Wednesday, September 15, 2010

Civil Theft, Breach of Contract, and Software Development with a Copyright Ownership Defense in Colorado State Court

Commerce Books (small) A recent Colorado Court of Appeals case addresses an interesting situation involving claims by a software company which came up with an idea for a software program and then had a falling out with the company it hired to market and later write the program.  The case is Steward Software Company, LLC v. Kopcho, No. 09CA1690, announced on September 2, 2010.  Specifically, the software company came up with an idea for a banking software and hired the marketing company, and later the developer.  The marketing company signed a nondisclosure agreement which stated that the it did not acquire intellectual property rights under the nondisclosure agreement except for the limited purpose of creating a marketing plan.  However, no written contract was ever signed regarding the marketing work.  Later, a developer was hired, but again, no written contract was signed.

After the initial version of the software was created, the parties had a falling out, apparently when the software company requested significant modifications to the program which took a great deal of time and increased the costs.  The software company decided to withhold payments and the developer ceased work after it registered the copyright for the program.

The software company sued the developer and marketing company for breach of contract, breach of fiduciary duty, conversion, and civil theft, among other things.  During the litigation, the software company apparently argued that the developer and marketer basically stole its trade secret idea and the corresponding program based thereon.  As a part of its defense, the software company and marketer asserted that they owned the copyright in the program, a fact which would defeat at least a portion of the claims regarding whether it stole copyrighted intellectual property, i.e., you can’t steal what you own.

Interesting, the case was removed to federal court on the basis that it raised a federal question, copyright law.  Generally, state courts have no jurisdiction to decide copyright issues as these are preempted by federal law.  However, here, the federal court remanded (sent back to the state court) the case because it held that the raising of the ownership of a copyright as a defense to a state court claim did not raise a federal copyright issue which gave it jurisdiction to hear the matter.

Back at the state court, the trial court did not allow the developer or marketer to instruct the jury on the defense that it owned the copyright and therefore could not have stolen the copyrighted intellectual property.  The jury determined that the developer and marketer had stolen something and awarded damages, but it was impossible to tell what exactly the jury believed had been stolen and whether this included the copyrighted materials.

The Colorado Court of Appeals held that one of the errors of the trial court was to fail to instruct the jury on the copyright ownership defense and remanded (sent it back to the trial court) the case.

This opinion case raises several points businesses should consider.

Should Have Created a Written Contract

First, as is a theme on this blog, the parties should have taken the time to draft and agree to a written contract.  Initially, no one expects that their relationship will break down, but when it does, a written contract can be invaluable.  For example, a written contract done well, would likely have addressed the scope of work and payment so that the contract could have provided a more efficient and cost effective way to deal the very sort of conflicts that gave rise to the falling out in this case.  It could have not only identified rights and obligations, but also addressed the modification process, cost or time limitations, liability limitations and so on.

Fork in the Road (small) In addition, a well written contract dealing with intellectual property issues most likely would specifically address the ownership of the intellectual property at issue.  For example, here, the question arises whether the software program developed by the developer was done for hire, a determination which affects ownership.  There is also a question as to the scope of the trade secret idea which gave rise to the program, who owned that, and who owned derivations arising from the idea, and to what extent.  Because there is no written contract to review regarding the roles, expectations, and intellectual property at issue, the issues get confused and it is likely nobody gets what they really wanted, and certainly not for the right price.

Who Owns the Copyright, Works for Hire

Second, in general, copyrights vest in the author of the work at issue. See 17 USC Section 201(a).  However, works made for hire vest in the hiring party, if done as an employee within the scope of employment, or as a part of a contract where the parties expressly agree in writing, signed by them, that the work is considered for hire.  See 17 USC Section 101.  When hiring someone to generate copyrightable work in a non-employment situation, it is important to make sure you specifically get the copyright in writing, or it likely rests with the authoring party.  Likewise, when hired to create copyrightable material, one should be deliberate about providing the specific rights one is giving away, while specifically retaining the others, and pricing the work accordingly.  Lack of clarification can create some ugly situations.

Emphasis on Trade Secrets

Third, the case seems to highlight the potential good use of trade secrets to control derivative development of products and intellectual property.  An idea is not able to be protected under copyright.  Old Key (small) However, a trade secret can be an idea, and can be protected, so long as it is secret and controlled.  In contrast, copyrights adhere to the original work of authorship.  As a result, while an idea is not copyrightable, the program, art, or literature that expresses the idea is copyrightable to the extent it is original.

What can happen, then, with appropriate contractual planning, is that the trade secret owner can keep control of the idea and use it to obtain a copyrightable product without releasing its advantage in the market related to its trade secret.

On the other hand, bad contractual planning can result in one party owning the trade secret, but failing to get the rights to the end result intellectual property.  The developer arguably cannot use the product without concerns about misappropriate of the trade secret, but the trade secret owner cannot use the resulting intellectual property either.  In short, the trade secret owner can spend a lot of money creating something they cannot use, while the copyright owner can demand more money to license the resulting product which is only really valuable to the trade secret owner. 

Copyright Defense in State Court

Finally, the case seems to indicate that in a copyright related matter, a plaintiff with state court claims such as misappropriation of trade secrets or violation of a non-disclosure or non-compete agreement can remain in state court by electing to not pursue copyright infringement claims which may be weak.  It also seems to mean that a defendant can still raise copyright related defenses even if they are not in federal court.  This would be important on the one side when a plaintiff wants to limit its litigation expenses and focus on stronger claims unrelated to its possible copyright claims to protect a market, a business model, or to reserve future investment opportunities, and, on the other side, if a defendant has copyrights, even unrelated copyrights, which can limit its exposure to liability.

