Legal Questions & Answers

A complete listing of Legal Questions for you and your Business.

Intellectual Property

Q : If I obtain a patent on my invention, does that mean I have the right to make, use and sell my invention?

A : Don't assume that once you obtain your patent, you will then be able to make and sell your invention free and clear. One of the most common misconceptions about obtaining a patent is that it gives you the right to practice your invention. The term "right to practice" refers generally to the right to make, use and sell your invention without impinging on the rights of others. In fact, the only right granted by a patent is the right to exclude. More specifically, a patent provides the right to exclude or prevent others from making, using, selling, or offering for sale your invention in the United States, or importing your invention into the United States. In the case of utility patents, this right to exclude is generally provided for a term of 20 years from the filing of your patent application. For design patents, this right lasts for 14 years from the issuance of your patent.

Q : When should I file my patent application?

A : The question of when to file often depends on whether you're interested in protecting rights exclusively in the U.S., or if you're also interested in attaining foreign protection. To maintain U.S. protection, your patent application must be filed within one year of any public disclosure, sale or offer for sale of your invention.

This one-year U.S. grace period, however, doesn't apply to most other countries. Rather, the rule in most countries is that the patent application must be filed before your invention is made available to the public. Thus, most people will want to ensure that their patent applications are on file before their inventions are disclosed to outsiders. This doesn't mean, though, that you must file your patent application in every country that you want to do business with before your public disclosure. As long as you file your U.S. application before making your invention available to the public, you will still be able to pursue patent protection in most foreign countries if you also file your corresponding foreign application within one year of the U.S. one.

Authors/Attorneys: Catherine J. Holland, J.D.;Vito A. Canuso III, J.D.; Diane M. Reed, J.D.; Sabing H. Lee, J.D.; Andrew I. Kimmel, J.D.; and Wendy K. Peterson, J.D., are practicing attorneys at Knobbe, Martens, Olson & Bear LLP, one of the largest and most well-respected U.S. law firms specializing in IP law. Collaboratively, they are the authors of Intellectual Property , available from Entrepreneur Press.

Business Contracts

Q : In vendor contracts, how can I change the section that states that the contract automatically renews every year?

A : This is easily changed, as is any provision in a pre-printed contract. If there is a section of the contract that is drafted with terms specific to your company, ask that a sentence be added that states that "notwithstanding any other terms in the agreement" (this wording is important), the contract shall terminate after XX years, or automatically renew no more than XX times. If the contract is entirely pre-printed, ask that this be typed onto the pre-printed contract page. Either way, make sure the contract term you want to change is modified in writing within the written contract that you sign.

Q :What are a few of the most important things I need to do when signing a contract?

A : There are some very simple steps you can take that will safeguard your personal assets and give your company an advantage in a contract dispute. First, make sure the signature block at the conclusion of the contract states the full legal name of your company rather than your personal name. Your personal name, as the contract signer, can be written under your signature, but the contract should clearly indicate the full legal name of your company as the entity entering into the contract. To gain the upper hand in contract disputes, make sure every contract you sign has two originals, and keep one of them. Initial every page of both final signed contracts with ink in a color that will not copy well, such as red. This deters anyone from to retyping a section of the contract to benefit one side and presenting the retyped contract as the original.

Author/Attorney: Laura Plimpton has 26 years of experience as a corporate lawyer, business owner and management consultant. She has reviewed or drafted more than 12,000 contracts. She is the author of Business Contracts , available from Entrepreneur Press.

Hiring and Firing

Q : Am I allowed to monitor my employees' e-mail? Do I have to tell them?

A : Employers monitor employees' e-mail for three primary reasons: 1) to prevent/address workplace harassment and discrimination, 2) to prevent disclosure of trade secrets and unfair competition, and 3) to improve employees' performance and productivity. It's important, however, for employers who wish to monitor employee e-mail to diminish the employees' reasonable expectations of privacy in their e-mail. Most courts have recognized that employees naturally have diminished expectations of privacy when they are using employer-provided equipment, such as computers and cell phones. To diminish such expectations, all employers should adopt a policy that states clearly that the employer-provided computers are employer property, are to be used for legitimate business purposes, and that the employer reserves the right to monitor for the reasons stated above.

Q : What's family leave, and am I required to give it?

