Dec
06

A Trade Secret Is a Trade Secret…. Until It’s Not

Unlike a patent, registered copyright, or registered trademark, all of which are the result of a formal grant by a government agency such as the United States Patent & Trademark Office, a trade secret has no such formal governmental recognition.  Instead, the trade secret owner must take proactive steps to both establish and protect its trade secrets.  To prevail in a trademark misappropriation lawsuit, the trade secret claimant must be able to define the trade secret, explain why it’s a trade secret, and demonstrate the steps it has taken to protect the trade secret from dissemination.

A common mistake in the world of trade secret IP is that many think that simply designating a document as confidential will automatically confer trade secret status on that document and its underlying content.  As discussed in our Nov. 21, 2023 blog entitled “Boosting Enterprise Value Through Trade Secrets,” this understanding is incorrect.

Consider a recent 2023 case out of Texas where the jury concluded that a telecom company acted in bad faith by filing a $23 million trade secret misappropriation lawsuit against a competitor; the court found that the underlying technology was not a trade secret.  Telegistics, Inc. v. Advanced Personal Computing, Inc. d/b/a/ Liquid Networx, no. 2019-15000 in the 190th District Court of Harris County, Texas.  Telegistics alleged that its former employee obtained a copy of Teligistic’s internal Request for Proposal (“RFP”) and used it as the basis for tweaking his new employer’s (Liquid Networx) internal RFP.  That is, the former employee altered the RFP so that it could be used by his new employer.  As such, Liquid Nerworx did not itself spend time and resources developing its own RFP.

Telegistics had made its RFP available to on-line to bidders who were invited to submit responses for Telegistics’ products and services.  The document included a confidentiality notice and information that permitted bidders to submit responses for Telegistic’s telecom products and services.  Telegistics claimed that the RFP was a trade secret.

Defendant Liquid Networx challenged the existence of Teligistic’s alleged trade secrets, claiming the plaintiff had not clearly defined its trade secrets.  Liquid Networx argued that while the source code of Telegistic’s platform, for example, could qualify as a trade secret, the actual output generated by the platform, such as the RFP, was not entitled to trade secret protection just because a confidentiality label was affixed to it.  Unfortunately for it, Telegistics was also unable to demonstrate any reasonable efforts it had made to keep the information it received from bidders confidential once received.

The jury agreed.  Interestingly, the jury went a step further and additionally found that Teligistics acted in bad faith by filing its lawsuit.  Networx is now seeking its attorneys’ fees as a result.

As our earlier blog emphasized, the plaintiff in a trade secret misappropriation lawsuit must at the get-go establish that it does indeed have protectable, definable trade secrets.  Telegistics did not meet this threshold.  Texas, as with almost all of the other fifty states, including Florida, has adopted the Uniform Trade Secrets Act as its statutory trade secret law.  Accordingly, it is highly likely that the same decision would have been reached no matter what jurisdiction the Telegistics case had been brought, namely, that the RFP was not a trade secret.

Take-Home Points.

The “confidential” labelling of a document, without more, will likely be insufficient for converting the confidential document into a trade secret.   Moreover, documents generated automatically by a software program that itself qualifies as a trade secret (e.g., source code and/or object code) may not qualify as a trade secret if other factors are not present.  For example, what steps has the trade secret claimant made to limit the dissemination of the collected information within the organization?

Here are some tips for consideration.

  1. Consider the nature of the document. Is it a general information form or something highly unique to be used in generating a potential economic benefit, e.g., a manufacturing document containing trade secret raw material specifications and which has limited access within the company.
  2. What is the purpose of the document?  Does it contain information about a trade secret (e.g., generally unknown information about a critical raw material component) where the development of the underlying trade secret involved creativity, considerable time, and considerable resources from human resources to financial resources (e.g., R&D spending)?
  3. Is the “confidential” document more of a general information form or a specially developed form?
  4. Is there an economic value that comes from maintaining the document’s confidence?
  5. What steps are taken to keep it from third parties and to limit access to the document within the company?
  6. If it is to be disseminated to third parties, what safeguards are in place to limit the dissemination of the document?
  7. When hiring an employee who has worked for a competitor, consider having the employee sign a document stating that, if he had any access to his/her former employer’s trade secrets, that he/she will not use any such trade secrets in the course of his new employment.  Such a document may help the new employer, if ever accused of trade secret misappropriation, establish that it took reasonable precautions to prevent the “entrance” of any trade secret information belonging to the trade secret claimant into new employer’s business.   This approach could help reduce the amount of any damages award.

