Monday, August 27, 2012

Specification-Compliance on Public Bid Projects, Part 2.

As discussed in my previous post, it is imperative for companies bidding on public projects to comply with specifications. If they do not, their customers or suppliers will hold them accountable for any oversight. Even if they do comply with specifications, business relationships or a customer's buying power (monopsony power) may cause a careful company to eat the cost of someone else's oversight.

In order for a careful company to cover itself, there are a few things the company should always do on public projects. In many cases, these would come in handy on private projects. First, never simply state that you are specification-compliant. Instead, state exactly the drawings and specifications on which your bid is based. It might get tedious, but to note exactly from which sources you get your bill of material or services can go a long way in protecting yourself in the event of later conflict. It is also prudent to date the drawings and specifications. Sometimes, these can change as a project proceeds.

When an oversight occurs and material or services are omitted from a bid, positively stating that you were only shown X number of drawings and specifications may exonerate you. Of course, if you have all of the specifications, then it is your responsibility to examine all pertinent documents to determine what the requirements are. But if you are in an industry where you typically do not receive everything, it would be prudent to note just what you are receiving. If you do, it puts the onus on either your customer or supplier who did have full access to the specifications.

Second, any time you get approval for a deviation, note it, and to whom you talked. If you can, get it in writing. On public projects, addenda are typically issued that may provide for this. Third, be redundant. Even if something is implicit in an industry, not everyone will see it that way. Again, it may be tedious and time-consuming, but you should not assume something is implied in your bid. You may have a page of notes or exceptions, but it can save you a lot in the long run.

Thursday, August 16, 2012

Introduction to Specification-Compliance in Public Bids Submission.

Most businesspeople are familiar with the process of public bid submission. It is common in most industries. Whether it is in the private or public sector, the company or governmental entity will publish specifications with their requirements for the project. Events in the distribution chain can get Machiavellian. It is not uncommon for companies to award bonuses to project managers who come in underbudget. As a result, not all the requisite information is always transmitted to parties who need it. When it is, or when requirements change or are subject to a differing interpretation from the engineer on the project or the ultimate customer, somebody is left paying the bill.

In today's economic and business climate, public bid projects are increasingly competitive. In the Midwestern United States, such opportunities are not terribly plentiful. On public bid projects, the engineers are the arbiters. Specifications will say a certain thing, but the engineers (in conjunction with the ultimate customers) are the ones who end up determining whether to enforce provisions of a specification. When conflicts arise, the contractors, vendors and other suppliers act as lawyers, arguing for or against the verbiage of a particular provision in the specification. As mentioned, in some cases, not all parties will have received the pertinent specifications. On many large projects, requirements will be found throughout the specifications. This can involve thousands of pages, so it is not too difficult to see why certain requirements are not always met, omitted, or missed completely.

On large projects, mistakes and omissions can bankrupt a company. That is why compliance with specifications is so important. Public jobs are so competitive that if a company does not supply one of their vendors with the specification, the result will be a more competitive price for them to give their customers in the distribution chain. When a conflict over the goods or services to be supplied ensues, everyone is pointing fingers at another party, expecting them to foot the bill. Thus, a company must be vigilant in making sure that their company is protected from unscrupulous and unreasonable customers or suppliers.

Using the legal process is anathema to most small businesses, because resorting to it is like using the nuclear bomb. In one particular situation you may get your way, but you have damaged business relationships and may have cost yourself much more in the long run. If you use the legal process you will almost certainly not be doing business with the party against whom you are using the legal process. In many cases, word-of-mouth makes others in your industry wary of doing business with you, because the fear is that you will take them to court. Of course, there is also the possibility that this word-of-mouth is actual defamation or business interference, in which case you can take further action. It may even go so far as to be a violation of antitrust or competition law.

Industries have developed ways of dealing with these situations without resorting to the legal system. Surely, individual businesses differ. Some companies use their buying power to bully other companies. Some use a cost-benefit analysis and acquiesce in a situation when it appears likely that they will be able to make more money in the long run by extending goodwill to a company who may actually have made the mistake or omission. In my next post, I will discuss tips and pointers for companies to use in dealing with specification-compliance on public bid projects.

Tuesday, August 7, 2012

Introduction to Electronic Commerce.

Some people may believe that a contract is not valid unless signed by hand. "Signed," according to the UCC, "includes using any symbol executed or adopted with present intention to adopt or accept a writing." [1] This includes online contracting, whereby an individual can agree to purchase goods via email or another electronic method. This happens in situations where goods are needed quickly. Sometimes one merchant ships goods to another merchant based on a good faith belief that the other party will pay according to the terms of a given email exchange.

