Choosing the Right Legal Entity for Your Business – Webinar

Seasoned business owners usually know enough to invest in the protection of some form of business entity. Too often, these individuals fail to engage in the necessary business and tax planning to get the most from their investment.
Whether you are a sole proprietor, partnership, corporation, limited liability company (LLC), limited liability partnership, or hybrid entity, you will gain useful knowledge. This webinar covers why a business owner should consider the benefits and costs of each type of entity, the existence of limited liability for owners, flexibility in terms of governance and ownership structure, and favorable treatment under state and Federal income tax laws. More sophisticated entrepreneurs may find certain advantages in terms of estate and gift planning and flexibility in operations and management.
I want to say thanks to the folks at IVY for giving me the opportunity to present the Ivy Webinar – Choosing the Right Legal Entity for Your Business with David M. Adler. In case you missed it, there is a link to the full webinar details below.
NOTICE AND DISCLAIMER: The webinar content is for informational purposes only. It is not legal advice and does not create a lawyer-client relationship with David M. Adler.
View Webinar Here.

Declaratory Judgment Action for Copyright Infringement

At a time when #media creation & consumption is traveling across a growing number of devices, at increasing speeds, and without care for for borders whether physical, digital, or geographic, licensing, distribution and use of digital content can cause problems.

The case of Fastcase, Inc. v. Lawriter, LLC, Case No. 17-14110 (11th Cir. Oct. 29, 2018) (Tjoflat, J), involved a dispute between two legal publication service companies over the right to re-publish the Georgia Regulations.

The Declaratory Judgment defendant and presumptive rights owner had no enforceable copyright or contract rights in the Regulations. Defendant updated the terms so that unauthorized re-publication of the Regulations would result in liquidated damages of $20,000 per instance, which was relevant to the jurisdictional issues of whether § 411(a) is a jurisdictional bar.

From The National Law Review, source for this story: “Practice Note: A demand letter alleging infringement under the Copyright Act—or even alleging state law claims that would arguably be preempted by the Copyright Act—confers jurisdiction on a federal court to hear the recipient’s declaratory judgment action.”

Illinois Amends the Freedom From Location Surveillance Act

The latest amendments to the Act provide even more privacy positive aspects. The definition of “electronic device” has been clarified to include any device that enables accessto, or useof an electronic communication servicethat provides the ability to send orreceive wire or electronic communications, including wireless communications connecting the device to a telephone network. [Emphasis mine]  Also, “location information” now includes information concerning the location of an electronic device generated by or derived from the possession of the device (rather than onlyoperation of the device). The amendments also remove time-based limits on some law enforcement searches.  No location information – rather than current or future location information – may be obtained without first obtaining a court order based on probable cause. Provides that the Act does not apply to a law enforcement agency obtaining basic subscriber information from a service provider under a valid court order or search warrant (removing prior subpoena requirement). The changes are effective immediately.

The Illinois Freedom From Location Surveillance Act (725 ILCS 168/) can be found here.

Copyright Must Read: SKIDMORE V. LED ZEPPELIN reversed, remanded for prejudicially erroneous Jury Instructions.

Hat tip to Joshua L. Simmons, Copyright Division Council Liaison from KIRKLAND & ELLIS LLP in New York for keeping the #Copyright Bar up to date on important developments.

From this week’s news letter is the decision in Skidmore v. Led Zeppelin involving a claim by Michael Skidmore, a Trustee, alleging Led Zeppelin copied key portions of its timeless hit “Stairway to Heaven” from the song “Taurus.” At trial, the jury found in favor of the Defendants. Skidmore appealed on the grounds of alleged trial errors. He also disputed the district court’s determination that the scope of the copyright for unpublished works under the Copyright Act of 1909 (“1909 Act”) is defined by the deposit copy.

The appellate court made several key holdings. First, the failure to instruct the jury that the “selection and arrangement of unprotectable musical elements are protectable” was prejudicial error.  Second, a jury instruction incorrectly stated that copyright does not protect “chromatic scales, arpeggios or short sequences of three notes.” Third, a jury instruction on originality  incorrectly omitted a statement that “any elements from prior works or the public domain are not considered original parts and not protected by copyright.” “In copyright law, the ‘original’ part of a work need not be new or novel.”  Lastly, the district court must revisit the issue whether as a matter of law, that Skidmore’s “evidence as to proof of access is insufficient to trigger the inverse ratio rule.”