 

In conclusion, every business, no matter how small, should be looking into trade secrets as a valuable asset, meaning one which can be monetized and form a part of an IP portfolio.  However, claiming something is a trade secret in a trade secret misappropriation lawsuit does not necessarily make it so as the Telegistics case demonstrates.    Any attorney who commences a trade secret lawsuit on behalf of a client needs to honestly assess whether the alleged trade secret will actually qualify as a trade secret under state statues and case law.   The same also applies where federal trade secret theft claims are involved as under, e.g., the Defend Trade Secrets Act.  Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to conduct a trade secret audit, create appropriate protection systems, etc. or to represent you in trade secret misappropriation matter.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL, THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.


© 2023 by Troy & Schwartz, LLC

 

 

 

 

 

 

 

 

 

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OTHER RECENT POSTS

Mar
10

UNICOLORS, INC. V. HENNES & MAURITZ, LP:  U.S. SUPREME COURT RULES THAT MISTAKES OF LAW DO NOT INVALIDATE A COPYRIGHT REGISTRATION

On Feb. 24, 2022 in a 6 to 3 decision, the U.S. Supreme Court held that mistakes of law – and not only mistakes of fact – could protect copyright infringement lawsuit plaintiffs from losing their copyrights on grounds of inaccurate registrations.  The decision is a win for creators who own registered copyrights.  Remember, since 2019, copyright registration is an absolute requirement for commencing a copyright infringement lawsuit as the result of the Supreme Court’s decision in Fourth Estate Public Benefit Corp. v Wall-Street.com, LLC.

Background of the Lawsuit

In 2020 Unicolor, a fabric design company, sued fashion giant Hennes & Mauritz, LP (H&M) for copyright infringement of Unicolor’ copyrighted 2-dimensional fabric designs.  Unicolor’ registered copyright stemmed from its copyright registration for 31 separate designs allegedly included in the same unit of publication.  The Copyright Office’s regulations governing the submission of applications provides that a single application may cover multiple works only if they were “included in the same unit of publication.” The opportunity to submit multiple works in one application can save the applicant considerable filing fees.  H&M argued that Unicolor had failed this requirement by making some of the designs exclusively available to certain customers while offering the rest to the general public.  That is, the designs were not included in the same unit of publication.

The Relevant Statute

The Copyright Act includes the following statements under section § 411(b):

(1)  A certificate of registration satisfies the requirements of this section and section 412, regardless of whether the certificate contains any inaccurate information, unless—

(A) the inaccurate information was included on the application for copyright registration with knowledge that it was inaccurate; and

(B) the inaccuracy of the information, if known, would have caused the Register of Copyrights to refuse registration.

(2) In any case in which inaccurate information described under paragraph (1) is alleged, the court shall request the Register of Copyrights to advise the court whether the inaccurate information, if known, would have caused the Register of Copyrights to refuse registration.

The Decision

The Unicolor case involves interpretation of § 411(b)(1)(A), commonly referred to as a safe harbor provision.  The District Court determined that because Unicolor did not know when it filed its application that it had failed to satisfy the “single unit of publication” requirement, Unicolor copyright registration remained valid by operation of the safe harbor provision.  The Ninth Circuit disagreed and instead opined that the safe harbor provision only applied to good-faith mistakes of fact, not law.  Unicolor had known the relevant facts surrounding publication of the designs; its knowledge of the law (or lack   thereof) was irrelevant

The U.S. Supreme Court sided with the District Court by holding that 411(b)(1)(A) is applicable to both mistake of law and mistake of fact.  As such, lack of either factual or legal knowledge can be the basis for the application of the statute’s safe harbor provision.

