Business Formation

As a lawyer representing start-up (or “young”) business clients, one subject always surfaces—web sites.  Web sites touch on many areas in the law, but primarily encompass critical intellectual property rights such as trademark, copyright, and trade secrets.  This article focuses only on protecting three critical areas of IP during the design and development of a business web site. 

The Three Pillars of Protection During the Web Site’s Design and Development Phase 

For many entrepreneurial companies, lawsuits can be fatal.  While the Internet is viewed by many as an open forum that carries little risk of litigation, business resources are far better used reducing the risk of litigation then defending against an expensive and potentially crushing, lawsuit.  With this in mind, a business must focus on three pillars of protection during the web site’s design and development phase-trademark, copyrights, and trade secrets. 

1.    Protecting the Business’ Trademark:  The business’ domain name is arguably one of the most important web site assets.  The domain name, like the business name, must be memorable and identify your goods or services.  Once you have settled on a name, immediately register a domain name that closely matches your business name/trademark.  

a.     Practice Tip 1 - If a web site will be integral to your business, research registered trademarks with the USPTO and the Nevada Secretary of State before you commit to a business name or register a domain name.  Do not commit to a name, or register a domain name, that possibly infringes on existing trademark rights.  Our firm recently encountered this issue with an existing, and very successful, client.  It will take significant time and resources to reach a resolution that satisfies both the client and the third party whose trademark may be infringed.  

b.    Practice Tip 2 - It is advisable to purchase additional domain names the business may not use, but are similar to your trademark.  As an example, if your trademark is “ACME Hardware” you may want to register both www.acmehardware.com and www.acmehardwarestore.com.  This ensures that third parties do not register a similar domain name and dilute your trademark in the future. 

2.    Obtaining Copyrights in the Design and Development of the Web Site: If the individual designing the “look and feel” of your web site or writing its code is an employee of the business, the business is generally considered the copyright holder of the work if the work is created in the course and scope of employment.  If, however, the business retains a third party to design the “look and feel” of your web site or write its code, the parties should execute a “work-for-hire agreement” to ensure the copyrights business is the legal author of the copyright.  

a.     Practice Tip 1- The United States Copyright Act of 1976 enforces work-for-hire agreements if certain prerequisites are met.  If the prerequisites are not met, however, then the business is not the legal author of the work.  Therefore, to hedge against the risk that the agreement is not enforceable under the Copyright Act, all agreements should also contain an appropriate assignment clause assigning all IP rights in the work to the business. 

b.    Practice Tip 2 – If the business hires a third party to design and develop the web site, and the third party utilizes its employees in the design and development, include a warranty in the agreement wherein the third party specifically warrants that all individuals designing and developing the site are employees of the third party, or, in the event they are not employees, the designer/developer has obtained all necessary copyrights in the assigned work.  An indemnity clause should then follow the warranty clause indemnifying the business against any loss resulting from a dispute over the copyright in the work. This protects the business if any individual who designed or developed the site later attempts to claim a copyright in the work. 

3.    Protecting Your Business’ Trade Secrets:  When a business designs and develops a web site, the employees or third parties involved in the process may become privy to a business’ trade secrets and/or confidential information.  Competitors are always looking to obtain this vital intellectual property.  Therefore, the business should take proactive steps to ensure this property is protected. 

a.     Practice Tip 1 – Businesses should have their employees execute an agreement when the employee is hired, or when the third party is retained to provide design and development services (whichever applies).  The agreement should contain appropriate confidentiality clauses, trade secret designation and protection clauses, non-disclosure clauses, and non-compete clauses in order to put the developer/designer on notice of the importance of the information and adequately protect the business’ trade secrets and confidential information. 

b.    Practice Tip 2 – Customer data is a hot-button issue when negotiating web site design and development agreements because the data has extensive value.  If your web site will collect customer data or that data is collected and stored on the web designer/developer’s servers, include an assignment of all rights in the customer data to the business.  Moreover, include appropriate confidentiality and trade secret clauses that will protect the data from being used or disseminated by the developer without the business’ express written permission. 

CONCLUSION 

This Level 1 Audit contains very general, high-level IP protection strategies for the three most important aspects of designing and developing a business web site.  Once the site is operational, a Level 2 Audit should be performed and resulting policies and procedures put in place (Level 2 Audit is not discussed here).  It is important to impress upon business clients that a web site places a business in the legal world of “publishing” and proper legal strategies are essential to protecting the business’ intellectual property assets in the design and development phase.

Matthew Digesti is a partner in The Digesti Law Firm LTP.  He advises a wide variety of entrepreneurial business clients in intellectual property portfolio protection, including extensive Web 2.0 transactions with celebrity athletes and musicians including Kobe Bryant, T-Pain, New Kids on the Block, Paul Oakenfold, the Game, Thalia, Chris Daughtry, and Third Eye Blind.  