Conclusion

Regardless of how one looks at this case, it seems apparent that the appropriate use of, and planning with, contractual relationships involving intellectual property is key.  Such use can significantly reduce costs and exposure to potential liability later on, allowing businesses to make informed decisions regarding product development, marketing, and investment.

Wednesday, September 1, 2010

Sorry, Been Real Busy, Blessings of Flexible Work Schedule, and How the Workplace Has Changed

First, let me apologize that this is the first post in over a month.  At first I was real busy with work, and then a whole set of problems occurred at work that prevented me from being able to pay attention to the blog.

Of the most import is that my 5 year old son got sick, and when he did not get better after a day or two, we realized he might have an appendix problem.  So we rushed him to the ER and confirmed that he had appendicitis.  We then rushed to the hospital where they put him in surgery as soon as they could, and found out that his appendix burst.  We ended up at the hospital for a full week as he recovered.  Naturally, that took a lot of our attention.

It is a real blessing to have a work place and a job where I had the kind of flexibility that I do.  I was able to spend nights and mornings with my son while my wife was able to keep the kids at home.  Friends watched the kids during the day while caught up on sleep or went to the office.  The hospital had wi-fi, so I was able to get basic work done while still attending to my son so he was never alone at the hospital.  Essentially with my cell phone and laptop, I was able to maintain a remote office where ever I was and keep things going without having to be at the office.

I have to specifically thank the families from church and elsewhere that took care of our kids, provided food, prayed with us, or visited the hospital like the Hammersmiths, the Johnsons, the Lascors, the Adams, my parents, the Geoffrions, the Orranges, the Baggerlys, our neighbor Ms. Bunny, the Cranes, the Gores, and I hope I did not miss anyone.  It was a blessing to see our faith community in action.

As I rushed around with our health crisis, it is clear how much things have changed in professional life.  With a laptop and cell phone I was able to convert almost anyplace into a work zone.  Face to face contact with clients, fellow attorneys, and staff remains important, but I could work around other pressing activities. 

I’m getting back up to speed and hope to post some content again soon.

Wednesday, July 21, 2010

Use of Trademarks by Online Hosts OK

Recent federal cases point out that online hosts such as eBay and Google are not responsible for their users’ trademark infringements.  A Second Circuit case, Tiffany v. eBay and Google v. Louis Vuitton Malletier, related to the identification of jewelry on-line as being from Tiffany, however, many of the items sold were counterfeit items.  To the extent companies like Tiffany want to prevent such users from using their mark for false goods, they must track down each user and then take steps to prevent the infringement.  This is extremely costly to those companies.

On the one side, it is important to note that not all uses of trademarks are infringing.  Marks can be used to properly identify products such as a car dealer advertising that it has Ford Mustangs for sale, a church stating it provides Starbuck’s coffee to attendees before services, or an individual stating that they only use Apple computers.  Therefore, users who are actually re-selling Tiffany products on eBay can state that the products are from Tiffany so long as they do not indicate that they are endorsed by or are affiliated with Tiffany.  Accordingly, online hosts can note that they have users who are re-selling Tiffany, or other trademarked, products.

On the other side, there is such a thing as secondary liability for trademark infringement which is a lot like conspiracy or aiding and abetting.  In the copyright context, Napster cannot provide a means for others to engage in widespread infringement knowing that this is what is going on, and then avoid liability by asserting that it is not the one actually engaging in the illegal copying.  In the trademark context, an online host cannot ignore specific infringement taking place on its site, turn a blind eye to infringement about which it should know, or otherwise facilitate infringement.

The recent case law continues to place the burden on trademark owners to enforce their marks.  Online hosting companies do not have to do this job for them.  However, they do have to respond and engage appropriately when infringement is brought to their attention.  Accordingly, companies with valuable trademarks have to continue to spend time policing their marks, one user at a time.  One can easily imagine the almost impossible task this can be given how any individual user on Facebook, Myspace, Twitter, eBay, Google, personal blogs, and so on, might be infringing at any given time.

This is another example of how the case law demonstrates the drastic changes taking place.  What is interesting is that the traditional models focus on control as held by the corporate entities, when it is the various consumers and small sellers who’s activities, in aggregate, are beginning to rival those of the corporate entities. 

Trademark law is about protecting consumers.  The traditional model is that the government gives the person with the most incentive the power to protect the consumers, i.e., the seller who wants to build their brand and convince consumers to buy their products.  Companies have traditionally ignored the consumers themselves and focused on the distribution chain as well as their competitors.  Perhaps trademark owners need to start using the technology that is causing them such a hard time to start to engage their customers more directly.  Perhaps a re-seller registration system focused on consumers rather than sellers where potential buyers could quickly communicate with the trademark owner to verify the authenticity of the product in question.  I’d be interested to know if that has been tried….

Wednesday, July 7, 2010

LLC Operating Agreement Controls Assignment of Membership Interest in Colorado

In the case of Condo v. Conners, No. 09CA1130, from May 27, 2010, the Colorado Court of Appeals held that the provisions of the operating agreement for an LLC which prevented a member from assigning his membership interest without the unanimous written consent of the other members are valid, and the assignment is void.

In Condo, one of the members of an LLC assigned his membership interest (in the form of the right to receive distributions from the LLC) to his ex-spouse as a part of his divorce.  The Operating Agreement for the LLC required that any assignment be approved in writing by the other members.  The other members of the LLC refused to approve the assignment and instead purchased the assigning member’s interest from him.  The former member’s ex-spouse then brought an action against the remaining members for tortious interference with contract and civil conspiracy on the basis that their actions had resulted in the divestment of her contractual right to the monetary distributions from the LLC.  The Court affirmed the summary judgment of the ex-spouse’s claims.