In finding for Unicolor, the Court found that cases decided before § 411(b) was enacted “overwhelmingly” found that inadvertent mistakes in copyright registration did not invalidate copyrights.  The court also referred to the legislative history which suggested that § 411(b) was enacted to make it easier, not more difficult, for nonlawyers to obtain valid copyright registrations.  One of the goals behind the new section was to “improve intellectual property enforcement in the United States and abroad.” H. R. Rep. No. 110–617, p. 20 (2008).  Section 411(b) did so in part by “eliminating loopholes” that could be exploited to block otherwise valid copyrights.

H&R had argued that copyright owners would be allowed to avoid the consequences of an inaccurate application by claiming lack of knowledge.   The Court emphasized that courts need not accept the copyright owner’s claim that it was unaware of the relevant legal requirements.  For example, willful blindness may support a finding of actual knowledge on either the issue of law or fact, triggering the application of 411(b)(1)(B).

The Court’s opinion did not address section 411(b)(1)(B) which states: “the inaccuracy of the information, if known, would have caused the Register of Copyrights to refuse registration.  Section 411(b)(2) makes it clear that any decision concerning the validity of a registered copyright is not made by the court but by the Register of Copyrights.  This step is generally commenced upon the court’s grant of a defendant’s motion to Submit the Matter to the Register of Copyright and then submitting the matter to the Register of Copyrights. Based on Unicolor, the Register of Copyrights should only be involved if the court finds that the copyright registrant had knowledge of the facts and/or law associated with registration’s error(s).    In contrast to registered trademarks and patents, a federal court has no right to invalidate a registered copyright.  It’s up to the Register of Copyrights to determine what impact, if any, the misinformation had on the Copyright Office’s decision to register the copyright to the designated owner in the first place.

Take-Home Points

The decision helps bolster the validity of copyright registrations involving errors made by the applicant.  In the commentator’s opinion, applicants should not automatically assume that all errors are “excusable.”  Nevertheless, it’s still a good idea to ensure that all information presented in copyright registration applications is accurate to start with to prevent a situation where the defendant draws out the case by asserting the registration is invalid.  Also, where an attorney files the application on behalf of the applicant, will the attorney’s error be “excused” for errors of law?

On the other hand, defendants who think they can get away with infringement by trying to invalidate the plaintiff’s registered copyright in a future infringement lawsuit should think twice.  This approach is akin to a shoplifter blaming the retailer for not having shoplifting preventive measures in place.

 

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  WE HOPE IT WAS INFORMATIVE.  HOWEVER, IT IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE!

 

Intellectual property law is a complex area of the law.  Contact us at 305-279-4740 for a complimentary strategy session on protecting your inventions, creative works, brands, and proprietary information through patents, copyrights, trademarks and trade secrets or our litigation services involving intellectual property disputes.   We represent both individuals and business entities.  Our mission is to serve innovators and creators in protecting the fruits of their hard work and ingenuity through our Client Services Creed:  Conscientious, Rigorous, Energic, Empathetic, and Diligent legal services. 

 


© 2022 by Troy & Schwartz, LLC

 

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Feb
22

DON’T LOSE PATENT RIGHTS BY FAILING TO TIMELY FILE A PATENT APPLICATION!

This blog discusses an often-missed fact about the potential impact of pre-patent-application-filing activity on the validity of any resulting patent.  In a nutshell, there is a “statute of limitations” for filing patent applications under certain circumstances.  Patents have been invalidated on the basis of late-application filing.  

On Feb. 10, 2022 in the case of Junker v. Medical Components, Inc., the U.S. Court of Appeals for the Federal Circuit (CAFC) effectively eliminated a bench trial award of $1.2 million to the plaintiff in a patent infringement lawsuit by invalidating the plaintiff’s design patent (Pat. No. D450,839).  The invalidation was not based on theories involving obviousness or novelty.  Instead, the validation was based on a written price quotation for a product incorporating the later patented design.

