IP-Related Risks As a Growing Concern for Technology and Research and Development Companies

It is not a secret that over the past decade, IP assets have been growing in value and gradually emerging as the most valuable and critical asset class for many companies. This is especially true for companies involved in technology or any aspect of product research and development. Yet, one issue that often remains unaddressed by business enterprises is the IP-related risk. To make sure that their companies remain on track and their IP remains uncompromised and unchallenged, corporate management and boards of directs must take IP risks seriously and create strategies to assess those risks. Quite often IP-related risks depend not only on actions of these companies but those of their competitors, unrelated third parties, government agencies and even illegal operators. As trusted counselors to our clients, we continuously import that all companies that increasingly rely on their IP asset base must create specific protocols to:

  1. Monitor compliance of their employees with internal IP protocols, confidentiality arrangements and trade-secret policies;
  2. Critically review access to the IP-related information and restrict disclosure only to those individuals whose input is critical to creation and development of the relevant IP;
  3. Review confidentiality and non-disclosure protocols and agreements with all independent contractors and third-party vendors;
  4. Review and monitor the IP portfolio with a designated patent counsel to make sure that the existing patents are properly maintained, all maintenance fees are timely paid, and that the newly developed patent applications are adequately protected and prepared so as to not jeopardize the company’s interests and potential patentability of the inventions; and
  5. Closely monitor patent and IP developments in the industry to make sure that the company’s IP is not infringed or stolen by bad actors.

The questions prudent corporate officers must ask themselves is whether they, members of their companies’ boards of directors and advisers will recognize when IP issues arise to the level of board concern. Similarly, members of the boards must ascertain whether their management can deal effectively with the IP issues and whether suitable and experienced advisers have been engaged to advise the management and the boards on these issues.

For more information, please contact us at Gellis Law Group at info@gellisgroup.com or ggellis@gellisgroup.com .

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George A. GellisIP-Related Risks As a Growing Concern for Technology and Research and Development Companies

New Tax Law Implications — Should Small Companies Convert to C-Corporations

There is no question that the most eye-catching aspect of the recently promulgated federal tax reform is the reduction of the new maximum corporate tax rate to 21 percent from the current 35 percent. The new tax legislation became effective January 1, 2018, which means that many small enterprises that have been operating as either limited liability companies or S-corporations are now considering whether to reorganize as C corporations to optimize their taxation. For instance, it is predicted that many technology startup enterprises are going to take advantage of this change in 2018.

As of the beginning of this year, most small enterprises were traditionally structured as pass-through entities (limited liability companies or S corporations), where profits were taxed according to their owners’ personal tax rates. While there is some tax relief in the new legislation for some of those pass-through companies, including a temporary ability to deduct up to 20 percent of income, many enterprises could access the permanent cut by converting to full-blown C corporations.  Notably, however, under the new tax code, enterprises involved in “professional services”, such as legal counsel, financial consulting or freelance design work, do not seem to qualify for this 20 percent pass-through deduction.

We strongly recommend all business owners to consult their accountants and attorneys before converting or taking any tangible steps towards changing your existing legal entity structure. Every entrepreneur and business owner must weigh benefits to their particular business and evaluate potential savings and weigh the desirability of conversion. It is important to remember that C corporations are double taxed–once on the 21 percent preferential rate, and again if and when the owners pay dividends to themselves. This means that as a result of more detailed analysis, it is quite possible that the two levels of tax will make a corporate operation far less advantageous than a partnership for many small entrepreneurs. However, if owners of the company do not intend to pay out dividends and are rather planning to re-invest a majority of profits back into the business as part of a long-term strategy, then it is likely that conversion is a viable option.

If, based on the analysis of accountants and tax professionals, a small business makes a decision to convert into a C corporation, such decision should not be taken lightly. While the immediate process of converting may take less than a week, provided your company is based in a state that allows for “statutory,” or streamlined, conversions, those companies that are formed in New York will need to take several extra legal steps, which are likely to include filing of a set of articles of incorporation with the secretary of state’s office, drafting a series of corporate bylaws, shareholder agreements and election of corporate officers and directors. The newly minted C corporation would also require owners to hold annual board meetings and issue stock certificates.  Legal advisors need to be consulted with regard to legal effects of conversion on the existing company obligations, contracts and agreements with landlords, customers and vendors.

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George A. GellisNew Tax Law Implications — Should Small Companies Convert to C-Corporations

SEC filed its first ICO-related Enforcement Action in the United States

Over the past year, the issue of Initial Coin Offerings came to the forefront of attention of financial institutions and consumers alike. While there have been some developments on this front over the past five months, on September 29, 2017, the SEC filed its first ICO-related enforcement actionSEC v. REcoin Group Foundation, LLCet al., No. 17 Civ. 5725, in the Eastern District of New York. This action seemingly represents the SEC’s first formal enforcement proceeding against an issuer of digital tokens.