A : The federal Family and Medical Leave Act (FMLA) is the primary federal statute requiring covered employers--those with 50 or more employees within a 75-mile radius--to provide unpaid leave of up to 12 weeks to eligible employees. Most important, the FMLA states that whenever the family and medical leave requirements under federal and state law differ, the employer must comply with whatever provision provides the greater family leave rights to the employee. The FMLA provides up to 12 weeks per year of leave for: 1) the birth, adoption or foster care placement of a child, 2) the care of a family member with a serious health condition, or 3) the employee's own serious health condition. The leave is unpaid (except when vacation, sick leave or paid time off is used), but employers are required to continue group health benefits during the leave. The employee has the right to return to the same or a comparable position upon the termination of the leave.

A : "serious health condition" includes pregnancy-related disabilities. Specifically, the FMLA's definition of a "serious health condition" includes "any period of incapacity due to pregnancy or pre-natal care." Employers should note that some states, such as California, have separate statutes that require pregnancy disability leave. The FMLA also covers a pregnancy-related disability of an employee's family member.

The FMLA applies to employers with at least 50 employees. Eligible employees are those who: 1) have worked for the employer for more than 12 months before the leave starts, 2) have worked at least 1,250 hours in the 12 months before the leave starts, and 3) work at a location where the employer has at least 50 employees within 75 miles of that location.

Q : What do I do if I want to fire an employee who's not doing his job well?

A: This is a complicated question, the answer to which depends greatly on the circumstances. Communication with employees is critical, and no termination should come as a surprise to an employee. Accordingly, even if the employment is expressly "at-will," it is important to counsel poor performing employees both on their precise performance deficiencies and how they can improve their performance in these areas. Equally important is documenting performance counseling along the way. By following a few simple guidelines, employers can justify termination decisions if and when challenged. Employees also are much less likely to assert claims if they believe that their employer has been fair to them and given them adequate opportunity to improve their performance over time before termination.

Q : What if I have to let an employee go because I can't afford to pay her?

A : Preservation of "at-will" employment relationships provides employers with maximum flexibility in the event of economic downturns. Honesty is usually the best policy, and if an employer truly cannot afford to pay certain employees, it should be straight with the affected employees and not make up reasons for termination. Often, economics may be the easiest way to justify a reduction-in-force. In the event of termination or layoff, employers should, however, ensure that they are not breaking any promises to the affected employees concerning severance payments.

Q : How can I make sure my employees don't reveal my company's trade secrets?

A : Because trade secrets derive their value and legal significance from not being known to competitors, employers must establish reasonable steps to maintain their secrecy. Employees who have been exposed to trade secrets may use them to compete against their former employers when they leave the company. To ward this, employers should consider:

  • Requiring employees to sign nondisclosure agreements
  • Conducting exit interviews for all departing employees
  • Using personal identification codes and passwords for computer accesses
  • Disclosing valuable information only on a need-to-know basis
  • Requiring footers or headers on documents designating qualifying information as "confidential" or "proprietary"
  • Restricting access to facilities
  • Using locked files for hard-copy materials
  • Requiring nondisclosure agreements from all third parties, including customers and consultants
  • Using on-site security

Training employees on the importance of trade secret protection and employee monitoring are also invaluable.

Author/Attorney: Tyler M. Paetkau, a partner at Littler Mendelson, P.C. LLP, is past chair of and advisor to the State Bar of California's Labor and Employment Law Section. He is the author of Hiring and Firing , available from Entrepreneur Press .

Forming a Partnership

Q : What is the difference between a lender and an investor?

A : When you go into business with others, the question of control is always an issue.

The reason is that the timeframe necessary to build a successful business is not always the same as that of the lender who wants his or her money back within a certain period of time. And it's not always the same timeframe as the investor who wants to see multiple returns on his or her investment as quickly as possible. The best approach for the entrepreneur is usually to reinvest all profits back into the business in order to achieve the early growth so important to the later success of the business. The problem is that the lender usually has a security interest in the business's assets and can seize them if the business fails to meet its obligations. On the other hand, an investor may not have that security interest but will likely be looking over the business with a careful eye all the time. The question of control is a serious question to examine before getting involved with either a lender or an investor.

Q : What is the biggest problem in a general partnership?

A : Although it's essential to file the appropriate paperwork to create an LLC or a corporation, a general partnership can be created by no more than a hug or a handshake. In fact, the mere act of working together, even without a formal document, can create the legal relationship. This goes for husband and wife as well as two or more non-related people. The problem is that, in a general partnership, there is joint and several liability. This means that any partner can create monetary obligations for the partnership and all partners will be personally responsible for the entire debt, even if they knew nothing about it. The creditor will usually go after the deepest pockets, in other words, the person with the most money. Be sure you know what each of your partners is doing in order to protect yourself against this problem. Your best protection is to form a legal entity, whether that's an LLC or a corporation. This will eliminate the problem completely.

Q : What is the problem when parents let children take over the business?