For more more information:

SKIDMORE V. LED ZEPPELIN
No. 16-56057, 16-56287, 2018 WL 4654729 (9th Cir. Sep. 28, 2018)

Illinois law and enforceability of postemployment restrictive covenants

Every business in this, the Information Age, is highly dependent on confidential and proprietary information.  As many design and creative professionals know, a design business is often based on intimate, personal relationships with clients. As a result,  relationships are built upon a high degree of trust and the professional reputation of the designer.  In addition, the designer brings a host of regular vendors and proprietary skills, knowledge, experience, including private and confidential information about clients, used for operating the Business.  It is not surprising that businesses will seek to prevent disclosure of business, technical and financial information (including information relating to clients, employees and vendors, as well information an employee learns during her employment.

Do I need a Non-solicitation agreement for my Design Business?

Increasingly, I am being asked by clients to prevent departing employees from using proprietary and confidential information and form poaching clients and employees.  These non-disclosure or non-solicitation provisions seek to prevent an employee from encouraging or soliciting any client, employee, vendor, or contractor to leave. Unfortunately,

Restrictive Covenants Are Hard to Enforce!

Post-employment restrictive covenants are carefully scrutinized by Illinois courts because they operate as partial restrictions on trade. Fifieldv. Premier Dealer Services, Inc., 2013 IL App (1st) 993 N.E.2d 938 (citing Cambridge Engineering, Inc. v. Mercury Partners90 BI, Inc., 378 Ill.App.3d 437, 447 (2007) ). In order for a restrictive covenant to be valid and enforceable, the terms of the covenant must be reasonable. It is established in Illinois that a restrictive covenant is reasonable only if the covenant (1) is no greater than is required for the protection of a legitimate business interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. Reliable Fire Equipment Co. v. Arredondo, 965 N.E.2d 393 (2011). The courts consider the unique factors and circumstances of the case when determining the reasonableness of a restrictive covenant. Millard Maintenance Service Co. v. Bernero, 566 N.E.2d 379 (1990). However, before even considering whether a restrictive covenant is reasonable, the court must make two determinations: (1) whether the restrictive covenant is ancillary to a valid contract; and (2) whether the restrictive covenant is supported by adequate consideration. Fifield, 993 N.E.2d 938. Absent adequate consideration, a covenant, though otherwise reasonable, is not enforceable. Id. ¶ 14 (citing Brown & Brown, Inc. v. Mudron, 887 N.E.2d 437 (2008) ); see also Millard, 566 N.E.2d 379.

For most businesses, enforceability of such covenants turns on the concept of “consideration.” The current Illinois authority on “consideration” is Fifieldv. Premier Dealer Services, Inc., 2013 IL App (1st) 120327. In Fifield, the Illinois appellate court noted that Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute “adequate consideration” in support of a restrictive covenant.  The court also clarified the process by adding that “Fifield [did not overrule or modify] Brown, which engaged in a fact-specific approach in determining consideration.

As a general rule, courts do not inquire into the adequacy of consideration. However, postemployment restrictive covenants are excepted from this general rule because “a promise of continued employment may be an illusory benefit where the employment is at-will.”  Most design businesses have at-will employees.

Fifield is equally important for both what it says and for what it does not. Clearly employment alone – any less than two years duration – is  NOT adequate consideration. However, the Fifieldcourt also stated that there could be other or additional factors such as an “added bonus in exchange for this restrictive covenant, more sick days, some incentives, [or] some kind of newfangled compensation,” that could be considered additional compensation that could support enforcement of the covenant.

Despite the recognition that the bar is set high for the amount of consideration necessary to enforce restrictive covenants, it makes sense to include them in your agreements with those who work for you.

In addition to the non-solicitation language, one should create a strong and broad definition of protectable proprietary and confidential information.  While it may not always be possible to stop a former employee from directly competing against you, it is possible to prevent said employee from using your own proprietary and confidential information against you.

 

Recent Court Decisions Provide Some Clarity in Ever-changing Techlaw Landscape

As every CIO knows, today all business is digital business.  From the corner mom and pop bodega using Square to process credit cards up to Cisco Systems global network of devices supporting Zetabytes of data over an increasing number of devices.

