Category: Levin Ginsburg News

Choice of Business Entity (Part 1)

Congratulations, you have decided to start a new business.  You are going to become an “entrepreneur”, a business owner.  You have put together your business plan, located potential business premises, talked with your advisors, and are ready to get started.

You have talked with an attorney and an accountant and they have advised you to form a “business entity”.  Now you have to decide which one is right for you.  So, what are your choices?  Following are just a few options:

Sole Proprietorship.  You could own and operate the business and not form a separate entity.  This is generally the “simplest” legal way of owning and operating a business.  Other than obtaining the required business licenses, all you need to do is to put an “open for business” sign up and you are ready to go.  The business is owned by only one individual and “dies” when the owner either stops doing business or dies.  The individual owner has unlimited liability for all obligations of the business.

Partnership.  If you have decided to go into business with other owners, you could form a partnership.  There are two kinds of partnerships:  general partnerships and limited partnerships.

In a general partnership, you and your partners will have unlimited liability for acts and obligations of the business, including those incurred by any of the partners in the business.  If you have no agreement, the partnership will be governed solely by the laws regarding partnerships in your state.  Without an agreement, if one partner dies or withdraws, the partnership terminates.

In a limited partnership, there must be at least one general partner who manages the affairs of the partnership and who will be liable for all the acts and obligations of the partnership.  The “limited partners” may not participate in the management of the partnership and are treated as investors.  They will not generally be liable for the acts and obligations of the partnership.  The partnership must file a Certificate of Limited Partnership in the state in which it wishes to organize.

In proprietorships and general partnerships, there can be serious legal consequences to the individual(s) who operate the business.  As pointed out, a sole proprietor, while “King” of the business, has unlimited liability for the obligations of the business.  General partners are entitled to their share of the business income, but also have unlimited liability.  Limited partners may not participate in management, but have limited liability.

So, what can a business owner do to limit his or her liability?

[To be continued, in Part 2, where we will discuss Corporations and LLCs, two of the more preferred ways of operating a business in order to minimize personal liability].

If you are starting a business and have any questions, please contact:

Morris R. Saunders at:

312-368-0100 or msaunders@lgattorneys.com.

Are Your Business E-Mail Messages Legally Compliant?

Overview:

You may have heard of The Can-Spam Act (“Can-Spam”), but if your business engages in email marketing, you must understand the requirements and put processes in place for compliance.  Can-Spam is a federal law that establishes requirements for all outbound commercial messages, regardless of whether they are B to B (business to business) or B to C (business to customer) messages.  The Act also provides recipients the right to have you discontinue your emails to them, which is referred to as an “opt-out” provision.   Finally, it instills high penalties for non-compliance.

Requirements:

The main requirements of Can-Spam are as follows:

  1. Header or subject line information must NOT be misleading.
  2. The subject line must be an accurate descriptor of the content of the message.
  3. Clear and Conspicuous identification that the message is an ad.
  4. Recipients must be provided your address.
  5. You must include an Opt-Out mechanism to avoid future messages.
  6. Opt-out requests must be honored promptly (i.e. within 10 business days).
  7. If you hire another company to handle your e-mail marketing, you are responsible for their compliance with Can-Spam.

Penalties for Non-Compliance:

Each separate email message that does not comply with Can-Spam may be the subject of up to $40,000 or more in penalties, and multiple people may be responsible for violations.  Therefore, both the company whose product or service is being advertised and the marketing company who originated the message may be legally responsible for violations.  In addition to the requirements of Can-Spam, commercial email messages must comply with other laws as well.  For example, if the content is deceptive or misleading information about a product, then the sender may be in violation of the FTC Act and/or other state laws regarding false and deceptive business practices.  Further, impersonation or the unauthorized use of the sender’s computer or system or other such acts are subject to criminal penalties.

Not all commercial messages require compliance with Can-Spam.  Only those messages whose primary purpose is commercial in nature.   For instance, emails to customers concerning their order, or other already agreed-to transaction with your company will avoid the necessity to comply with Can-Spam as they are viewed as relationship or transactional messages.  However, oftentimes a business will send a message that combines elements of transactional or relationship content with commercial content.  At that time, it is important to consult with an attorney for guidance as to whether such a message must comply with Can-Spam or if the message would not fall under the purview of Can-Spam.