As part of the action against Maksim Zaslavskiy and his related companies, the SEC also sought and obtained orders freezing the defendants’ assets. In the complaint related to this case, the SEC alleged that the President and sole owner of the two corporate defendants, fraudulently raised at least $300,000 related to two (2) ICOs, for which no SEC registration statements were filed (nor registration exemption applicable). Tokens issued in the ICOs were purportedly backed by investments in real estate and diamonds.

The SEC alleges, however, that neither company had any significant operations. Specifically, it seems that with respect to REcoin, Mr. Zaslavskiy allegedly claimed that the company was ready to invest the ICO proceeds in real estate, and that REcoin had raised between $2 million and $4 million, while in fact no more than $300,000 was raised. With respect to the second corporate defendant, Diamond Reserve Club, Mr. Zaslaviskiy allegedly marketed “memberships in a club” that invests in diamonds and obtains discounts with product retailers to “skirt the registration requirements of the federal securities laws.”  The complaint alleges that the advertised “‘memberships’ were in all material respects identical to the ownership attributes of purchasing the purported ‘tokens’ or ‘coins,’ which are viewed as securities by the SEC.  Notably, it seems that neither business entity was involved in any business operations aside from soliciting funds.

SEC took the position that the tokens that REcoin and Diamond Reserve Club purported to—but never in fact did—create or sell are in fact securities subject to their jurisdiction.  The SEC further noted that the stated purpose of the tokens sold in each ICO was to acquire assets that “would generate returns for investors stemming from . . . the appreciation in value of the REcoin and Diamond tokens as the Companies’ businesses grew [due] to the managerial efforts of teams of ‘experts’.”

For any of our clients contemplating structuring, marketing, and consummating an ICO, we would like to point out that the SEC gave particular attention in this enforcement action to statements about the ICOs and tokens that appeared in the whitepaper prepared for each ICO and in social media. The SEC treated these statements as subject to Rule 10b-5 and the other anti-fraud standards imposed by the federal securities laws.

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George A. GellisSEC filed its first ICO-related Enforcement Action in the United States

Urgent Alert About New Federal Overtime Rules

As outsourced general counsel to most of our clients, we have to often deal with internal employment matters for our client companies.  Over the past years, overtime-pay related matters have been attracting more and more attention in a range of industries.  Yesterday, on May 18, 2016 the revised Overtime Rules were released by the federal Department of Labor.  The rules raise the minimum salary threshold for employees classified as “exempt” from the overtime pay requirements.  The new rules go into effect on December 1, 2016 and provide, among other requirements, that:

  1. In order to be considered exempt and ineligible for overtime wages under the “white collar” executive and administrative exemptions, most employees will need to be compensated on a salary basis of at least $913.00 per week (or $47,476.00 per year), in addition to the requirement that they perform certain delineated “exempt” duties and responsibilities. It is expected that this amount will be updated on January 1, 2020, and every three years thereafter.  Non-discretionary bonuses, incentives and commissions that are paid quarterly or more frequently can count towards up to ten percent of this salary amount.
  2. For employees to be classified as exempt under the “highly compensated exemption,” employees must actually receive a total annual compensation of at least $134,000.00 per year, and perform at least one exempt duty. If that amount is not actually received, for example because commission earnings were less than expected, an employer may bring the annual compensation to the required minimum within one month after the end of the year.

All employers irrespective of industries should be prepared to comply by December, potentially by raising salaries or by reclassifying employees as eligible for overtime pay (or non-exempt).

If you have any questions or concerns, please contact us.  Our experienced team of attorneys will help you navigate the regulations to ensure that your employees are being properly classified and that your companies are in full compliance with the new Federal requirements.

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George A. GellisUrgent Alert About New Federal Overtime Rules

Happy Holidays!

Wishing our wonderful friends, clients and colleagues a very Merry Christmas and a happy, healty & prosperous New Year!

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Blue Screen PandaHappy Holidays!

Supreme Court decision likely to increase Trademark owners’ costs

The Supreme Court settled a divisive trademark issue in Hana Financial, Inc. v. Hana Bank, et al. The Justices decided that the legal concept of “trademark tacking” should be analyzed by a jury, in the event of a lawsuit, instead of a judge. The decision may not seem important to anyone unfamiliar with “trademark tacking,” but it will likely result in higher litigation costs for any trademark owner who has to protect their registered trademarks in court.

The concept of trademark tacking allows a trademark owner to alter a registered trademark and still keep the legal protection of the original mark. The only requirement is that the new mark must be the “legal equivalent” of the old mark. The test for this determination is that consumers must consider both marks to be indistinguishable. If the new mark meets the standard, it is afforded the legal benefits associated with the original mark. Trademark tacking exists because the Courts realize that trademark owners change their marks to modernize or adjust to market conditions.