In reaching its conclusion, the Court of Appeals for Colorado first noted that for a tortious interference with contract claim to succeed, there must be a valid contract.  In general, Colorado statutes provide that an LLC membership interest is personal property which can be assigned and transferred.  C.R.S. § 7-80-702(1).  Any person who receives a transfer or assignment has the same rights as the member.  C.R.S. § 7-80-702(3).  However, the Court also noted that LLC's are governed by operating agreements which control over provisions of the statutes contrary to the operating agreement terms, subject to exceptions certain inapplicable exceptions.  C.R.S. § 7-80-108(1).  The goal of the statutes governing LLCs in Colorado is to give maximum effect to freedom of contract in operating agreements.  C.R.S. § 7-80-108(4)

Accordingly, because the operating agreement at issue prohibited assignments without the consent of the other members, the Court found that the assignment was void.  The assignment was void because the member who made the assignment was limited by the terms of the operating agreement, and because the operating agreement governed over contrary statutes which otherwise might have allowed for the assignment. 

The Court went on to note that Colorado does not require any “magic words” in the operating agreement to make the assignment void such as a specific statement that the assignment would be void.  Rather, the language in the operating agreement that the assignment, without the written consent of the other members, was not effective for any purpose, was sufficient to void the assignment.  As a result, the ex-spouse assignee was never, and could never be, a member, or have any membership interest.

In the operating agreements we do for clients, as well as buy-sell agreements incorporated therein, we broach this and other similar issues with the members of the expected LLC asking them, for example, to determine whether, and how, they will allow the transfer or assignment of membership interests (whether voting rights, rights to distributions, or otherwise).  It is an important exercise that many potential members do not initially recognize, or realize, they should address.  But very often, when potential members consider the issues, they do not want to allow the membership interests to be freely transferable and they want to have some control over who can be, or become, a member of the LLC.  For example, even if a divorce does not come into play, none of the members will live forever, and the succession of the membership interests in the estate of a deceased member, for the stability and perpetuation of the business, must be considered.

The Condo case reinforces that operating agreements are valid and will be enforced by the courts under Colorado law.  The case shows that the members at the formation of the LLC have real power and their choices have real consequences which should be taken into consideration before there is a dispute.  Furthermore, LLCs which exist, but where the members have not addressed these issues, or do not even have an operating agreement, can, and should, spend the time and money to put something in place before a dispute arises.

Wednesday, June 30, 2010

Update on Indy Film: Sita “No Longer” Singing the Blues

One of the first posts on my blog was Copyright Law Not the Problem for Indy Film.  The film was Sita Sings the Blues and is centered around a song that the film maker, Nina Paley, could not get licensed after she already made the movie around the song. 

The American Bar Association Journal contained an article about the film in its May 2010 edition which is called No Longer Singing the Blues.

While the ABA article highlights some of Ms. Paley’s crusade regarding copyright alternatives, what I thought was particularly interesting was the report that Ms. Paley did eventually obtain a license.  Originally, the demand was for more than $200,000; however, she was able to negotiate a deal for $50,000 per 5000 units sold.  Since then, she has been able to do some distribution of the film and, if you follow the link above, you can apparently view the film for free on Google videos.

The point is that Ms. Paley has obtained a workable license under the current copyright regime.  While the argument remains that some copyright owners can use their rights to prevent the creation of artistic works, it is debatable whether that is necessarily a bad thing. 

If the song is so valuable that someone wants to create a film centered around the song, it is hard to argue that the song has no value, or that the author of the song should not be able to obtain the benefit of the value they have created.  The copyright laws are focused on trying to encourage the creation of such works by giving authors the ability to capture this value.  And one has to wonder whether the song on which the film is based would have been created, or made available to others, if the copyright law incentives had not existed.  In many ways, the film, and its value, are dependent on the song and would never have existed without the song.

This raises the relational issues on which I like to focus.   Songs and other works are often more than just an independent work.  They are created and tied to their creator in intangible ways, they have a context.  Some don’t want their work used for purposes that are antithetical to their views, values, or goals.  An example is when a politician uses a song by an artist that is diametrically opposed to the politician.  From the author’s perspective the use of the song twists and perverts their creation.  It’s like taking a quote out of context. 

While we want to promote the creation of works for the public’s use, I am not sure that it is good to completely severe works from the authors intent, desires, dreams, and hopes.  Some things may never be created or said, but that is the necessary corollary of actually being able to say or create something of meaning or value.  It is the necessary corollary of expression. 

Furthermore, it should be noted that often times it is the limits which force the creation of the best works.  Boundaries are not in and of themselves a bad thing.  They simply establish the scope of the work.  A painting has to have edges, and a novel has to use words.  In fact, it is those limits which create the medium in which one operates.  Likewise, access to a limited world of possibilities is often what forces us to do better with what we have, instead of relying on others.

Regardless, Ms. Paley got a license and the world keeps turning. 

Wednesday, June 23, 2010

Copyright Registration: Not Jurisdictional but Still Really Important

One of the frequent questions I get is whether a copyright owner has to register their works in order to have a copyright or to obtain protection under the federal Copyright laws.  Last year, I wrote a short post highlighting registration asking the question: “Should I Register My Copyright?”  Initially, I noted that one has a copyright regardless of whether one registers the work.  I then focused on the advantages of registration including statutory benefits such as enhancing damages, and evidentiary benefits such as having presumptive proof (if the registration is successful) that the work is protected by copyright law.

While these advantages remain true, new developments in the law help to clarify the importance of registration, importance which I think must be emphasized.