For instance, let's say A Seller deals in widgets. B Buyer needs widgets tomorrow, and sends a high priority email to A asking to ship them immediately. B Buyer may not have time to get a purchase order requisition through his company's purchasing department in time to receive the widgets when B needs them. So, A must rely on B's good faith in entering the online contract with no purchase order or handwritten signature. B's intent is surely to enter a contract, because the characters in his email to A indicate his intention to adopt or accept the terms of A's overnight shipment of widgets to B.

Now, if B were a scoundrel, and wanted to evade any terms of A's good faith shipment without a handwritten signature or formal purchase order, B would not be able to do so. Laws authenticating electronic signatures are ubiquitous in the United States. B would be bound by the terms of the online agreement.

Another example might be the situation where B sends another high priority email to A requesting widgets immediately, and A provides the terms of the transaction, but includes no mention of how long the price is valid. Three months and one day later, B sends a purchase order to A for standard delivery at the price sent over three months earlier. What then? Well, the UCC provides that the price quote would be valid for a "reasonable time," but not to exceed three months. [2] Of course, A could honor the quote if the price has not changed, or has changed a small amount. This would be of A's own volition, however, and not what the law provides.

Generally, the determination of reasonableness of time is a jury question. [3] It depends on the nature, purpose, and circumstances of the action. [4] The court and factfinder would likely look to the express terms of the agreement, as well as what is called "course of performance," "course of dealing," or "usage of trade." [5] A "course of performance" is conduct and behavior of parties to a particular transaction if the parties have an agreement involving repeated occasions for performance by a party, and the other party does not object to the performance of the performing party, or acquiesces to it without objection." [6] A "course of dealing" is conduct and behavior of parties with regard to comparable business transactions before entering the subject agreement. [7] "Usage of trade" is probably the easiest concept to grasp of the three. It is "any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect" to the subject transaction. [8]

Express terms prevail over the three others. [9] Course of performance prevails over course of dealing, because it deals more directly with the conduct and behavior of the two or more parties in their prior business dealings with each other. [10] Course of dealing prevails over usage of trade because it deals directly with the conduct and the behavior of the two or more parties in business dealings, but not with each other. [11] Usage of trade is more consistent with industry or geographic standards that each party assumes the other to implicitly implement into their agreement without having to discuss them. Following these guidelines, the factfinder, or jury, would then determine the duration of "reasonable time," in a particular situation.

[1] UCC 1-201(b)(37).
[2] UCC 2-205.
[3] St. Ansgar Mills, Inc. v. Streit, 613 N.W. 2d  289, 295 (Iowa 2000).
[4] UCC 1-205(a).
[5] UCC 2-202(a).
[6] UCC 1-303(a).
[7] UCC 1-303(b).
[8] UCC 1-303(c).
[9] UCC 1-303(e)(1).
[10] UCC 1-303(e)(2).
[11] UCC 1-303(e)(3)

Thursday, July 12, 2012

Antitrust and Unfair Competition, part 3: Bid Rigging.

Bid rigging occurs when a "commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid." [1] This is sometimes done to meet particular quotas regarding how much business must go through the public bidding process, or as a favor to another party. It is also a type of price fixing among competitors to ensure that the party who is supposed to "win" a contract, in fact wins the contract.

In the public sector context, bid rigging results in harm to the agency seeking the bids, and the public. The agency is harmed because they will receive a higher price than they would through a true competitive bid process. The public is harmed because in the public sector context, they are the taxpayers paying the higher price.

In the private sector context, bid rigging still results in harm to the company seeking bids. It does not affect the public, but it would have an ancillary effect on shareholders of publicly-traded companies. The company would have to pay a higher price to a contractor or vendor for goods or services. This would ultimately lead to lower amounts of cash that could be capitalized and distributed to shareholders. Even if the cost to shareholders would be almost negligible each time the bid rigging occurs, its accumulation would likely have a noticeable impact if it became a part of the company's culture in its purchasing department.

You may or may not have come across an incident of bid rigging in your business dealings. Bid rigging is not necessarily common, but it is not unheard of either. People often try to "team up" with other people in other businesses. Sometimes, the tactics they use in implementing their strategy will run afoul of antitrust law. Technical antitrust violations occur much more frequently than one might initially think. People do not always notice the violations as unethical conduct, because they are helping someone they know. They may not recognize that what they are doing is foreclosing competition from otherwise worthy competitors.

[1] Wikipedia, Bid rigging (last visited July 11, 2012).

Wednesday, July 11, 2012

Antitrust and Unfair Competition, part 2: "Good Ole Boy" Networks.

