Wisconsin Business Law and Litigation
A blog dedicated to Wisconsin business law and business litigation matters, authored by Chris Moander of the Moander Law Firm.

Dear Readers:

I will be attending the Small Business Times BizTech Expo for the next few days. If you have not had a chance to sign up, come on down. I’m very excited about this event because it’s drawing some major national speakers and some quality local speakers. Aside from the usual expo set up of booths and chit-chat, there well over ten individual business strategy seminars that are free to people attending the event!

If you do come on down, I will be the guy likely having a great time meeting new folks, learning about new technologies, and talking shop with everyone and anyone.

I came across a link that I think outlines the basics of how venture capital works. The slideshow shows key elements of the financing process. What I find particularly important and useful is the explanation of why VC firms need and, frankly, deserve preferred stock in companies in which they invest - I love the fact the author uses the term “mischief” to describe the alternative of giving VC’s common stock.

I also think the author has the right idea in emphasizing that both investors and entrepreneurs have something to gain from transparency in the financing process - if everyone understands the terms, a true “meeting-of-the-minds” occurs and each side is happy with the deal.

Now, I do not claim to be an economist and neither does Larry Bodine, but he claims that the current recession is on its way out. His evidence appears to support his assertion. At the very least, any sign that a part of the economy is rebounding should bring some hope to businesses and individuals around the US.

It seems like no business gives substantive employee references any more. From my first job to my most recent (aside from my own firm), I don’t recall one instance of any former employer telling a potential employer anything more than “I would hire him again.” Pretty thin on details and value. We know why this trend came along…lawsuits. But is a five word reference the best practice?

The April 2008 Wisconsin Lawyer magazine has a wonderful article on the issues of employer liability and employer references, written by Matthew L. Mac Kelly. Mr. Mac Kelly outlined several points to curb employer exposure to liability when giving references, a few of which I think are novel and allow an former employer to actually communicate quality information to potential employers instead of doling out useless platitudes.

• Be truthful when making references, especially when you think the former employee poses a foreseeable risk to potential employers/co-workers. On the other hand, claiming a former employee engaged in specific conduct (especially illegal or inappropriate conduct) is a bad idea. Instead, an former employer could refer to the suspicion that the former employee engaged in certain activities.
• A former employer can formalize the reference process by selecting particular employees as the “reference folks” who have a duty to handle reference calls - only they can give references. To further formalize the process, a policy can be instituted requiring proof that a reference request is being made for a legitimate business purpose. All reference requests must be submitted in writing to the “reference folks,” thus ensuring that any reference is legit and proper.

The Coca-Cola formula. The Colonel’s Secret Recipe. Both are well-known as “trade secrets” and it also well-known that both are valuable and aggressively protected. So, what is a trade secret and what does that definition potentially mean for your business?

Wisconsin has adopted the Uniform Trade Secrets Act, which defines a trade secret - trade secret law is state-based, unlike other forms of intellectual property law. In simplified form, a trade secret is:
- information (formula, pattern, program, etc) from which your company gains specifically identifiable economic value by virtue of not being known by competitors, and
- you put reasonable efforts into keeping that information secret.
Reflecting on Coke’s formula, you can see that it’s formula provides the company with economic benefits because nobody else can reproduce the exact flavor of Coke absent the trade secret formula. Further, the formula is revealed to only a few Coca-Cola employees. Thus Coke has a trade secret.

The primary problem businesses run into with trade secret law is the second prong - reasonable efforts to maintain secrecy of the trade secret. Courts judge reasonableness based on the nature of the secret so a business generally has no way to predict what protection measures will be sufficient in the court’s eyes.

Employees are the main issue in most trade secret matters; Watergate-esque break-ins are not the real concern. Two major employee-centered problems arise: (1) whether your employees (new or not) are misappropriating the trade secrets of another business/former employer and (2) whether current and ex-employees misappropriating your trade secrets. The former subjects you to potential liability and the latter causes you to lose money and potentially need to litigate (although employee actions may not be prevented by internal rules and thus such theft is no fault of yours). For clarification, misappropriation occurs when somebody (most likely an employee) “takes” a trade secret (usually from an employer) and uses it without the owner’s consent.

When new businesses begin hiring, they are driven clarify to extreme degrees that no employee should bring in either ideas, documents, etc from former employers to use at the new job. They may also inquire into any non-compete or non-disclosure agreements the employee signed with a prior employers and, contrarily, may have employees sign new non-compete and non-disclosure agreements to protect the company’s own trade secrets.

There is no doubt that trade secrets are valuable, but they require constant tending, like a plant.