The CAFC’s opinion does not refer to the lower court’s finding of facts concerning the plaintiff’s lawsuit against the company & the individuals who are merely referred to as the plaintiff’s business partners but who were also defendants in the lawsuit.  The lower court found that these business partners were not credible in their assertions that one of them was actually the inventor of the design in patent no. ’839.  To add insult to injury, it was one of these business partners which corresponded with Boston Scientific, unbeknownst to the plaintiff.  It may be that the lower court’s judge, after hearing and reviewing the evidence, avoided invalidating the design patent because of the unsavory actions of the plaintiff’s business partners on several fronts.

The CAFC’s decision is a cautionary tale to inventors to timely file their patent applications once the invention is ready for patenting to avoid: 1) either not being awarded a patent; or 2) having a granted patent later invalidated.  Under the law pertaining to patent applications filed before  May 16, 2013, a patent claim is invalid under 35 U.S.C. § 102(b) if “the invention was  . . .  on sale in this country, more than one year prior to the date of the application for patent in the United States.”   In Junker, the plaintiff filed his application for a design patent on Feb. 7, 2000. The Boston Scientific quotation was dated Jan. 8, 1999. Under the statute, the plaintiff had until Jan. 8, 2000 to file his patent application if the quotation constituted an offer for sale.

Congress amended § 102 when it acted the America Invents Act (“AIA”).   The amended AIA is applicable to patent applications filed since March 16, 2013.    The Junker patent was thus analyzed under the pre-AIA statute.  In determining if the on-sale bar applies, a court will rely on the underlying factual findings.   The lower court found that the communication sent to Boston Scientific Boston was not a quotation and not an actual offer for sale.

The CAFC focused only on the pre-AIA statute.  Because it concluded the 102b bar applied, the CAFC did not address any of the other appealed issues.  The Junker appellate court’s analysis focused on determining if the January 8, 1999 letter was an offer for sale of the claimed design or merely a quote, as the letter stated three times, signaling the parties were engaged in preliminary negotiations.  In conducting its analysis, the court applied traditional contract law principles involving an offer and acceptance.   Based on the CAFC’s precedent, only an offer which rises to the level of a commercial offer for sale, one which the other party could make into a binding contract by simple acceptance, constitutes an offer for sale under § 102(b).

One of the plaintiff’s business partners had responded through his company Xentek in response to Boston Scientific’s request for a quotation.   As such, the letter with its quotation was not an unsolicited price quotation or invitation to negotiate but a specific offer to Boston Scientific but not by the plaintiff who apparently knew nothing about the offer.  Additionally, the letter did not just include a quote but contained a number of terms typical of a commercial contract because if provided specific shipping conditions and that the shipment will be “FOB (free on board) Athens, Texas.” FOB is a standard contract term where goods shipping is involved to allocate the risks and responsibilities of the buyer and seller with respect to delivery, payment, and loss/damage of the goods.   The letter also included payment terms along with multiple different purchase options for Xentek’s goods where the listed prices were based the number of units ordered.  The court concluded that the detail of the relevant commercial sale terms in the letter establishes that the letter was not merely an invitation to negotiate.  The letter included multiple offers for sale, any one of which Boston Scientific could have simply accepted to bind the parties in a contract.  Additionally, later communications between the two companies used the exact same commercial terms suggesting that Xenex’s original terms were definite and not “suggestions.”

The Junker plaintiff argued that the letter was not an offer for sale but merely a price quotation inviting further negotiation, as the district court had found.   The court did state “[t] word quote is commonly understood as inviting an offer rather than as making one, even when directed to a particular customer.”  However, it opined that the terms of the letter must be considered in their entirety to determine whether an offer was intended, or if it was merely an invitation for an offer or further negotiations.  Here, the quotation went beyond merely providing a quote and included delivery, various ordering options, and payment terms.   Relying on a contracts law treatise which provides that if the quotation contains detailed terms, it may well be deemed an offer, the CAFC invalidated the patent due to the on-sale bar.