The essence of "good ole boy" networks is a violation of Section 1 of the Sherman Act. As seen in my last post, Section 1 prohibits concerted action restraining trade. A "good ole boy" network is one governed by a close relationship and a sharing of sensitive business information. The close relationship is one involving nearly exclusive dealing. The sharing of sensitive information involves price dissemination, group boycotts, and other conduct that makes no business sense unless there is reciprocity from the other party.

Section 1 deals with horizontal restraints of trade, among other things. A horizontal restraint of trade is concerted anticompetitive conduct by competitors in the distribution chain in order to eliminate, lessen, prevent or foreclose competition from another competitor or competitors. Examples of horizontal restraints include price fixing, price dissemination, market and customer allocations, and group boycotts and concerted refusals to deal. Within these examples, there are numerous subcategories.

"Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service or commodity only at a fixed price, or maintain market conditions such that the price is maintained at a given level by controlling supply and demand." [1] Price dissemination often results in price fixing. Price dissemination occurs when pricing or sensitive business information is exchanged, resulting in a competitive advantage for one or both of the competitors. Market and customer allocations occur when competitors will allocate customers geographically or demographically, resulting in less competition and higher prices for the consumer. Group boycotts occur when "two or more competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to cease doing business with an actual or potential competitor of the firms conducting the boycott." [2]

"Good ole boy" networks engage in all of the above behavior. They do not do so all the time, but such networks are characterized by barriers to entry such as being part of a specific in-group of like-minded individuals with industry experience and friendships, and the sharing of business information in order to help other members of the network succeed in business. Members of the network will share price information, resulting in price fixing. They will allocate customers and markets so as to not encroach on another member's territory. They will pressure other members to not do business with firms that upset them, or do not conduct business their way. They will also give members of their in-group better prices than they give individuals or businesses outside of their group.

If you are part of a "good ole boy" network, be aware that participation in the above behavior can subject you to criminal liability, as well as civil liability. As mentioned before, civil liability for antitrust violations can result in treble damages, or damages three times the actual amount.

In my next post, I will discuss another horizontal restraint often subsumed within price fixing and price dissemination: bid rigging.

[1] Wikipedia, Price fixing, (last visited July 11, 2012).
[2] Wikipedia, Group boycott, (last visited July 11, 2012).

Tuesday, July 10, 2012

Antitrust and Unfair Competition, part 1.

Antitrust and Unfair Competition Law is one of the most complex legal fields. Unlike many other areas of law that simply apply legal doctrine to a given set of facts (one level of abstraction), Antitrust and Unfair Competition Law applies legal doctrine to economic doctrine, and then to a given set of facts (two levels of abstraction). The frames of reference that affect which economic doctrine to apply are fuzzy with Antitrust Law, because the definition of the relevant market can differ greatly. The definition of the relevant market is of paramount importance when determining whether an entity has "Monopoly Power," under Section 2 of the Sherman Act. Monopoly Power is how much market share a given business entity has. If you define the relevant market improperly, a monopolist might appear to have much less of a market share than they actually do.

Section 2 of the Sherman Act ("Section 2") deals with monopolies. Section 1 of the Sherman Act ("Section 1") deals with concerted action restraining trade. Both are nebulously written. Section 2 merely states that persons who monopolize or attempt to monopolize, or combine or conspire with anyone to monopolize any part of trade or commerce, shall be deemed guilty of a felony. Section 1 states that every contract, combination, trust or otherwise, or conspiracy in restraint of trade is illegal. As with Section 2, Section 1 violators are also guilty of a felony. The Clayton Act allows parties injured through Antitrust Law to bring civil actions. Successful civil actions can receive what is called "treble damages," or three times the amount of actual damages.

Neither Section 1, Section 2, nor the Clayton Act can be read literally, because to do so would prohibit much conduct that is not practically anticompetitive and unethical. For instance, noncompete agreements are legal restraints of trade, and quite reasonable when a former employer has imparted an employee with specialized skills and knowledge at great expense. Scholarship limits in the NCAA are also a legal restraint of trade. It is literally a restraint of trade for Division I Football Bowl Subdivision schools to agree to limit their rosters to 85 scholarship players at a given time. But the Court affords governing bodies like the NCAA deference because of the rules needed for effective competition. [1]

That deference comes in the form of the "Rule of Reason." Some conduct is so blatantly anticompetitive that it is per se illegal, or illegal "on its face." Some conduct is so anticompetitive that it only deserves a "Quick Look." Some conduct is anticompetitive, but must be judged carefully. Such conduct is examined using the Rule of Reason, which is a full balancing test of the anticompetitive behavior, its procompetitive effects, and a determination of which outweighs the other.