- November 7, 2011

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So you have taken your lawyer's advice and formed an LLC, and LTP, or a Corporation?  Now what?  

Forming a business entity is a great idea to protect your personal assets.  Generally speaking, your personal assets such as your car or home are protected from your business creditors once you do form an entity.  That protection, however, is not automatic.  Even if you have formed an entity, you still need to manage your business in a way that provided ongoing protection to your personal assets.  Your entity's liability shield will do you no good if you do not follow several important steps while operating your business.  An example includes proper capitalization.  If you get sued, and you lose, the person suing your company may still be able to go after your personal assets by "piercing the corporate veil."  

In plain English, this means that the person who sued you may go after your personal assets, such as garnishing your wages, if your business was not properly capitalized.  An example would be if you own an online merchandise company.  If you routinely sell $1,000 worth of t-shirts, but you only carry a balance of $5 in your business checking account (and thus could not satisfy a judgment levied against your business), the plaintiff may be able to argue that the Court should allow him to go after your personal wages to satisfy the judgment.  This can absolutely be avoided if you follow these excellent tips from National Litigation's Consultant Review.  This is a must read for any business owner.

1) What Are Your Licensing Requirements? If one of the two choices below applies to your business, you need a business license with Washoe County.  All information on obtaining business licenses can be accessed here.

1. The business location address is in the unincorporated area of Washoe County. An map of the counties can be located here.  
2. The business is mobile and you will be doing business in the unincorporated area of Washoe County. 
   1. If your business is mobile, you will need to keep track of income earned in each jurisdiction in which you hold alicense to    report annual gross receipts. 
   2. Note:  You need a separate business license from each county in which you conduct business. 

2) Get Your Application:  There are 3 ways you can obtain a copy of the Washoe County business license application.

1. In person at of our office location. 
2. By mail by calling our office.
3. Via the internet from this web page.

3) What You Need to Get Your Business Name on File:  

1. If you are incorporated in the State of Nevada, you will need a copy of your Articles of Incorporation and a current list of officers. 
2. If you are using a business name other than your own first & last name, you will need to file a Fictitious Firm Name (DBA) certificate with the Washoe County Clerk at 75 Court Street, Reno, Nevada.  Make sure to include a copy of the filed certificate with your business license application.  The Fictitious Firm name (DBA) Certificate can be found here.    
3. If you are a Corporation doing business under a different name then the corporate name, a Fictitious Firm Name certificate will also be required.

4) Visit the Nevada Department of Taxation:  If you are selling anything, you will need to register with the Nevada Department of Taxation. They are located near the Reno/Sparks Convention Center at 4600 Kietzke Lane, Building L, #235, in Reno. Onde you arrive, they will provide you with a clearance letter that must be included in your business license application. 

5) Visit the Nevada Secretary of State:  All new businesses must register with Nevada Secretary of State’s Office for the Nevada State Business License. You may register with them in 1 of 3 ways.

1. In person at their office in Carson City.  
2. By mail.  
3. Through the Nevada Secretary of State's web site. 

6) Get the Required Federal and State Licenses:  Some businesses require additional licensing, and Washoe County will need proof that you have obtained these licenses when you file for the County’s business license. 

1. A good example is if you practice medicine.  A license from the State Board of Medical Examiners is required to practice medicine and must be obtained before a business license can be issued by Washoe County. If you’re not sure, please check with Washoe County’s main business office to determine if additional licensure and documentation is required. 

7) Make Sure to Follow All the Rules When You Are an Employer: All businesses that have employees must obtain workers compensation from the insurance company of their choice. Keep your policy handy.  Your policy information will be required on the State Industrial Insurance Compliance form contained in the County’s business license application package. 

8) Complete the Business License Application:  Make sure that ALL the forms included in the application package are completed and returned, including the Nevada Business Registration, Personal History (not applicable to corporations), Worker’s Compensation Insurance Compliance (even if you have no employees), and Child Support Compliance forms. Businesses that are operated from the home must also complete a two-part “Home Business Requirements” supplement.

9) Turn in the Application and Supporting Documents:  Most home-based businesses will be finished at this point. However, some are not.  See step 10 below. 

10) Complete the Sign-Offs: If you plan to open a commercial business (run from a storefront), or a non-home based business run from your property (such as horse boarding) you will be required to obtain approval from several County agencies before your license can be issued. The business license office will prepare the sign-off forms for you. 

IT’S IN THE MAIL! Your business license certificate will be mailed to you within 5 working days after you have submitted a complete application with all the required approvals, along with the $75.00 first year fee.  CONGRATULATIONS.  You are licensed!