Ownership versus Right to Enforce

First, let me point out that there is a difference between having a copyright, and being able to enforce the copyright.  Using the real property example, it is one thing to own your house lawn, it is another to actually prevent others from walking on your lawn.  With copyright, the walking on your lawn is someone else making aStop sign (small) copy of your work without permission.  You, as the author, may own the copyright in the work, but the fact of ownership does not in itself prevent someone from making a copy of the work.  The power of ownership really takes effect when you can use the fact of ownership to prevent someone from making copies.

Accordingly, while one may have a copyright in their original work of authorship by virtue of having actually created the work, one must also be able to prevent copying.

Copyright Protection Other than a Lawsuit

brick wall (small) Second, there are ways to prevent copying other than filing a lawsuit.  For example, if one never shows their work to anyone else, no one can make a copy of the work.  One can also use physical barriers or technology to prevent copying, like watermarks, encryption and so on.  Use of these types of measures is a key part of creating a copyright protection system and should not be ignored.  However, these measures have their limits, including their feasibility and applicability. 

A Legitimate Lawsuit Option for Enforcement

Third, the perhaps the last component of a copyright protection system is a legitimate threat of litigation against those who are copying the work.  One thing to be noted is that copyrights are a federal right and can only be enforced in federal court, i.e., by making a federal case out of it.  But in addition, this is where registration becomes key.

The Reed Elsevier v. Muchnick Case

A recent case from the U.S. Supreme Court addressed registration as a pre-requisite for enforcement of copyright claims.  The case is Reed Elsevier, Inc. v. Muchnick et al., 130 S.Ct. 1237 (2010).  There, some of the parties seeking copyright protection under federal law had not registered their copyrights.  The trial court raised the question on its own (without the parties raising the question) of whether it had the ability to handle the case if those parties had not registered their works.  Another way of saying this is to say that the court raised the question of whether it had jurisdiction to hear the copyright claims. 

This came about because the federal copyright statutes state that a party cannot file certain copyright claims (for our purposes, it is enough to note that the certain claims at issue are pretty much the ones most important to copyright owners) unless they have registered the copyright.  Specifically, the statute states, in part, “no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.”  17 U.S.C. Section 411

Applying this statute, the trial court determined that it did not have jurisdiction, and the parties appealed the issue all the way to the Supreme Court.

In resolving the question, the Supreme Court stated that trial courts do have jurisdiction to handle cases involving unregistered works.  However, the Supreme Court indicate that registration was an essential element of a claim for violation of a copyright under the statute.  In short, this means that while the court can hear the case, the copyright owner still has to prove they registered, or tried to register, the copyright with the Copyright Office to succeed in their lawsuit.

Like any lawsuit, a party has to prove they are entitled to relief or a remedy.  If one is claiming someone else trespassed on their property by walking on it without permission, they not only have to prove that the other person actually walked on their property, they have to also prove that they own the property at issue.  If they cannot prove this, they cannot prove an essential element of the trespass claim and they will loose.

With copyright violations, the federal statutes establish the elements of the claim that a copyright owner has to prove to win.  It may be obvious that a copyright owner has to prove the the other person actually copied the work at issue, but the Reed Elsevier case also suggests that the copyright owner will have to prove that they at least attempted to register the work with the Copyright Office as well if they want to win.  If they cannot prove this requirement, they will likely loose.

thumbs down (small) The reason I say that they have to prove they at least attempted to register the copyright is because registration does not have to be accepted for the copyright owner to file suit.  A copyright owner has to have either successfully registered the work before they sue, or have tried to register properly, but been denied registration.  In addition, in some situations, the registration can occur within three months of the suit for a violation of the copyright.

Conclusion

It is integral to be able to enforce a copyright in court against others who copy.  Without the ability to enforce the copyright, one really has nothing from a legal perspective.  Accordingly, because one must register their copyright to be able to win in a lawsuit about copyright infringement, registration is exceedingly important.

Wednesday, June 16, 2010

Legal Assessments: Mean What You Say in Both the Contract and the Relationship

I’m back after a whirlwind of work related to some litigation matters with which I am periodically solely occupied.  My old boss and mentor Rob Baldwin used to tell clients when he was really busy with one matter that he expected they would want the same thing when their matter required the same kind of attention.

Introduction

Previously, I’ve discussed some issues regarding entity structure for companies and corporations from a relational perspective.  These discussions have focused primarily on internal relationships, specifically between owners, principals, shareholders, or members.  I want to turn the attention now to the relationships an entity has with third-parties, whether customers, suppliers, independent contractors or the like.

The Contract Governs Over Informal Negotiations

In general, the same principles apply such as accurately identifying the duties and responsibilities, providing notice or disclosure, and actually complying with the terms and conditions.  But what I want to do here, is point out that often, the people involved in a legal relationship formalized by a contract of some kind, tend to allow for a bit of a incongruity between what they understand the relationship to be, and what they included, or excluded, from the actual document formalizing the relationship.  Specifically, what I want to point out is that the contract will most often govern any dispute, regardless of the informal negotiations before hand.  As a result, the contract matters more than the informal negotiations, and a company can do a lot to stand out by making sure their contracts accurately reflect the informal negotiations.

A personal example

Let me give the example of a form contract you might get from a service provider.  I recently had computer troubles after the lightning storm here in Denver a week back.  I took the computer (my really old G4 iMac) to a service provider to retrieve data Hard Drive small from the hard drive.  I explained that I suspect the drive is fine and it is simply the power to the computer that is a problem.  After discussing the situation with the representative at the store, confirming the price for the services, and what I needed done, I was given the standard service contract the provider uses for me to sign and initial.  Of course, being an attorney and all, I actually read the terms.