If you have any further questions or wish to inquire about our fixed-fee advertising clearance services, please contact:

Natalie A. Remien at:

(312) 368-0100 or nremien@lgattorneys.com.

A Baseless Lawsuit Was Filed Against My Business. Can I Recover My Attorneys’ Fees?

Defending lawsuits is sometimes an unfortunate but necessary part of doing business. Whether the case was quickly dismissed by the court, or whether you won the case after a trial, you and your attorneys knew the case was unfounded from the beginning and yet you had to spend substantial time and money that you could have devoted to your business in order to successfully defeat the case.

Depending on the facts and circumstances and whether the suit was pending in state or federal court, your fees may be recoverable from other side as a sanction for filing a “frivolous” claim against you. However, absent a contract or statute providing otherwise, you will most likely be unable to recover your attorneys’ fees simply because you won your case.

Assuming the suit was filed in Illinois, sanctions may be available. Generally, to recover fees against a party or his or her attorney under either rule, it must be shown that the party and/or his attorney either: (1) failed to reasonably investigate the facts or the law before filing the offending complaint, (2) filed the complaint for the purpose of harassment, delay, or to increase the cost of litigation for the opposing party.  One principal difference between the federal rule and the Illinois rule is that under the federal rule, only an attorney can be monetarily sanctioned based on unwarranted legal contentions. Thus, if the complaint was filed in federal court, while both the attorney and client are responsible for ensuring that the facts contained in the complaints are accurate and complete, only the attorney may be sanctioned for a complaint based on a claim or argument that is not warranted by existing law.  By contrast, under certain circumstances, the Illinois rule permits the court to sanction both the party and his attorney—even if the complaint is found to have been legally (as opposed to factually) unwarranted.

It is important to note that not every meritless case is considered “frivolous” for purposes of recovering attorneys’ fees. The United States Supreme Court has held that an action or claim is frivolous if “it lacks an arguable basis either in law or in fact.” Similarly, the Seventh Circuit Court of Appeals has characterized a filing that is incoherent and lacks a legal basis as “frivolous.” Thus, “frivolous” does not necessarily mean “meritless,” but rather, a frivolous suit lacks a factual or legal basis, and as such, has very little chance of being won.  For this reason, it is recommended that a party wishing to seek sanctions do so at the end of the case, i.e., after the court makes a determination that the claim lacks legal and/or factual merit.

In addition, as the Seventh Circuit Court of Appeals recently determined, whether a case or claim is “frivolous” is not the end of the inquiry. A request for attorneys’ fees may nonetheless be denied where fees that were incurred were “self-inflicted” by, for example, pursuing one strategy over another, or briefing an appeal on the merits rather than filing a motion to dismiss for lack of jurisdiction.

Both the federal rule and the Illinois rule are discretionary and are strictly applied by the courts. As such, sanctions are infrequently granted. Regardless of how and when your litigation was resolved, you and your attorneys should evaluate whether it would be appropriate to seek sanctions, and if so, whether it would be worthwhile from a cost perspective.

If you have any questions regarding a litigation matter you find yourself involved in, please contact:

Katherine A. Grosh at:

(312) 368-0100 or kgrosh@lgattorneys.com


[1]  This article is the first of a three-part series: Part II will address the recovery of attorneys’ fees pursuant to various Illinois statutes, and Part III will address the recovery of attorneys’ fees pursuant to a contract where the dispute is resolved outside of the litigation context.

Keeping your Trade Secrets Safe: The Runaway Employee

How can a business protect its critical information when an employee goes to work for a competitor? Many employers simply assume that if it deems information “confidential,” the law automatically protects it when an employee leaves and goes to work for a competitor.  That’s not necessarily the case.  In order to protect its confidential information, such as intellectual property, information, systems, customer lists, pricing information and the like, an employer must take affirmative steps long before the rogue employee leaves to ensure that its information is protected.  Such information can be protected from disclosure both under Illinois common law and pursuant to the Illinois Trade Secrets Act (“ITSA”).

