’s business environment, one may think of NDAs as a Neurotic Delusional Approach toward innovation:  an illusion of greatness in one’s ideas that gives rise to insecurity that the idea will be misappropriated.

NDAs are not a substitute for trust or good judgment. Use discretion regarding who and what to share – if you don’t think you can trust them, they are not the people you want to work with.

That being said, a great idea is worth sharing and innovators need to open up conversations with industry much earlier and disclose knowledge-based propositions pre-contract. Otherwise, be willing to put your idea in the public domain and let innovation take its course.

For alternatives to protecting your ideas and intellectual property, check out http://www.creativebarcode.com/ a Barcode system & App that uses barcodes to authenticate, attribute & protect innovation concepts disclosed to third parties and their completed creative works displayed online.

Leave me a comment and share your thoughts with me on the value of NDAs. Or visit my website http://www.paulabrillson.com.

The Compassionate Leader. 

As an attorney and executive adviser, I have been regularly called upon by management (or their boards) to manage  crisis.  Whether it is an employee or director matter, a falling out between partners, a threatened litigation, or breach of confidentiality; all companies face crisis from time to time. While external issues are not always in the control of management, internal issues typically are. Whether internal/external, how these threats are handled are indicative of the type of leadership skills management possesses.

In a recent workshop at the Thiel Foundation’s 20-Under-20 Retreat, I asked 30 new entrepreneurs and mentors what they thought was one of the most important qualities in a Leader.  The responses I received ranged from:  a hard worker to a multi-tasker to having a vision.  While these are all important traits, in my opinion, one of the most important ones is compassion and here’s why:

  • Employees know whether or not you really care about them – if you listen to their ideas, communicate openly, understand their key strengths, and compensate them fairly.
  • Clients will  know if you truly care about them — if you are responsive to their needs, provide proactive customer service and offer solutions that help them work better/smarter/faster.

Sure, management is under a great deal of pressure to meet sales objectives and satisfy their Board of Directors.  At the same time, startups are generally cash strapped and may try to do things on a shoe-string but what are some of the real underlying problems that generally lead to crisis mode?

1. Shutting out those who know the problem best.

Employees are generally aware of the issues at hand and some may have good suggestions on how to turn things around; after all, they are the ones in the trenches who have a vested interest – a continuing paycheck and a potential payout on their stock options. Keeping them in the dark creates an environment of distrust and insecurity.

In one case, the CEO held a weekly conference call with the team. The majority of the time when someone voiced an issue the response would typically be: “This isn’t relevant to the rest of the group; let’s take this out of band.” Needless to say, that offline conversation rarely happened.  After awhile, the weekly conference calls were nothing more than a cheerleading session where most people were on mute (e.g., doing other things) while the CEO congratulated himself and the team or staying in business for yet another week.

2. Promising what you can’t deliver.

Employees and consultants share the same ongoing objective – getting paid for their work and having access to necessary resources. Unfortunately, management doesn’t always get the memo.

In one startup, consultants were rarely paid on time and employees’ expenses were not readily reimbursed.  They’d hear the “check is the mail” and then two weeks later, nothing. “ One employee who reportedly emailed the CEO on a daily basis to let him know there was still nothing in his mailbox finally received his check with an added bonus: a termination notice inside.

In another instance, the product specs were oversold; customer deadlines were not being met and the CEO’s phone went straight to voice mail. Employees had no idea what to communicate to their accounts and so eventually, their business began migrating elsewhere.

3. Gossiping about others.

To me this is probably the worse offense I’ve witnessed in a company — the CEO who gossips about his employees, his board members and even his customers.   Sure it’s hard to be the CEO when you’re at the top of the food chain and no one to gripe to but hey, haven’t you heard…. it’s lonely at the top.

A recent Randstad survey of more than 1,500 U.S. employees found that three out of five workers listed gossip as their top workplace pet peeve. If the CEO is gossiping to me about someone else…what is he saying about me to others?  In that environment of distrust, everyone’s watching his back and not the bottom line.

Compassionate leaders can avoid or manage crisis best when they listen to the concerns/feedback from the team, communicate expectations clearly and honestly and doesn’t disrespect others by gossiping.  A leader that chooses to cultivate compassion will have a significant advantage over those that do not. Business owners may consider this “Dalai Lama approach” to be too touchy-feely, but in truth, cultivating positive relationships is at the core of any successful business or relationship.

What are you thoughts on compassionate leadership? I’d love to hear from you!

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