Turns out that the standard form contract I was supposed to sign included a certification by me that I had a back-up of the data off the hard drive.  It then went on to state that I would not hold them responsible if the data on the drive was lost during the repair work.  This gave me pause.

As you can imagine, the terms are there because the provider needs the freedom to work on a broken machine without concerns that their efforts might accidentally destroy data which cannot be replaced.  However, the situation in the form contract did not fit my circumstances.  I was there because I needed them to retrieve the portions of the data on the machine for which I did not have a back-up.  If I had the back-up, I would not need them.  In addition, they wanted me to release them from responsibility, even if they lost the data because they were negligent (which is another way of saying they lost the data because of their own fault when they reasonably should not have lost the data).

This put me in a quandary.  First, I was not about to lie and certify that I had a back-up.  Second, I got a little concerned that they might be a bunch of hacks.  I am willing to pay them because they hold themselves out as being capable of providing the services I am requesting using a skill I do not have.  But their form contract implies that if they delete my data because they do not really have any skills, or because they have those skills and failed to apply them to the job, I basically have no recourse.

The Application

I bring all of this up as an example of how we do business and form legal relationship.  In talking with the representative, I felt comfortable that they understood what I needed and had the skill necessary to do the job.  I also received assurances that they understood my problem and would do what they could to help by applying skills I do not have, without accidentally deleting the data they were trying to recover for me.  But after all of this conversation and forming of the relationship with the provider, the contract, which actually formed the relationship, was different in important respects.  So the question arises, which one will actually govern the transaction: the informal conversations, or the contract.  The answer is generally going to be that the contract will govern.

My issue with repair work on a computer is small.  But when this principle is applied to a bigger transaction, with larger consequences, the same problem arises.  One might have a great interaction with the other person, but get a contract that contradicts one’s understanding of how things are going to work.  It might provide for discretion by the other person that keeps them from being responsible in certain situation, or limit how much skill they have to actually apply to the job.  In the end, it is the contract which will govern any conflicts, and the discussions and expectations formed outside of the contract will probably not be worth much.

What many of us tend to do is pretend that the informal interaction is the real relationship and will actually be how the other party will perform in the relationship, even if the contract does not force them to do so.  However, the contract is where the rubber hits the road.  If someone is willing to say they can do something informally, they certainly ought to be willing to back it up by making themselves accountable in the actual contract if they cannot do it.  Otherwise, we are simply entertaining a form of lying.

An Opportunity for Businesses to Stand Out

I think it is better, and actually a way for businesses to stand out among their piers, for businesses to draft their contracts in a way that honors the informal relationship they form to get business. 

Using my example of the computer repair, it is perfectly possible to craft language in a form contract that addresses the concerns of both the provider and the customer.  One way is that rather than asking a customer to release the provider from the responsibility to exercise the skill they hold themselves out as possessing, the provider could simply specify what the provider will be responsible for while also specifying what they will not be responsible for (like faulty equipment or incidental damage caused by good faith attempts to do the work requested on the machine).  The provider could focus the form contract on getting authorization from the customer to do what is deemed necessary by the provider, at the providers discretion, to accomplish the task at hand, with a disclosure that such activities may have unintended consequences which the customer is willing to accept as a condition of providing the machine for the work, including a loss of data.  The provider could state that they are limiting their liability for legitimate screw ups that could have been avoided to the amount of the charges for the work performed so they have an incentive to exercise their skill, but do not have to worry about a screw up sinking their business.  And the provider could use the contract to suggest the customer get a back-up of the data before allowing the work, noting that if the customer chooses not to do so, the provider cannot be held responsible for inadvertent losses of data.  

The Contract Matters, SO Draw a Line

Another point is that businesses and individuals should pay attention to the actual contracts.  The informal relationship is a legitimate basis for some concessions in the contract terms, knowing that when all is said and done, one will have to live with the contract terms if things go bad.  However, we do have to draw the line somewhere.

For me, I only crossed out the term in which I was asked to certify that I had a back-up of the data because, while it bothered me that they wanted me to release them from all liability for deleting my data while doing the work, it was not critical data and they had agreed to significantly limit the charges for doing the work if they could not retrieve 75% or more of the data.  On the other hand, I was not about to lie.

Saturday, April 10, 2010

Intellectual Property (IP) Copyrights and Copywriting—Just Like Music or Movies

It has recently come to my attention that some copywriters do not necessarily understand that they have the same kinds of rights as other creative artists.  And this is likely true for many professionals who create original works.  However, copywriters, like musicians and other artists have the same set of statutory rights. 

For example, many are familiar with the idea that a musician or movie studio can license their song or movie to others for specific purposes like personal use.  When one buys a copy of a song performance, or a copy of a movie, they are generally buying a license for personal, private use.  The buyer does not have the right to make copies of the work, to play it for the public, or to make it available for download on the internet.  

Copywriters and other creative professionals have the same ability.  A copywriter can license their copy to their clients to be used for specific purposes, or they can give them all of the rights to the copy.  Likewise, when a designer creates a logo or a web design, they can license the use.

The fundamental idea is that all creative professional (as well as consumers) need to know their rights because this defines the product they are providing or buying, and should determine the price to be paid.  A creative professional who provides their clients with all the rights to copy, use, modify, distribute and otherwise work with a creative product is giving away a great deal more than a professional who provides the client with a license to use the product in a certain way.  The price should also be significantly higher.  And finally, the professional who gives away everything must understand that they have not retained any right to use the product for their own purposes such as inclusion in a portfolio unless they specifically retain that right.

Depending on the business model of the creative professional, these issues should be closely examined so that the professional manages their assets appropriately.  For example, a copywriter can license the use of their copy and charge a fee based on the anticipated use.  Then, if the copy is successful the copywriter can reap the benefit or offer the client the opportunity to buy more rights to continue to use or modify the copy.