Would the same decision have been reached under the A1A had Junker’s design patent been filed after May 16, 2013? The AIA’s amendments to Section 102 for patent applications filed after March 16, 2013 have muddied the waters.  First, the AIA has relocated the statutory bar provisions to a new 35 U.S.C. § 102(a)(1).  Second, it has carried forward the concept of a “grace period” in a new 35 U.S.C. § 102(b).

102(a)(1)  NOVELTY; PRIOR ART

A person shall be entitled to a patent unless: (1) the claimed invention was patented, described, in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention….

102(b) EXCEPTIONS

(1) DISCLOSURES MADE ONE YEAR OR LESS BEFORE THE EFFECTIVE FILING DATE OF THE CLAIMED INVENTION.

(A) the disclosure was made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if: (A) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

(B) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor.

The AIA’s oddly worded 102(a)(1) provision was ostensibly intended to exclude from the statutory bar any prior commercial activity by the inventor that does not place the details of the invention into the public domain.  That’s why the phrase “or otherwise available to the public” was added at least according to the AIA’s legislative history:  to exclude confidential sales or offers to sell an invention from triggering the on-sale bar. Under the pre-A1A statute, case law held that private offers for sale (as in Junker) or private uses or secret processes practiced in the US that result in a product or service that is then made public may be deemed patent-defeating prior art.  To add further confusion, Congress did not expressly define the word “disclosures” in the new Section 102(b) or the relationship of these “disclosures” to Section 102(a)(1)’s patent-barring events.   Congress should have left well enough alone and just modified the original 102(b) statute to explicitly state that confidential sales or offers for sell shall not trigger the on-sale bar.

In fact for now, the Supreme Court and the Federal Circuit have both concluded that Congress had not made that intent sufficiently clear to afford it a legally recognized policy.  In Heisinn Healthcare, S.A. v. Teva Pharmaceuticals USA, Inc., 686 U.S. (2019),  Supreme Court affirmed the CAFC’s conclusion that under Section 102(a)(1), a publicly disclosed commercial sale of an invention by an inventor, even if it does not place the details of the invention into the public domain (i.e., remains confidential), if made more than one year before the effective filing date of a patent.  As such, the disclosure can qualify as invalidating prior art under AIA Section 102(a)(1). Thus, the Heisinn decision arguably resurrects the pre-AIA separation of the statutory bars into two categories: public disclosures (patented, publication, in public use) and commercialization (on sale).

Confusing, isn’t it?  Based on Helsinn, those who are considering filing a patent application in this AIA world should for now assume that any confidential sales activity prior to applying for a patent might not be accorded a safe harbor.   Thus it makes goods sense to file at least a provisional patent application before commencing any such transactions or clearly within a year of commencing any sales activity whether confidential or not.  Prompt disclosure of the invention in at least a provisional patent disclosure is further encouraged considering that patents are now granted to the first inventor to file, another outcome of the AIA.  Moreover, all inventors should proceed cautiously when revealing their invention to anyone by having proper confidentiality agreements in place with language curtailing the providing of any information to any third party without the inventor’s written permission.

As a reminder: 1) the pre-AIA statute remains applicable to all patents granted on applications filed before March 16, 2013; and 2) a patent infringement lawsuit can occur during the lifetime of the granted patent (about 20 years after the filing date or 14 years from the grant date for design patents granted pre-AIA and 15 years post-AIA) and some years thereafter as a result of the patent statute’s 6-year statute of limitations for bringing a lawsuit. The impact of the pre-AIA statute will be around for a while.  As for the AIA statute, perhaps the courts will have a chance to add some clarity around the Helsinn decision in the not-too-distant future.

Take Home Points for Those Contemplating a Patent Application in the AIA World

  • Timely file patent applications to avoid any problems related to attempting to commercialize the invention before actual filing which could be violative of the AIA’s 102(a) and 102(b) provisions for patents resulting from applications filed since March 16, 2013 as the Helsinn decision demonstrates.
  • Ensure that all communications with potential commercialization partners are maintained in confidence and exchanged under the terms of an executed NDA.
  • Don’t broadcast “deals” of a business venture publicly before an application is filed.