How do we determine race, ethnicity, or national origin? To some, that’s an easy question, for others, not so easy (especially businesses). The 7th Circuit, which covers Wisconsin, dissected this issue in a recent case, Abdullahi v. Prada. The lesson the court imparts is that, when a discrimination claim is filed, the case is not centered on which boxes are checked in the EEOC forms.

As background for businesses, when a discrimination complaint is filed, the person(s) filing the complaint must use a form that has boxes marked for various categories, including race, national origin/ethnicity/nationality, color, etc. The ruling in Abdullahi appears to view these boxes are rough estimates as to the basis of discrimination, not firm categories. This puts businesses in a tighter spot when sued for discrimination, particularly regarding ethnicity, national origin, and race. Again, this case is particularly important for Wisconsin businesses because Wisconsin is in the Federal Court’s 7th Circuit.

H/T: Ohio Employer’s Law Blog and Workplace Prof Blog

Forgive me for lapsing into legalese in my last post. I believe I should clarify some things.

Copyrights are an actual property right. If you own the copyright, you control that content for the allowed period of time and can generally use it how you see fit. Businesses struggle with the idea of intellectual property (particularly non-patent areas) because intellectual property rights are applied to what we call “non-exclusive property,” versus “exclusive property.” For example, consider a plot of land. If you own it, you can exclude others from entering or otherwise using the property. You have exclusive rights to the land. Nobody can use or take part of the land without depriving you of your right to use that part of the land - the property is exclusive. Intellectual property is not like that. The copying of your work does not deprive you of your property (the work itself) - two or more entities are using the work at the same time, hence the work is not exclusive. Rather, copying deprives you of your right to economically benefit from distribution of the work.

From another perspective, you and your business have invested time and money into generating even basic materials (such as marketing materials), much less major products (books or digital media). Costs sunk into these works are almost always substantial. It’s important to protect this work as your own, much like you would want to protect physical items you create or goodwill you generate - copyrights help protect your livelihood.

I briefly mentioned the need to invest money in legal advice when determining a suitable business name. It is well worth the cost to have an attorney confirm whether your chosen name is either not protected (nobody else has it) or able to be protected (geographical names and descriptive terms are not protected). You seriously curb the risk of being sued for copyright infringement and ensure the protection of your chosen company name - both are preventative in nature. Additionally, lawyer review can also help evaluate the marketing efficacy of the chosen name - is it unique enough to be remembered easily and get attention drawn to your company?

In an attempt to be witty, I tried to find some jokes on the topic of copyright law and, sadly, I found none, which is a real shame. My goal was to provide some levity on a subject that is in the papers daily in regards to pirated music and movies. Clearly, I did not meet my goal, so let’s delve into the area and how it can affect your business.

Copyright is the primary tool used to protect works of authorship (ex: music, movies, books, etc) under federal law (the Copyright Act). The goal is to protect the expression of ideas, but not the ideas themselves. Consider the concepts of authorship and expression together - combined, they apply to more than just a few set concepts, like movies. Rather, copyright can apply to your marketing materials, your website designs, or various other pictorial or literary works used in your business.

There are a few requirements to secure a copyright:
(1) copyrightable subject matter - covers a fairly broad spectrum of things, but generally (and I do mean generally) literary works, images, music, and video recordings are protectable insofar as the expression of the work goes (remember that ideas themselves can’t be protected). You cannot copyright things like procedures, processes, or systems - note, though, that these things can be protected by other areas of the law.
(2) modicum of originality - translated, you need some original input into the work.
(3) fixed in a tangible medium of expression - translated, one needs to be able to perceive, reproduce, or otherwise communicate the work (ex: recording music on a CD).
(4) Register the work for copyright protection with the U.S. Copyright Office.

• While registering a copyright is very important, one’s copyright is effectively created at the time the work is fixed (see #3 above).
• Registration with the USCO allows you to sue should someone infringe on your copyright. Please note that you don’t have to register with the USCO to have a copyright, but generally you can’t sue for infringement without having registered.
• Registration also lets the whole world know that you own the copyright.
• Sometimes, you will have to submit copies of your work to the USCO for filing in the Library of Congress. Whether you need to do this is a case-by-case judgment.

Business owners need to know who actually owns the copyright for work produced. The Work for Hire Doctrine, which determines whether a business has a copyright on work, is applicable in two situations: (1) the work must be made by an employee in the scope of his or her employment (as part of the job) and (2) if there is a written agreement that the work produced is a work for hire. If the work is produced in either scenario, the business owns the copyright. As always, the key is a written agreement stating who owns what.

As with all contracted-for work, there can be disputes about whether a person or entity is an employee or independent contractor and thus who has the copyright. Courts will look at several factors, including the control the business had over the work’s creation, tax status of the creator, whether employee benefits were extended to the creator. If you don’t watch these ownership issues and handle them with care, you could lose the copyright to an independent contractor.