Key to the management of creative products, and the sustainability of the businesses in question, is first knowing the legal rights as they relate to the asset and product, and then accurately reflecting the transfer, and retention, of the appropriate rights through contracts and agreements. 

From the consumer side, it is important to make sure the buyer knows what they are getting and how they can use it, and to make sure the price reflects the value being provided.  The last thing anyone needs is a fight about who can use what.

Finally, the clear identification of the buying and selling of the rights to a particular creative work can help the parties decide who will register the work so that they can enforce the proper party has confidence in the ability to enforce their rights down the road.

Saturday, April 3, 2010

Creative Connection Trade Show Lessons

The Trade Show with Creative Connections went great.  There was a steady stream of traffic and I had some interesting conversations with various business owners.  I also learned a couple of lessons that will be very useful for the future.

The first is that I need to bring a drink.  I got parched fast talking with everyone.  It was great, but I found out quickly that all of the drinks and snacks were  cash only and I generally don’t carry cash.  However, this last time, a friend was kind enough to get a bottle of water for me.

Second, not too surprisingly, there were a lot of people who came through the show in order to give the exhibitors their cards and invite us to come to sponsored networking events or other trade show events.  This wasn’t bad, but it isn’t necessarily the kind of people with which one hopes to spend time talking.  Having a second person at the booth would be helpful to make sure that I am able to talk with those who might actually be interested in my services.

Third, I think that having on my sign some of the specific services I provide might help.  This would have gotten some of the conversations in the right direction right away as visitors to my booth did not necessarily know why I was there.  Listing out things like Trademark Registration, Copyright Protection, Contracts Review and Drafting, Company Formation, and so on, might be a helpful to visitors.

Fourth, setting aside some times for consults with prospects with a sign up sheet might have also been useful.  That way, I can move beyond introduction straight to a second contact opportunity.

Finally, I toyed around with a give away of some kind.  My firm has sometimes given away a simple will at Estate Planning presentations.  I was considering a Trademark analysis as a give away given the context, but perhaps a single member LLC Operating Agreement would be appropriate.  If one needed an Operating Agreement for a multi-member, I could discount the cost by the usual cost of drafting a single member Operating Agreement.  And I could simply make it a certain number of hours credit toward whatever work the prospect might need.  I think that next time I will move on that possibility.

Thursday, March 11, 2010

Creative Connections Trade Show, March 25, 2010 at Colorado Community Church, 3-7 pm

I’ve been a part of Creative Connections for over a year now, since when they used to meet at the Koelbel Library on Holly and Orchard.  I’ve even had the privilege of presenting to the group on topics like Intellectual Property 101 and Independent Contracts.  The group features creative professionals like digital and print designers, marketing consultants, artists, web developers, copywriters, film and video producers/editors, screenwriters, and more.

Brochure pic

This coming March 25, 2010 from 3 pm to 7 pm, the group is having its second annual trade show where members set up booths to show the public, and hopefully interested businesses, their products and services.  I will be hosting a booth at the trade show and hope that you might stop by to see what me, and my friends, are doing.  It looks to be a great chance for businesses to get some insight and ideas into using creative media to augment business.  And of course, I will be there to talk with, and to help businesses as they take advantage of intellectual property resources.

The event is being hosted at Colorado Community Church, just south of Hampden on Colorado Blvd.  There will also be speakers and presenters on topics of interest related to the value of creative media to businesses.

Come on over and meet with your friends at Creative Connections, this Friday at 9:00 AM, at Colorado Community Church, just south of Hampden on Colorado Blvd. As always, it’ll be friendly, informative and fun!

Wednesday, March 10, 2010

Slowing Down Can Save You

Some people are snails and some are risk adverse.  However, it isSnail unlikely that those people are very successful in running businesses.  

Business leaders tend to see what is going to happen before others.  A successful friend of mine in the nonprofit world suggested that this is what it means to have vision.   But in addition to seeing what is ahead before others, they act on it swiftly.  They are first to market, first responders, first to invest in appreciating stocks, etc.  

Being able to be successful involves a combination of vision, speed, and risk management.  As a result, it seems that more often than not, a successful business leader’s default speed is full throttle.

It is for those business leaders that the admonition to slow down can be very important. 

There is a difference between going quickly in order to take advantage of benefits which will disappear as time goes on, and moving quickly because one has developed the habit of moving quickly in situations where the benefit is reducing as time moves on.  One is a sense of urgency based on a cost/benefit analysis, the other is a psychological condition.

It may seem obvious in some situations, like one should not market a new tech device without first getting intellectual property rights in place .  But other situations, or even certain details, may be less obvious.  For example, carefully reviewing real estate documents as well as carefully surveying the physical property before a purchase can result in catching issues and problems such as neighbor encroachments, unrecorded leases, and so on.  Furthermore, what may seem obvious to one person, may not have occurred to others.  An example is whether a particular person should be the CEO of the company—it may be the obvious end result to the business leader, but getting the pieces in place to facilitate the transition, getting buy in from other key players (including the candidate), and providing the right atmosphere for success, may require time.

The CEO example also highlights the fact that no one is operating in a vacuum.  Any time we act, as individuals or businesses, we are affecting others, some who have a say, others who do not, and many in between.  Managing these relationships is not easy, and can substantially slow down the business process.  Ignoring these relationships can be devastating.  Addressing them is an investment. 

Capital Do Not Enter (small) Politics is an example of this sort of relationship management, in some cases, run amok.  For example, when I worked in DC, I remember one Congressman in a key Committee Chairmanship expressing less than genuine doubts about certain legislation important to the President simply to get the President to call him. 