Section 2 tends to be less relevant to small businesspersons. Attempted monopolization is a crime, but it requires a "dangerous probability" of achieving monopoly power. Usually a small business would not have a dangerous probability of achieving monopoly power, but it all depends on how the relevant market is defined. In a small enough geographic area, some relatively small businesses might indeed be a monopolist. For instance, a company offering a product that has no suitable comparison within the region may very well have monopoly power, with the biggest indicator being that they can have large profit margins because of a lack of competition. In fact, such a scenario is not all that uncommon. But simply having monopoly power is not the issue. Engaging in monopolizing conduct is when the conduct becomes illegal. Monopolizing conduct is conduct that attempts to maintain or achieve monopoly power through anticompetitive behavior.

The take away from Section 2 is that almost all small businesses would not have monopoly power, unless the geographic definition of the market is small enough. However, monopolizing conduct that attempts to foreclose competition is not nearly as uncommon. Even then, without monopoly power, monopolizing conduct does not lead to attempted monopolization unless there is a dangerous probability of monopolization and the intent to do so.

Section 1 will be discussed in greater depth in my next post.

[1] NCAA v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85 (1984).

Friday, June 15, 2012

Implied Warranties and the Distribution Chain.

Big companies have big legal departments. The purpose of those legal departments is to minimize risk for the company. In large companies that deal in goods, most of them will attempt to disclaim what is called the Implied Warranty of Fitness for a Particular Purpose ("IWFPP"). Usually, a disclaimer of IWFPP will accompany a disclaimer of the Implied Warranty of Merchantability ("IWM") and any express warranties. These generally work, but not always.

IWM can be disclaimed by mentioning "merchantability" in the disclaimer, and it must be conspicuous. Words like "as is" in connection with the purchase contract can be used. Additionally, circumstances such as failure to notice a defect upon inspection or a refusal to inspect, or courses of performance or dealing can also exclude implied warranties. IWFPP can be disclaimed by stating that "[t]here are no warranties which extend beyond the description on the face hereof." [1] IWFPP can also be disclaimed by specific language excluding the IWFPP.

Whether an implied warranty has or has not been disclaimed has real-world consequences. An implied warranty is predicated upon an an unmentioned assumption made by the buyer to which the seller either has or has not taken exception. There are problems if B buyer purchases goods from S seller, and those goods turn out to be defective in a way that incorporates an implied warranty, because either B buyer or S seller are going to have to pay unexpected costs. B buyer will have to pay unexpected costs if S seller has properly excluded implied warranties. S seller will have to pay unexpected costs if S seller has not properly excluded implied warranties.

There are further issues when there is an intermediary company, like a representative or distributor. If the first company in the chain of distribution excludes all implied warranties, the next level of distribution is sometimes hanged out to dry. The goal of the next level of distribution is to sell the product of the company higher up in the distribution chain. As a result, a number of things can happen. The terms and conditions of the original company may not be transmitted that disclaim implied warranties. Express warranties may be made by the lower level of the distribution chain. New implied warranties can also be created.

In the latter two situations, involving express warranties and new implied warranties, the lower level of the distribution chain is exposed to often unreasonable levels of liability. Let us consider a hypothetical involving a large company, A, that has produced a widget. D is a distributor of A's widget, and B buyer purchases the widget. A supplies D with however many widgets that D can sell. D needs to sell A's widgets to make money, and carrying inventory is costly. So D will attempt to sell these as quick as is practicable. A has terms and conditions like all large companies, that disclaim IWM and IWFPP. In D's attempts to sell A's widgets, it is unreasonable to assume that D will not create a new IWFPP.

The elements of IWFPP are: (1) the seller had reason to know of the buyer's particular purpose; (2) the seller had reason to know the buyer was relying on the seller's skill or judgment to furnish suitable goods; and (3) the buyer in fact relied on the seller's skill or judgment to furnish suitable goods. [2] In nearly every case that D sells A's widget, D will have created an IWFPP. A buyer of a good will tell D the purpose for which the good is being purchased. D will direct the buyer to a particular good. Thus is the IWFPP created.

Depending on the relationship between A and A's widgets and D distributor, A may be liable to B buyer. D distributor may have actual, implied or apparent authority, in which case B buyer can sue A. If B buyer sues to recover from A, A would then be able to recoup the amount for which A is liable from D distributor.

In the real-world, this ultimately comes down to an economic analysis. If D distributor made an implied warranty over goods that cost a lot, A may or probably will attempt to recover from D distributor. If D distributor made an implied warranty over goods that do not cost a lot or did not create a lot of legal liability, A probably will not attempt to recover from D distributor.