The decision in Hana Financial makes sure that the question of what a typical consumer would consider “legal equivalents” is decided by a group of, presumably, typical consumers – the jury. The Supreme Court’s decision seems logical when considered that way. However, the ruling will have several implications for any trademark owner who has to defend a trademark in court. Any lawsuit that involves trademark tacking will now, likely, be more expensive. Matters of law can be decided by the judge at many stages of litigation and do not always require a full trail, which limits the costs and time associated with a lawsuit. Now that trademark tacking is determined by a jury, a full trial with discovery on the matter will be required. A potential unintentional benefit to this increased litigation cost is that fewer trademark tacking cases may be filed altogether. A second big concern for trademark owners is the increased uncertainty associated with jury determinations. A jury consists of a different group of people in every trial. Trying to guess how a hypothetical group of people will decide an issue is much more difficult than guessing how a judge who handles a lot of trademark lawsuits will rule.

The Supreme Court’s decision in this case will not have a direct impact on many people’s lives. However, all trademark owners should be mindful of this when making alterations to trademarks or contemplating litigation.

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George A. GellisSupreme Court decision likely to increase Trademark owners’ costs

Employer updates for the New Year

At the turning of the calendar year, several laws affecting employers’ obligations changed, which are very important for those employers – especially small business owners – to be aware of, and comply with. Three such changes for 2015 include: wage reporting requirements; an increase in New York’s minimum wage; and exemptions from overtime pay for certain employees.

In the final days of 2014, Governor Cuomo signed a bill eliminating the wage notice requirement. Previously, employers were required to notify ­– and receive written acknowledgment from – every employee about their rate of pay, allowances, and pay day, amongst other information. Effective as of the new year, Governor Cuomo’s signature eliminated the Wage Theft Prevention Act’s reporting requirement, so employers need not expend energy and resources on this notification process.

New York also implemented the second stage of a minimum wage increase at the end of 2014. As of December 31, 2014, the minimum wage is $8.75 per hour. A third increase will occur at the end of 2015, raising the minimum wage to $9.00 per hour. The New York Department of Labor has made new posters available at http://www.labor.ny.gov/workerprotection/laborstandards/workprot/MW%20Updates/minimum-wage-update.shtm for publication.

The third change affects the salary minimum for the exemption from overtime pay. The “Executive or Administrative Exemption” exempts certain employees (such as bona fide executive, administrative, professional and outside sale employees) from overtime pay. To qualify for the exemption, an employee’s job duties and salary must meet certain requirements (an executive or administrative job title does not suffice). In New York, as of December 31, 2014, the minimum weekly salary for an employee to qualify for the exemption is $656.25; the federal standard is $455.00.

The change in calendar year generally correlates with implementation of new or amended legislation. It is important for business owners to be aware of these changes to avoid potential regulatory compliance issues.

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George A. GellisEmployer updates for the New Year

Advice for Startup Founders and Employees – Never Sign Agreements You Do Not Understand

Start-up teams are usually composed of young entrepreneurs untrained in legal dealings, particularly in the countless intricacies hidden within stock purchase, stock option and technology transfer agreements. In fact, that’s precisely why they need competent legal counsel.

We encounter an increasing number of start-up teams that run into legal problems because attorneys they chose at the inception of their operations behave merely as vendors of legal services, instead of as trusted advisors. It is well known that large law firms are in a great position to offer tech start-ups a good “bang” for their buck — knowing that start-ups are typically cash starved, large law firms often charge very little money upfront for their standardized multiple-page contracts with the balance of costs due at a later time. This is easy because such services for start-ups are virtually zero-cost – some firms simply reuse templates and recycled documents.

However, when the ink hits the page, the founders and early employees of start-ups are left in the dark as to the true nature of the agreements. Large law firms do not waste time educating clients who are receiving discounted services about the details within the provided agreements. While it is the right of every person to take the risk of signing a document without being fluent in its language, clients should at least be made aware of those risks.

At Gellis Law Group, whether we represent and deal with founders, key employees or consultants, we thoroughly educate our clients on the ins and outs of every document they are about to sign. Even a one-pager is broken down meticulously. This ensures that our start up team clients do not come to the realization years down the line that the founders or investors got everything while they were left with a fraction of the value of their contributions.

Say for example that a key employee was awarded stocks at an agreed-upon price at the founding of a start-up. What he may not know is that, if he is ever terminated or demoted, the company may have the legal right to buy back these shares for a fraction of the original cost – leaving that employee with almost nothing upon his exit. Was he aware that he may not be getting what he signed up for? Not if his attorneys didn’t thoroughly take him through the contract.

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George A. GellisAdvice for Startup Founders and Employees – Never Sign Agreements You Do Not Understand