Politics is simply a large scale example of what goes on, whether we like it or not, in business all the time, i.e., the exercise and sharing of power.  The Founders put in mandatory checks and balances for the specific purpose of SLOWING THINGS DOWN where there was the exercise and sharing of the most power.  Likewise, in business, we should consider the value of slowing down to make sure what we are doing really makes sense, is really for the good of the business overall, and to manage the relationships.  In fact, it is often in taking the time to manage the relationships that we get the unique insight from other people as to what really makes sense, and what is really good for the business.

If people really are our best resource, let’s take the time to consult them, consider their input, and use them.

Wednesday, March 3, 2010

Remember, Best Intentions Often Not Enough

Business people need to keep in mind that many of the activities that can get them and/or their business into trouble do not have an intent requirement.  That means, you do not have to have a bad intent to get into trouble.  And on the flip side, having good intent does not earn you a pardon.

This is important because in the rush of business, when opportunities or decisions present themselves, the same focus and decisiveness that make many business people successful, can also be their undoing.  Focus, taken too far, ignores outside factors and potentially interested parties.  Decisiveness then moves quickly down the path which is informed by the information available.  Combined, a business leader can make quick decisions on limited information ignoring potentially important concerns because of the good that is expected to come out of acting on the information the leader does know.

Therein lies the rub. 

Business leaders may try to comfort themselves during the mad rush of business decisions with the belief that good intentions, in combination with their business sense, will get them through unscathed.  However, often, in business environments where there are many interested parties, and decision makers can have multiple persons to whom they are responsible (shareholders, Board of Directors, Members, executive officers, employees, etc…) the question may not be whether one is trying to do good, but whether one is taking care of certain people to whom they have some responsibility, or whether one is making reasonable efforts to avoid doing harm to someone.

As a result, good intentions are not enough.  In addition, business leaders need to make sure that their good intentions are in harmony with their other responsibilities and duties they may have.  In short, business leaders need to keep in mind all of the various parties and persons who might be interested, tempering their good intentions in the moment with full consideration of those persons and parties “not in the room.”

Tuesday, March 2, 2010

New Colorado Case Says Members and Managers of an LLC are Directly Liable to Creditors for Excessive Distributions

Under Colorado Revised Statute (“CRS”) Section 7-108-403, a director of a corporation who agrees to a distribution that prevents the corporation from being able to pay its debts is personally liable to the corporation for the extra amount.  But in addition, Colorado courts have determined that creditors can proceed against the directors who make the distribution in a lawsuit to recover the excessive distribution.

Colorado Developments Regarding LLCs

Now, the Colorado Court of Appeals in Colborne Corp. v. Weinstein, 2010 WL 185416, No. 09CA0724 (Colo. Ct. App. Jan. 21, 2010)(link here), has held that, by analogy, limited liability companies (LLCs) are under the same basic rules.Take Money Hand

Specifically, under CRS Section 7-80-606 Members of an LLC are liable to the LLC for excessive distributions knowingly made to them.  In the Colborne case, creditors sued the Members and Managers of an LLC under Section 7-80-606 asserting that the Members and Managers should also be liable to the creditors, not just the LLC, for any excessive distribution.  The Members and Managers of the LLC argued that the statute only allowed the LLC to recover from them, not the creditors.  While the lower court agreed with the Members and Managers, the Court of Appeals has now stated it agrees with the creditors, and has sent the case back to the lower court for more proceedings.  Accordingly, the creditors are being allowed to bring a case directly against the Members and Managers to hold them liable for the excessive distribution.

Conclusion and Summary

On the down side, this does mean that LLC Members and Managers cannot hide behind the LLC entity if they give themselves all of the money from the LLC through a distribution without paying off their creditors. 

However, there is also a lot of upside.  First, if the rule prevails that the creditors can proceed against Members and Managers for an excessive distribution, creditors will be more likely to lend money to such entities knowing that they will have some recourse if the Members and Managers start making large distributions that could deplete the LLC’s ability to pay them back.  Second, as the LLC statutes are tested in court, and the court’s analogize more with the corporate law which has been around longer and already been tested more, the LLC law becomes more stable and predictable.  This lowers the risk and potential cost of creating and running a successful LLC.

Overall, the case suggests the courts in Colorado are heading in the right direction regarding the responsibilities of the Members and Managers of LLCs.

Monday, March 1, 2010

Proxy Voting is limited in Colorado for Directors of Nonprofits

Under Section 7-128-205 of the Colorado Revised Statutes, a director of a non-profit, if allowed by the Bylaws, may make a written proxy directing another director to vote a particular way on a particular issue.  If this is done, the director is deemed to be present for purposes of quorum, and the vote is taken according to the direction of the written proxy.  However, the proxy is only good for the specific issues identified in the proxy, and the authority is only to vote as directed by the proxy.  No other proxy voting is allowed by a nonprofit director.

For a corporation, there is no similar statutory provision for directors to vote by proxy.  Accordingly, under the quorum and voting statutes for a corporation, it does not appear that a proxy vote by a director is allowed.

If you’re on a nonprofit board, remember this proxy rule so that the decisions of your board are legitimate and can be documented appropriately.

Wednesday, February 24, 2010

Legal Assessments: Entity Structure Adding Value to Your Business

After several weeks working on trial preparation and other cases, I can get back to writing a bit more substantively for the blog—particularly on the topic of legal assessments. 

As a refresher, my Legal Assessment posts are about exploring some of the legal issues affecting business from a relational perspective.  Often, business people see legal rules and structures as essentially roadblocks to getting things done.  Sometimes this is true, often times it is not.  Doing a Legal Assessment is about examining the rules and laws to understanding the reasons for them in order that we can properly evaluate our position in  relation to all of the people and business around us, and engage in business responsibly.