An employer’s trade secrets, such as its customer lists, are a protectable interest. An employer has a clear and ascertainable right in protecting its trade secrets. To show information is a trade secret under ITSA, an employer must meet two threshold requirements. First, it must show the information was sufficiently secret to provide the employer with a competitive advantage. Second, the employer must show that it took affirmative measures to stop others from acquiring or using the information. Examples of steps employers typically take to keep information confidential include keeping the information under lock and key, limiting computer access, requiring confidentiality agreements, and other employer efforts to advise employees that the information imparted to them must be kept secret. Establishing this second prong is where employers typically fall short.

Where employers have invested substantial time, money, and effort to obtain a secret advantage, the secret should be protected from an employee who obtains it through improper means. Although employees may take general knowledge or information with them that they developed during their employment, they may not take confidential information, including trade secrets. The taking does not have to be a physical taking by actually copying the names. A trade secret can be misappropriated by physical copying or by memorization. Using memorization to rebuild a trade secret does not transform the trade secret from confidential information into non-confidential information. A trade secret can also be obtained through reverse engineering

Whether and how an employer keeps information secret is one of the most important factors when determining whether information is a trade secret. When information is generally known or understood in an industry, even if it is unknown to the public at large, it does not constitute a trade secret. If a business fully discloses information throughout an industry through a catalog or other literature, it is not considered a trade secret. If the information can be readily duplicated without considerable time, effort, or expense, it is not considered a trade secret. If a customer list, for example, is generally available to all employees and the employees are not required to sign confidentiality agreements, the list is likely not considered a trade secret.

By far the most litigation in this area is over whether an employer’s customer list is a confidential trade secret.  Whether customer lists constitute trade secrets largely depends on the facts of each case.  Customer lists and other customer information can be considered a protectable trade secret if the information has been developed by the employer over a number of years at great expense and kept under tight security. However, the same type of information is not protectable where it has not been treated as confidential and secret by the employer, was generally available to other employees and known by persons in the trade, could be easily duplicated by reference to telephone directories or industry publications, and where the customers on such lists did business with more than one company or otherwise changed businesses frequently so that their identities were known to the employer’s competitors.

Illinois courts have found that customer lists do not constitute protectable trade secrets where, for example: a) the particular industry was competitive and customers often dealt with multiple companies; b) the employer had failed to produce sufficient evidence to demonstrate that the customer list was subject to reasonable efforts to protect its secrecy; and c) sufficient efforts had not been taken to maintain the list’s secrecy. To be a protectable trade secret, the employer must demonstrate the information it seeks to protect was sufficiently secret to provide it with a competitive advantage. However, for steps to be deemed sufficient to protect a trade secret, extensive steps must be taken to protect both the electronic and hard copies of the purported trade secret.

For more information regarding the protection of a company’s confidential information, please contact:

Howard L. Teplinsky at:

(312) 368-0100 or hteplinsky@lgattorneys.com

Estate Tax Developments under the New Tax Act – What about Illinois residents?

Under the Tax Cuts and Jobs Act, the new federal estate tax system “exempts” from federal estate tax, all estates under $11.2 million for each decedent, meaning that a married couple could have an estate of $22.4 million and not incur any federal estate taxes. This higher amount means that most estates will not be subject to federal estate tax. These amounts will be subject to increase, based upon increases in the Consumer Price Index; however, the amount “sunsets” after 2026, and the amounts will be reduced by half.  The good news is that many estate plans can be drafted with little regard to federal estate taxes in some states. The bad news is that residents of Illinois are subject to a much lower threshold and may need to examine their estate plans in light of the Illinois thresholds.

Illinois taxes all estates in excess of $4 million AND, if not structured properly, both spouses may not be able to take advantage of the full amount. While federal law generally permits a surviving spouse to “use” any unused exemption amount of their deceased spouse, Illinois does not permit this. For federal tax purposes, if one spouse dies with a $6 million dollar taxable estate, then under some circumstances, the surviving spouse may use his or her own exemption of $11.2 million, plus the “unused” $5.2 million of the deceased spouse.