 

   THANK YOU FOR YOUR INTEREST IN THIS BLOG.  WE HOPE IT WAS INSTRUCTIVE.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

           Have a question about intellectual property?  Contact us for a complimentary strategy session to determine your best course of action to protect and commercialize the fruits of your hard work, creativity, and innovativeness.


© 2022 by Troy & Schwartz, LLC

 

 

 

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Posted in Intellectual Property Law, Patent Law - Current Issues on February 22,2022 04:02 PM
Jan
11

OUT-OF-STATE CORPORATIONS AND LIMITED LIABILITY COMPANIES TRANSACTING BUSINESS IN FLORIDA – DOES THE ENTITY NEED TO BE REGISTERED TO DO BUSINESS IN FLORIDA?

Several states including Delaware, Wyoming, and Nevada are popular states for incorporation and limited liability company formation for privacy and taxation reasons.  But what if the corporation or LLC will actually be transacting business in Florida and not in its state of incorporation/formation?

Under Florida law, such LLCs or corporations (known as foreign LLCs or corporations, collectively foreign entities) may not transact business in Florida until they obtain a certificate of authority from Florida’s Department of State.  Over the years, I have encountered several foreign entities that have not obtained this certificate even though they were clearly a business operating in Florida.  In one case, the entity could not file an breach of contract lawsuit until it had received its certificate of authority and paid a fine.

Both incorporation and limited liability formation in all states is relatively simple and typically carried out by a non-attorney.   As for Florida, the failure of the foreign corporation to early-on obtain a Florida certificate of authority is generally the result of unfamiliarity with the law by non-lawyers.

According to Florida law, both foreign corporations and limited liability companies must not transact business in Florida until it obtains a certificate of authority from the Department of State.   See §607.1501 of the Florida Corporations Statute and §605.0905 of the Florida Revised LLC Act.   Neither statute provides guidance as to what constitutes “transacting business.” Both statutes do, however, provide a non-exhaustive list of activities which do not constitute “transacting business” such as:

  • holding managers’ meetings or members’ meetings (LLC) or board of directors/shareholders meetings (corporation);
  • maintaining bank accounts;
  • collecting on debts or enforcing mortgages;
  • transacting business in interstate commerce;
  • conducting an isolated transaction that is completed within 30 days and that is not one in the course of repeated transactions of a like nature;
  • owning or controlling a subsidiary corporation or LLC incorporated in or transacting business in Florida;
  • owning real estate or personal property located in Florida that produces no income (the statutes make a specific exception for income-producing property).

As for “transacting business,” the following activities are examples of transactions that likely require registration:

  • Having a physical presence in the state such as a business office, warehouse, or store;
  • Having employees or payroll in Florida;
  • Applying for and obtaining a business license in Florida.

Are there any ramifications if a foreign entity needs a certificate of authority to transact business, but does not get one?  Legally, the entity may not file a lawsuit in a Florida court, and if a lawsuit is filed, the court may stay the proceeding until the unregistered foreign entity obtains a certificate of authority. The unregistered entity may, however, defend the lawsuit. In addition, any contracts executed by the unregistered entity are still valid, notwithstanding the lack of a certificate of authority. By transacting business in Florida without a certificate, the entity is deemed as a matter of law to have appointed the Secretary of State as the company’s agent for service of process.  Finally, the entity is liable to the Secretary of State for civil penalties for each year (or part thereof) that it operates without a certificate of authority.

Practically speaking, an entity that is conducting its business operations within Florida, entering into contracts executed in Florida with other Florida entities or Florida residents, and/or is earning money in Florida from Florida businesses/residents should register the foreign entity in Florida.  Florida banks and financial institutions may also prefer, even require, that the foreign entity be registered as a Florida foreign entity.