The prior posts were as follows: First, I highlighted what it means to look at legal issues from a relational perspective.  Second, I discussed the basic types of business entities and the concepts behind having a separate business entity.  Third, I discussed how some legal principles and structures can promote the independent operation of a business entity.  Screwdriver

Now, for the fourth installment, I am going to highlight some of the specific legal tools and principles that can be used by a business to add value to its operations.

Duties and Responsibilities

Knowing what one is required to do, what one may do, and what one can expect from others, is foundational to beneficial interactions in the business world.  There are rights, privileges, options, discretionary rights, conditional rights, and much more.  These concepts in law are every well developed.  Business can take advantage of these concepts to better define their business activities in their formational documents, inter-business contracts, employment relationships, and other interactions.  Doing so allows businesses to better control their costs, income, expenses, and risks. 

Using these legal principles can be as simple as defining when and how a business is going to be paid for a product or service to make sure that its cash flows are predictable.  For example, setting up a construction subcontract so payment terms are based on percentages of delivery of materials or completion of work may make the difference for a business to be able to stay afloat during tough economic times.  Another example might be locking in a discount from a supplier contingent on prompt payment during an initial term.

The other side of this equation is to take advantage of the latitude allowed by law to limit responsibilities and duties so that costs and expectations are appropriately limited.

It is not only important to have the business deal concepts in place with another party, it is also important to create and use appropriate language that gets the job done.

Notice and Disclosure

A familiar topic in business failures and problems is when one person is alleged to have unfairly taken advantage of another.  An extremely easy and cost effective process that would often avoid these types of problems, and sometimes even facilitate more advantageous results for the parties involved, is notice and disclosure.  For example, sending a letter to an affiliate to let them know you are considering changing suppliers before you actually do so, or telling a partner about a purchase decision.

Clearly, sometimes information is confidential and cannot be shared.  But many times, notice and disclosure are simply overlooked.  A deal may be going well and one simply does not consider whether others might want to know about the deal, be concerned about it, or have an interest.  We also may assume that others with whom we are communicating understand all the information we take for granted.

But notice and disclosure can be extremely valuable.  Often, simply giving others a chance to take a look, or letting others know about a transaction, or decision, eliminates the ability of others to object later.  Providing notice often creates a presumption of fairness.  Providing notice can shift the burden or obligation of raising an objection or concern.  Providing notice can result in obtaining additional information from other sources that one might have overlooked, or even been unable of obtaining, resulting in major corrections.  And providing notice, even when it is not really necessary, can build integrity and trust.

Notice and disclosure is about knowledge and freedom.  We have to remind ourselves that we do not know everything, and that when we let others know information, we actually obtain more freedom to act without fear or reservation.

Compliance

The last legal principle is simply doing what you say you are going to do.  Whether it is internal or external rules or regulations, it is extremely problematic for a business to set up a requirement and then ignore it.  Often times, this happens simply because business’s loose track of their own rules or get busy and forget to do what is necessary to comply. 

But rather than ignoring the failure to comply or the rules they just can’t get to, businesses should adjust their rules so they accurately reflect their values, and their compliance is consistent.  This not only helps businesses avoid problems with those who might complain when the business fails to comply with the rules, it also helps both internally and externally interested parties understand the business values and act accordingly minimizing costs for the company.

In other words, if your members do not actually have their annual meeting on the first Wednesday of each September, the formational documents should be adjusted.  And if you have an employee manual that calls for annual reviews, which do not actually take place, something needs to change.

Conclusion

The implementation of the legal principles of duties, notice, and compliance, add value to almost all the aspects of a businesses operation.

Wednesday, January 6, 2010

Welcome to the New Year, 2010

Fortunately for my firm and practice, the last few months of 2009 were very busy.  It seems like business has been picking up again.

Now, starting the New Year 2010 off, the firm has two immediate trials coming up.  One is a two week trial in Denver this next week, and the other is a two week trial in Montrose starting in mid-February.  While I am not participating in the trial this month, the significance of it is that our litigator extraordinaire, Mike Reagor, will be preoccupied with the first trial, and I will therefore be heavily involved in preparing for the second trial in February.

All this to say that I am pretty busy.

Regardless, life and business go on.  As some indication of activities in the near term, I expect to be doing the second half of the radio show with B Hopkins re the FTC Regulations in early February, probably the 3rd.

Also, I have been working on the development of Legal Assessment services related to evaluating a business’s status in the areas of company formation and documentation, intellectual property identification and protection, as well as its contractual relationships.  Blog posts will continue to address the concepts behind these services.

Eventually, I will also be writing some posts on the topic of Estate Planning as it relates to creating a legacy, i.e., Legacy Planning.

So 2010 starts. 

One thought on the general economy heading into 2010:  I have read a lot about how 2010 cannot be worse than 2009.  Even so, the same pundits state that there is apparently no reason to believe that it will be a really good year either.  In particular, the measures of wealth dropped so dramatically over the last couple of years, it is asserted that it is unlikely we can recover to the previous level anytime soon, perhaps not even this decade. 

While this may be accurate in the aggregate, I just want to point out that such aggregate information will not, by its very nature, apply to everyone.  In fact, it only indicates that while some may do poorly, others will do well, and the overall averaging effect is expected to be “less than” a full recovery to the previous perceived level of wealth. 

For me and my house, things must be put in perspective.  Our overall wealth has increased.  We have four healthy beautiful kids, a roof over our heads, great friends and family who are there for us in rough and good times, a steady paying job, and work streaming in.  I expect 2010 to be a great year of opportunity.  Best wishes to you and yours as well!