“Typical” estate planning has often maximized the federal exemption amount on the first spouse to die by putting that into a segregated trust while leaving everything else to the surviving spouse. If you have not looked at your estate planning documents, you should do so immediately. Under the “typical” plan, the surviving spouse is often only entitled to receive income from that segregated trust which holds the maximum federal exemption amount; principal distributions are based upon need. Thus, the surviving spouse may not be able to access principal of the decedent’s estate without establishing a need. And to make matters worse, if that trust holds more than $4 million dollars, then there will be liability for Illinois estate taxes upon the death of the first spouse.

If you have any questions about your estate plan or how federal and Illinois estate taxes affect your estate planning, please call or contact:

Morris Saunders at:

312-368-0100 or msaunders@lgattorneys.com.

 

New York Toy Fair Is Approaching. Are You Legally Prepared?

February 17, 2018 is fast approaching.  Anyone who is anyone in the toy industry will be at Javits Convention Center showcasing the latest and greatest in toy innovation.  All businesses in the toy industry are putting the final touches on their displays and their presentations.  Is a meeting with the company’s lawyer on the pre-show checklist?  If not, why not?

Consulting with the Company’s lawyer may save a company tens, even hundreds of thousands of dollars.  The following is a short discussion of some of the items that should be on every toy company’s “To-Do” list prior to attending Day One of the New York Toy Fair.

  1. Intellectual Property.

At the very least, the company should consider applying for a trademark registration for the name of the company and its products.  Unfortunately, the number one thing most companies forget or ignore until there is a legal battle ensuing is to properly protect the Company’s intellectual property, such as its name and the names of its products.  Trademarks for product names are fairly inexpensive to search and protect, and yet, may cost a company dearly if those names were to become the subject of a cease and desist letter and resulting federal court infringement litigation.  We defended a toy manufacturer in a trademark infringement lawsuit that allegedly infringed a competitor’s trademark.  After two years and in excess of $50,000 in legal fees (pretty inexpensive in trademark dispute litigation) the matter was resolved.  Consulting with counsel and filing the appropriate trademark applications could have avoided the huge waste of time and expense.

Another form of legal protection often overlooked is copyright for the toy’s design.   If the design meets the requirements of a sculptural work, such as a plush toy design, then copyright can be a powerful tool in locking out your competition from the use of designs that are “substantially similar”.  Prior to any trade show, toy companies must identify and protect its intellectual property, or risk the very goodwill of the company.  Intellectual property can give a company significant value.

  1. Privacy and Security.

Toy companies, like all companies, must take steps to protect the data of the company, minimize the risk of a breach, and put in place technological and legal measures designed to decrease liability in the event a breach does occur.  A comprehensive privacy program including but not limited to updated privacy notices, terms and conditions, internal policies, incident response plans and insurance coverage all geared toward reducing risk of legal liability is imperative if the company is to survive.  If the toys being showcased are “smart” or “connected” toys, privacy and security issues involving the Internet of Things will be at the forefront of manufacturers’, retailers’, and consumers’ minds.  Retailers seeking to avoid liability undoubtedly will have questions as to how the software works, what, if any, personally identifiable data is collected, how is it being stored, retained and destroyed.  Additionally, if a third party vendor will be used to provide software for a smart or connected toy, the company must seek counsel knowledgeable in privacy and security in order to reduce legal risk to the company that may result from the use of such software.

  1. Labeling / Advertising.

Federal law requires product packaging and certain advertisements for toys and games intended for use by children 12 years of age and under to display cautionary statements regarding choking and other hazards.  Safety related labeling and advertising for toys generally depends upon the category of toy and the age of the child for which the toy is intended.  It is imperative that toy companies be familiar with these laws and engage counsel who is familiar.

For more information, please contact:

Natalie A. Remien at:

(312) 368-0100 or nremien@lgattorneys.com.

Is Your Business BIPA Compliant?