The forms for registering a foreign corporation or LLC are relatively straight forward.  Note that you must provide a Certificate of Existence, no more than 90 days old, from the original state of entity formation.  A Florida registered agent is required.  You are also required to list the date that your entity first started transacting business in Florida.  If you have been conducting business as a foreign corporation before obtaining a certificate authority, you may be responsible for any back Florida Corporate Income Tax and a penalty.

If you are registered corporation, you will be subject to Florida Corporate Income Tax based on Florida-specific adjustments for corporations doing business outside of Florida.  LLCs themselves do not pay income taxes, only their members do.  Florida is one of the few states which does not have a state income tax for individuals.  Accordingly, Florida LLC members will not owe state income tax on their LLC earnings.  Some states, but not Florida, impose a separate fee on LLCs for the privilege of doing business in the state.

Finally, note that the foreign corporation or LLC must have a name distinguishable from other companies already registered in Florida.  Otherwise, the registrant will be required to register an alternative name to use within the state for a foreign corporation/LLC Florida qualification action.

              THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL, THE CONTENT IS NOT LEGAL ADVICE & IS PROVIDED SOLELY FOR INFORMATIONAL PURPOSES. 


© 2022 by Troy & Schwartz, LLC

 

 

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Posted in Business Law, New Businesses, Startup Businesses, Uncategorized on January 11,2022 05:01 PM
Oct
11

THE SECOND CIRCUIT’S RECENT DECISION IN HORROR, INC. v. MILLER – FRIDAY THE 13TH 40 YEARS LATER

This September 2021 decision addresses complex aspects of Copyright Law involving both copyright ownership issues and termination rights wherein the Creator of a work can reclaim rights in an originally assigned copyright 35-40 years after the work’s assignment.  The commentator has previously posted blogs discussing the importance of properly categorizing the work’s Creator as a work-for-hire under the Copyright Act.   Failure to do so may result in a situation wherein the plaintiff in a copyright infringement case may actually not be the owner of the registered copyright. Under such circumstances, a copyright infringement case may be dismissed because the plaintiff, as a non-owner, may not have standing to sue for copyright infringement.

The public policy underlying the Copyright Act’s termination right under 17 U.S.C. § 203 is to give Creators a second chance when the work they licensed or sold (assigned) becomes more valuable than anticipated. Improper classification of the Creator also impacts a Creator’s termination rights because the Creator of a work-for-hire cannot invoke a termination right. Disputes over termination rights often turn on an analysis of the nature of the Creator’s relationship to the work.

The defendant in Horror (Victor Miller) was the screenplay writer of the 1980 horror movie “Friday the 13th”.   The screenplay was created for Manny, Inc. which later transferred its copyright in Miller’s screenplay to Georgetown Productions, Inc.  It was Georgetown Productions that registered the screenplay as a work-for-hire.  The rights were later acquired by Horror, Inc.  In 2016, Miller notified both the “first” company which had retained his screenplay writing services decades before and Horror, Inc. that he planned to exercise his termination rights.

Horror filed an action in the U.S. District Court of Connecticut, seeking a declaration that the screenplay was a work-for-hire by an employee and not subject to termination. The district court disagreed with Horror’s position, finding that Miller had instead been an independent contractor and the screenplay did not qualify as a work-for-hire.  Horror appealed. The Second Circuit affirmed the lower court’s decision.

Employment Status Analysis

In arriving at its “independent contractor” conclusion, the Second Circuit discounted the plaintiffs’ position that Miller had been an employee at the time he wrote the screenplay.  The plaintiffs’ argument focused on Miller’s membership in the Writers Guild of America (WGA) at the time he was hired to create the screenplay as grounds for his designation as an employee and the registered work’s classification as a work-for-hire.   Miller’s original agreement with Manny was conducted under a collective bargaining agreement governing WHA’s writers and signatory employers like Manny.

The Second Circuit concluded that Horror wrongly relied on labor law’s framework defining “employee.” Instead, Copyright law controls the analysis; its concept of employment is grounded in the “common law of agency” and serves different purposes from labor law.