Copyright holders possess three major rights: (1) the right to reproduce the work, (2) the right to distribute the work (sell it for profit), and (3) the right to create “derivative works,” works based on the original copyrighted work (ex: all the Star Wars films after the original movie from 1977). If the copyright is registered, the copyright holder has the right to sue infringers. The duration of these rights extends: for the life of the creator plus seventy years; for the life of the last co-author (if there is more than one author) plus seventy years; and for works-for-hire, ninety-five years from first publication or one-hundred twenty years from creation, whichever expires first.

Copyrights are great to have because they protect your work but they can also be sold with the company if you decide to bail. As with most legal work for startups, the up-front costs are very much worth it. Your attorney can determine whether your idea could infringe on another’s copyright and, if not, can secure your copyrights to the benefit of your company.

Trademarks are designed to do one thing: protect the goodwill generated by your company and protect your consumer’s ability to distinguish your products/services from your competitor’s. Your trademark will cause a consumer to associate certain qualities and recollections with your business - in other words, the meaning of the mark to the mind of your customers. Thus the economic value of a trademark can be enormous. A good example is the Nike Swoosh, which is recognized all over the globe and therefore Nike gets the benefits of people recalling what company the Swoosh represents. Certification and Collective marks, those used by trade associations and commercial groups, can also be protected as they, too, reflect qualities and recollections of patrons.

A protectable trademark must be distinctive (to a degree) from all others in the marketplace. Generic, descriptive, and commonly used terms are not enough. Trademarks that are “fanciful” are protectable. For example, Kodak or Exxon - the terms themselves lack inherent meaning, but were created to brand a company’s products. “Arbitrary” terms are also protectable. Examples include Amazon.com and Apple Computer - the terms do have inherent meaning, do not describe the products offered, but have acquired secondary and unique meaning to the public. You can also protect “suggestive” terms, those terms that suggest but don’t describe the product or the product’s characteristics. Suggestive terms can be tougher to distinguish than other protectable trademarks because they require the consumer to use their imagination to connect the goods/services to the appropriate use (thus a good deal of proof is necessary to support protectability). For example, Greyhound is a suggestive trademark because it implies that the bus service is fast, like a greyhound.

A business does not need to register a trademark to get protection from infringement. First use of the mark and continual use of the mark are enough to establish rights to the mark. However, registration is always important to formalize rights and let the world know the mark is yours. In Wisconsin, trademarks are registered with the Secretary of State for a nominal fee. Protection is effective for ten years, but renewal applications must be received by the Secretary of State within 6 months of the expiration date. Protection of the trademark through the state is limited. Better protection is offered through the U.S Patent and Trademark Office, although the process is more costly and complicated. USPTO protection announces to the whole world that you own the mark and secures protection across the U.S.

Aside from registration, it’s important for your attorney to verify nobody else uses your mark or a mark that is very similar. This is where the real costs of trademarks appear. Good trademark research is not cheap, but as usual, it’s imperative to the protection of your work. You don’t want to start using a mark and build up a customer base only to get sued two years down the line and have to alter your now well-known mark.

As a trademark holder, you have some specific rights. One is the ability to sue for infringement. Infringement means that someone is, in some form or another, interfering with the use of your mark - they are potentially tapping into your customer’s goodwill. In infringement cases, courts usually look at factors such as whether your opponent uses its mark in the same geographical area, if goods/services are similar, and the strength of each mark (uniqueness). Another right is the option to sue for trademark disparagement - basically, another entity is ripping on your trademark and goods/services under that mark through misrepresentations of fact. Finally, you also have the right to remedy trademark dilution should your mark be “famous” (it’s not always clear what constitutes a famous mark) - if a competitor is devaluing your mark by using their own, you might be able to recover damages.
Trademarks, in my personal opinion, are the most valuable intellectual property you can own. Trademarks are signs of quality or experiences that stick in the minds of your customers for a very, very long time - they are marketing at its finest. As a quick experiment in the value of trademarks, think back to your childhood…now, think about places you and your family would eat out…I’ll bet that burger chain is still something you think of fondly…and I will also bet you can recall imagery about that restaurant….and at least some of that imagery contains a trademark, like McDonald’s golden arches. What’s more, trademarks accumulate value of time and that value can be sold with a company - all your years of hard work in customer service can yield volumes of extra cash when a business is finally sold. Trademarks are a worthwhile investment.

I’m working on preparing another set of posts much like my Wisconsin Litigation posts a month ago, only this time, the focus will be intellectual property. Specifically, I plan on covered the basics of trademarks, trade secrets, and a few other areas that any business needs to understand.