What began as largely static website e-commerce at the turn of the millennium is now every day operations across multiple devices and the many different brands of platform and content delivery network.  In case you missed it, two recent cases will have a wide impact regardless of industry period

Law Enforcement Access To Cell Phone Location Data Requires Warrant

In the case of Carpenter v. United States, the Supreme Court ruled that law enforcement must obtain a warrant to have access to location and other data contained on a suspect’s cell phone.  In case you’re not familiar with the case, the facts in the Carpenter case are worth mentioning. In 2011, the government, conducting a criminal investigation in Detroit, obtained months’ worth of time-stamped records known as cell-site location information (CSLI) for suspects.  Wireless carriers produced CSLI for petitioner Timothy Carpenter’s phone, and the Government was able to obtain 12,898 location points cataloging Carpenter’s movements over 127 days—an average of 101 data points per day.  Carpenter moved to suppress the data, arguing that the Government’s seizure of the records without obtaining a warrant supported by probable cause violated the Fourth Amendment.  The District Court denied the motion, and prosecutors used the records at trial.  Carpenter was convicted, based in part on the cell-site records, and he appealed. holding that the government’s acquisition of historic cell-site location information (HCSLI) – at least to the extent it includes 7 days or more of cell-site records – was a search and thereby required a warrant.

In reversing the conviction, a majority of the Court has recognized that individuals have a reasonable expectation of privacy in the whole of their physical movements and a warrant is required only in the rare case where the suspect has a legitimate privacy interest in records held by a third party.  The Court downplayed the significance of its ruling, calling its decision “a narrow one” that “does not express views on “real-time CSLI” or question the application to … a range of other information-gathering tools, such as security cameras.”

What this means for business.  While pundits are wisely praising the decision as a victory for privacy, I for one, do not believe it applies that broadly. Even so, there is a tangible benefit for corporate counsel at technology companies, especially those that maintain location information about their customers. Lawyers and compliance pros will feel some relief knowing that they do not have to scramble, prevaricate or litigate with law enforcement when a company receives a subpoena or other demand for location data without a warrant attached.

For additional views on this decision, please see an article from the International Association of Privacy Professionals here, and another from the Electronic Frontier Foundation here.

States Can Now Require That Internet Retailers Collect Sales Tax

The other notable decision to come down from the Supreme Court involves the long-simmering issue of state taxation on internet sales.

The decision, in South Dakota v. Wayfair Inc., was a victory for brick-and-mortar businesses that have long complained they are put at a disadvantage by having to charge sales taxes while many online competitors do not. And it was also a victory for states that have said that they are missing out on tens of billions of dollars in annual revenue.

The South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State” to address the erosion of its sales tax base causing a corresponding loss of critical funding for state and local services (“Act”).  The Act covers only sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.  Top online retailers with no employees or real estate in South Dakota who met the Act’s minimum sales or transactions requirement, but do not collect the State’s sales tax opposed the Act. South Dakota filed suit in state court, seeking a declaration that the Act’s requirements are valid and applicable to respondents and an injunction requiring respondents to register for licenses to collect and remit the sales tax. At trial and on appeal, courts held that the Act is unconstitutional.

The ruling effectively overturned a system that it created.  In 1992, the Supreme Court held that the Constitution bars states from requiring businesses to collect sales tax unless they have a substantial connection to the state. That case was Quill Corporation v. North Dakota.  The Quill decision helped pave the way for the growth of online retail by letting companies sell nationwide without navigating the complex patchwork of state and local tax codes.

South Dakota’s attorney general, called the ruling “a big win for South Dakota and Main Streets across America.”  The case should benefit both rural businesses where local businesses have been hit hard by competition from online retailers and municipal coffers as well, because in some states local sales taxes are collected at the state level.  Owners of brick-and-mortar stores like the decision as a means of leveling the playing field because they feel they often missed out on sales of big-ticket items since sales tax could have had an amplified effect on the price.  For consumers, this could mean paying more for products bought online.  Although most have a “use tax” that works like a state sales tax for online purchases, few if any consumers actually pay it.

Since the beginning of my practice in 1999, I suggested businesses take a state-by-state approach when it comes to issues like sales tax, since it can vary widely by jurisdiction.  No business is entirely virtual. All businesses will need to examine their ecommerce strategy to see whether and to what extent this case affects the business model.

David Adler continues focus on Cyber Security Conferences

Soem prior conferences:

Data at Risk: Regulatory and Privacy Concerns in a Data Breach. – Enfuse Conference 2018, Las Vegas, NV, May 23, 2018.

Trends in Cyber-Law 2017– ISACA CSX North America 2017, Washington, DC October 2-4, 2017

The Human Side of IT Acquisitions– Assoc. of Technology Acquisition Professionals CAUCUS IT Procurement Summit, New Orleans, LA, November 7-8, 2017

My topic, Assessing and Responding to Cyber Legal Risk,was chosen for presentation at the 2018 New York State Cyber Security Conference. 

#nyscyber