The Second Circuit relied on the Supreme Court’s 1989 seminal case of Community for Creative Non-Violence v. Reid where the High Court laid out the scope of employment framework for establishing copyright ownership under 17 U.S.C. § 102.   In discussing CCNV, the Second Circuit noted that “the Copyright Act uses a more restrictive definition of employment” in order to protect authors whereas labor law construes employment broadly “to serve workers and their collective bargaining interests and establishing rights” including safety and pay rights.  Thus, Miller’s membership in the WGA and Manny’s status as a signatory employer to their collective bargaining agreement did not create an employment relationship that converted the screenplay into a work-for-hire.

In determining that Miller was an independent contractor who had the right to terminate Horror’s copyright, the Second Circuit considered CCNV’s enumerated factors for establishing whether the Creator of the work was indeed an employee:

  • Miller’s previous screenwriting employment and graduate degree in theater established his expertise and skill in screenwriting requiring little oversight/direction;
  • Manny, Inc. never provided Miller with typical employment benefits such as health insurance of paid vacation time;
  • Manny, Inc. never withheld or deducted any taxes or social security payments from the two lump sums he received for his screen-writing services.
  • Nothing in Miller’s employment agreement with Manny, Inc. could be construed as granting Manny the right to assign additional projects.
  • Miller was the only person credited as the screenplay writer.

Certain types of commissioned works may also qualify as a work-for-hire under the Copyright Act when the Creator is an independent contractor and not an employee but only if the Creator and the commissioning party have both signed an agreement stating that the work is a work-for-hire. Additionally, the work must fall into one of the Copyright Act’s nine enumerated classifications for this type of work-for-hire.  Screenplays are not one of the enumerated classifications. Here, the agreement between Manny and Miller never specified that the screenplay would be a work-for-hire.  Even if the screenplay would have qualified as one of the enumerated classifications, the absence of the required agreement eliminated any chance of establishing the screenplay as a work-for-hire under the “independent contractor” scenario.

As a result of the Second Circuit’s decision, Miller now has the right to terminate his copyright.  He will presumably try to negotiate a licensing agreement seeking royalties commensurate with the movie franchise’s success.

Comments

Copyrights enjoy a long lifetime but  nobody has a crystal ball.  Parties who are contemplating obtaining the rights to a copyrighted work(s) should consider the money-making potential with the knowledge that the work’s Creator (including his/her estate) could seek to terminate the copyright 35-40 years into the future. Parties who are acquiring the rights as a successor-in-interest should consider the possibility of termination and determine if the work was a bona fide work-for-hire: 1) by an employee; or 2) via a “work for hire” agreement signed by both the Creator/independent contractor and the hiring party for certain classifications of works.   Why?  Because a “true” work-for-hire is not eligible for termination.  On the other hand, independent contractors may not wish to have their work designated as a work-for-hire and instead assign the rights in return for monetary compensation to preserve their termination rights.

As the Horror decision shows, a registration which specifies a work as a work-for-hire does not necessarily make it so. Had this been a copyright infringement lawsuit brought by Horror against another party, chances are that an astute copyright infringement attorney would have challenged Horror’s ownership and standing as the owner of the registered copyright.  Why?  Because the Creator was never an employee.  Nor would the work  have likely qualified as a work-for-hire under the “independent contractor” alternative provided for under the Copyright Act.

Copyright law is complex even though at first blush it appears relatively simple due to the ease of completing a copyright registration application.  However, numerous pitfalls abound for the unwary and even the issuance of a registration does not mean that the registration is absolutely immune from problems as the Horror decision demonstrates.

Copyrights can be extremely valuable intellectual property assets.  Make sure you understand the pitfalls to avoid problems down the road where your ownership may be questioned or the Creator may have the right to exercise termination rights.   Contact us for a complimentary consultation on your copyright matters.

 

WE THANK YOU READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE.  HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE OR AN ATTORNEY-CLIENT RELATIONSHIP.  

 

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Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740

 

 

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