In order to increase productivity and efficiency, businesses are increasingly using biometric data to identify employees, customers and other individuals.  For example, some employers use biometric data to identify their employees and track work hours for purposes of compensation.   Biometric information includes fingerprints, retina scans, facial scans, hand scans, or other identifiers that are biologically unique to a particular person.   While convenient, and seemingly secure, such biometric identification methods raise serious privacy concerns.  The Illinois Biometric Information Privacy Act, 740 ILCS 14, et seq. (“BIPA”), imposes many requirements concerning the collection, use, storage, and destruction of biometric information with which businesses, including employers, must comply, or risk liability.

Under BIPA, before an Illinois business collects, stores, or uses biometric identifiers, it must develop a written policy and make the policy available to the public.  The policy must include a retention schedule describing how long such data will be stored, and provide guidelines for its destruction when the reason for the original collection of the data no longer exists, such as when an employee resigns.  Additionally, Illinois businesses must describe and adhere to a destruction schedule for biometric information that it is no longer using.  If no schedule is provided, then BIPA requires that a business destroy such information within three years of the individual’s last interaction with the business.

In addition to the required written policy, Illinois businesses must obtain consent and a written release from an individual prior to collecting biometric information.  BIPA is currently one of the strictest state statutes regarding the collection, retention, storage and use of biometric information.  Before biometric information may be collected, all Illinois private entities must (1) inform the individual in writing that a biometric identifier is being collected or stored, (2) inform the individual in writing of the specific purpose and length of time for which the biometric identifier is being collected, stored and used, and (3) receive a written release executed by the individual assenting to the collection, storage and use of a biometric identifier.  Absent a court order or law enforcement directive, businesses may not share biometric information without express consent from the individual.

Illinois businesses that utilize biometric identifiers but do not comply with BIPA may face severe consequences. BIPA provides that individuals may bring an action against a business that negligently or intentionally violates a provision of BIPA.  If the claim is for negligence, the business may be liable for damages up to $1,000 per violation, and if the claim is for an intentional violation of BIPA, the business may be liable for damages up to $5,000 per violation.  Damages in either category may be higher if actual damages exceed these numbers.  An aggrieved party may also receive attorneys’ fees and costs, an injunction, and other relief.

Recently, privacy-related claims are on the rise as a result of BIPA.  Since mid-2017, over 25 lawsuits have been filed in Illinois alleging violations of BIPA.  The majority of the cases are class action lawsuits by employees claiming violations of BIPA relating to employee time clock technology that uses an employee’s fingerprint as a means of identification.  Time will only tell whether employers will spend the additional resources necessary to comply with BIPA, or choose to avoid the use of biometric identifiers and information altogether.

For more information regarding BIPA compliance and other privacy issues, please contact:

Natalie A. Remien at:

(312) 368-0100 or nremien@lgattorneys.com.

Updates to Construction Contracts

As is its custom every ten years, the American Institute of Architects (AIA) has released updated versions of many of its industry standard construction documents commonly used by owners, architects and contractors.  The A101 (Standard Form of Agreement between Owner and Contractor) and A201 (General Conditions of the Contract of Construction) – which constitute the most commonly used owner/contractor construction forms – contain a number of notable changes.  Some of the more important substantive changes that owners and contractors will need to consider are as follows:

  • Owner Termination for Convenience – The 2007 A101 and 2007 A201 provided that if an owner terminates the contractor for convenience (as opposed to a termination on account of the contractor’s default), than the contractor may recoup projected overhead and profit for anticipated work that had not yet been performed as of the termination date.  The 2017 versions contemplates a stipulated termination fee which will need to be negotiated by the parties.
  • Owner Financial Information – The 2017 A201 version has provided the contractor the express right to refuse to proceed with the work or stop work in progress if the owner fails to provide reasonable evidence that the owner has made sufficient financial arrangements to fulfill its payment obligations under the contract.
  • Warranties – The 2017 A201 version now provides that all warranties issued in connection with the work, such as warranties from material or equipment providers, must be issued in the name of the owner or provide that they are transferable to the owner.
  • Owner/Contractor Communications – The 2007 A201 stated that owners and contractors shall “endeavor” to communicate through Architect.  The 2017 version now contemplates that owners and contractors will communicate directly and will keep the architect informed of the nature and substance of those communications.
  • Minor Changes in the Work – The 2007 A201 provided that the architect may order minor changes in the work that do not adjust the contract sum or contract time.  The 2017 revisions now incorporate a mechanism for the contractor to register its objections to the architect’s proposed changes and the right not to proceed with the changed work until the objection is resolved.
  • Lien Waivers – Subcontractor and supplier lien waivers now must be included in each draw request.
  • Contractor Lien Indemnification – The 2017 A201 now provides that so long as the owner has funded its payment obligations, the contractor must indemnify the owner for lien claims and other claims for non-payment by such contractor’s subcontractors or suppliers.