A : When you start a business, it's no secret that your corporate bank account is not very large. As a result, most landlords, banks and purveyors of substantial equipment will not accept a corporate signature on their leases, loans and contracts. They will insist on personal signatures and the owners' guarantees. When children take over the business, the owners' signatures are usually still on the original contract. If anything negative happens, these signatures become critical. The parents usually have more assets and money than the children. These assets become vulnerable to people looking for obligations to be paid. Anything for which the parents originally signed--such as a franchise, a loan, an automobile, a printing press, etc.--are fair game, even though Mom or Dad might not have been involved in the business for many years.

To avoid this problem, you should treat the transition to the next generation as much like a sale to a stranger as possible. This way, most creditors, lenders and the like will accept the transfer and respect the transition as a complete change of ownership. If it's a franchise, make sure the corporate stock is legally transferred, have the franchisor accept the transfer and, if necessary, have new franchise documents prepared. If it's a loan, don't allow the next generation to merely adjust, extend or modify it. Get it paid and have your children sign a new loan document for additional credit or time. If necessary, parents may agree to guarantee the loan for a limited time period. If it's a lease, a rental or a purchase contract, make sure new documents are created at the first opportunity.

Author/Attorney : Ira Nottonson serves as a legal consultant and is a Law Review graduate of Boston College Law School. His past clients include House of Pies, IHOP, Orange Julius, PIP Printing and Quickprint. He is the author of Forming a Partnership and co-author of The Small Business Legal Toolkit , both available from Entrepreneur Press .

Small Business Legal Tool Kit (Legal and Tax Issues)

Q : Is my new hire an employee or an independent contractor?

A : To answer your question, you must look at the issue of control. The more control an employer exerts over a worker, the more likely the worker is to be considered an employee. It's a matter of controlling the details of how the job is performed vs. controlling just the results. The IRS looks at the behavioral and financial controls, as well as the relationship between the parties. Behavioral controls include things like the amount of training provided, who directs the sequence of tasks, etc. Financial controls refer to who carries the risk of loss, whether the worker incurs expenses that are not reimbursed and the like. Finally, any contractual relationship between the employer and the worker is examined, as well as whether employmentlike benefits are being provided to the worker. The IRS also considers whether the job performed is a key aspect of the employer's business

Authors/Attorneys: Theresa A. Pickner owns a law practice that specializes in business, taxation and estate planning law. She holds a J.D. and an LL.M. in taxation from the University of Denver. She is the co-author of The Small Business Legal Toolkit , available from Entrepreneur Press .

Ira Nottonson serves as a legal consultant and is a Law Review graduate of Boston College Law School. His past clients include House of Pies, IHOP, Orange Julius, PIP Printing and Quickprint. He is the co-author of The Small Business Legal Toolkit , available from Entrepreneur Press .

Asset Protection

Q : How Can I Protect My Home If A Judgment Is Entered Against Me?

A : Unless you are one of the lucky few who live in Florida or Texas, which have unlimited homestead exemptions, the homestead exemptions in most other states are too small to protect your home. A Qualified Personal Residence Trust ("QPRT") may be the answer. A QPRT is an irrevocable trust that takes title to your home. If a judgment is entered against you, the judgment will not attach to the home because you no longer own it. QPRT's are permitted by the IRS as a way to not only shield a home from creditors but to also reduce estate taxes. A QPRT may be used for a primary residence or a vacation home but not for income-producing real estate.

Q : What happens to my business if I can no longer run it?

A: Maintaining continuity of your business in the event of illness or incapacity can prove difficult. In most cases, unless there is a partner or other key employee who can continue the company in your absence, you'll have to value the business by a professional and offer it for sale.

The problematic aspect of this decision is whether or not you have an equity position that can be sold. For example, a consultant whose business is based on a special expertise may not have anything to sell since an outsider may not be capable of handling the concept. Even if a buyer is qualified, the loyalty relationship between entrepreneur and client may not be easily transferable. You may only have a client list to sell, which requires special negotiation. This also applies to massage therapists, personal chefs, and the like. If your business has more tangible assets such as a retail shop, a small manufacturing business or a restaurant does, the sale could be significantly easier-and profitable.

Authors/Attorney: Robert F. Klueger (J.D.; LL.M.) is an attorney at law for Klueger & Stein, LLP. He is admitted to practice law in California and before the U.S. Tax Court. He is a Certified Tax Law Specialist (State Bar Board of Legal Specialization) and is AV rated by Martindale. He has been practicing law since 1974 and has represented clients against various taxing authorities in all courts, including the United States Supreme Court. He is the author Asset Protection, available from Entrepreneur Press .
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