Many of these changes are intended to approximate the types of modifications that owners and contractors negotiate when entering into construction contracts using the AIA forms.  Nevertheless, it is important for the parties to take note of these provisions when using the forms without specific consideration of these issues.

For further information regarding construction contracts and the construction process, please contact:

Jeffrey M. Galkin at:

312-368-0100 or jgalkin@lgattorneys.com.

Trademarks for Apps

If you are a typical person today, you’ve likely used at least three different apps before 9 am.  You get up in the morning and click on your weather app of choice to figure out what to wear and whether to take your umbrella.  Then you grab an UBER® to get to the office and during the ride, you order your coffee so it is ready for you as you breeze through the building on the way to the elevator.  No sense in waiting for the coffee, as this is a needless waste of time.  With more and more people relying on apps, app design, branding, marketing, and protection are more important than ever.

The number of mobile apps is exploding. In June 2016, Apple® reported approximately 2,000,000 total apps in its app store.  By May 2017, that number had increased by approximately 200,000.  Mobile apps may be discussed in three categories – mobile web apps that enhance web browsing, apps that offer users a new service not previously available via a smart phone, and traditional brands whose business is widely known (such as WALGREENS®).  With all of the competition in the marketplace, companies must consider how to protect their app brand as a trademark, before it launches the new app into the marketplace.

To be “protectable” as a U.S. trademark, an app must have a few key characteristics.  First, consider the name of the app.  Does it describe a feature or function of the app?  If so, the owner may want to reconsider, as the U.S. Patent & Trademark Office typically does not allow registration of descriptive marks.  Instead, the owner of the app will need to come up with a name that is either merely suggestive of the service the app provides or is arbitrary.  Arbitrary names of apps are those that do not describe or suggest anything about the app.  APPLE® itself is a good example of an arbitrary trademark, as APPLE® is a trademark for computers, pads, phones and other goods and services, all having nothing to do with fruit.  Suggestive trademarks may be the happy medium where the function of the app is not outwardly described, but the app name hints at the meaning.  For example, ENLIGHT® is a photo editor app and would be considered suggestive because it suggests something about photo editing but does not describe it.

In considering the name of the app, owners will also want to pay attention to the color and icon they will use with the app.  Will these elements convey a unique design that may lend itself to trademark protection?  While color is sometimes not claimed as part of a design trademark in the trademark application or emphasized in a typical enforcement setting, in the app setting it is important to claim color, as it is one mechanism to set the app apart from others.

Registration of an app name and design provides many benefits.  The most important benefit is having the presumption that the owner has the right to use the name, design, and color of the app nationwide over all others, subject to certain exceptions.  Another important benefit is that when the app name or design (or both) is a registered trademark, all others are put on notice of the owner’s rights.  That is, all others are held to know about the registered app, even if they did not actually know about it.  Finally, federally registered trademarks may obtain relief from an infringer without a lawsuit.  If the owner simply wants the infringer to stop using the confusingly similar name, design and/or color scheme, the owner need only submit proof to the marketplace on which the app is available, and the marketplace, such as the Apple® App Store, will assist in removing the infringing app.

For further inquiries pertaining to apps and trademark protection and related questions regarding your intellectual property, please contact:

Natalie A. Remien at:

312.368.0100 or nremien@lgattorneys.com.

*UBER®, WALGREENS®, APPLE®, and ENLIGHT® are all registered trademarks of their respective owners.

(Please note that we are not endorsing any products or services mentioned in this blog).

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