[1] UCC 2-316(2).
[2] Renze Hybrids, Inc. v. Shell Oil Co., 418 N.W. 2d 634, 637 (Iowa 1988).

Monday, June 11, 2012

Precision with Legal Definitions in F.O.B. Destination.

In my last post, I discussed some of the difficult issues faced by buyers and sellers of goods when those goods are damaged in transit. Basically, if the contract is silent on who bears the risk of loss or damage to the goods in transit, then responsibility for damage to the goods is with the buyer after the seller tenders delivery to the freight carrier. Article 31 of the CISG has comparable rules with some nuances.

I thought it might be useful to delve into the definitions of "receipt" and "tender of delivery." They do not mean the same thing, and are tantamount when examining issues or potential issues with carriage. "Receipt" means taking physical possession of goods. In many cases, delivery will be tendered and the buyer has title or ownership to the goods, yet the buyer will not have physical possession of them.

From a buyer's standpoint, this is not inconsistent with the default rule when goods are to be shipped and the contract is silent on who owns the goods in transit. If A manufacturer sells goods to B buyer, and B buyer takes ownership of the goods after tender of delivery, and the goods are damaged in transit, then B buyer is responsible for replacing the goods. The result is the same when the situation is examined through the F.O.B. concept.

Tender is such performance by the tendering party to render the other party in breach or default if they do not perform. Tender of delivery requires the seller to place and hold conforming goods at the buyer's disposition, as well as give the buyer notification reasonably necessary to enable the buyer to take delivery. Note that it says conforming goods, which are those meeting the obligations of the contract. In other words, the goods are in such condition that the seller has met its legal obligation.

Tender does not require the seller to give physical possession of the goods to the buyer. Delivery requires voluntary transfer of possession. Tender of delivery can mean transfer of physical possession if the parties so contract, but the default rule when a contract is silent demarcates physical possession and delivery.

So, tender of delivery essentially means that the seller must place goods at the buyer's disposition, and a voluntary transfer of possession occurs, but not necessarily physical possession. If contracted-for goods are shipped F.O.B. Origin, then tender of delivery does not mean the same thing as receipt. If the goods are shipped F.O.B. Destination, then tender of delivery does mean the same thing as receipt.

Tuesday, June 5, 2012

The importance of F.O.B. Destination.

If you deal in goods, chances are that you are familiar with the terms "F.O.B. Origin," and "F.O.B. Destination." Alternatively, you may hear the terms, "F.O.B. Factory", "F.O.B. Shipping Point," and "F.O.B. Jobsite." Part 5 of UCC Article 2 deals with tender, delivery, shipment and risk of loss as it pertains to F.O.B. F.O.B. means "Free on Board," although one may also hear it as "Freight on Board." F.O.B. specifies whether the buyer or seller bears the risk of loss to the goods during shipment, and where responsibility is transferred.

In many cases, there is not a breaching party. The seller dutifully tenders the goods to the freight carrier or other method of transit, and the buyer is not aware that the goods may be damaged in transit. If the goods are F.O.B. Origin, the risk of loss or damage to the goods in transit rests with the buyer. If the goods are F.O.B. Destination, the risk of loss or damage to the goods in transit rests with the seller. To the buyer, having goods shipped F.O.B. Destination is a sort of insurance while they are in transit.

People may think this is not fair, and it is not. It is not fair that the buyer of goods who has no control over damage in transit be responsible for paying to replace goods damaged. But this is exactly what happens. It causes enormous problems in business relationships, as the buyers sometimes are so angry that they henceforth avoid doing business with the seller.

Article 2 allows the parties to contract around the default rules for shipment. The circumstances of a case, trade usage or practice, and a course of dealing or performance also allow parties to evade the default rules of Article 2 for shipment. These latter options, however, involve proving the shipment terms in court, which is almost certainly going to ruin business relationships.

If there is a breach by the seller, then the default rules do not apply. The seller cannot deliver damaged goods to the carrier and shift the risk of loss onto the buyer. The issue with this is that the ability to discern whether the seller delivered damaged goods to the transit company is sometimes exceedingly difficult. Unless damage is clearly due to the rigors of transit, a buyer may not be able to tell whether the goods were damaged before or during transit. The resolution of issues like this often comes down to prudent, shrewd or accommodating businesspersons. A prudent seller admits that the goods were damaged when they delivered them to the carrier, especially when there is a future business relationship in the balance. A shrewd or dishonest seller will not admit the goods were damaged, especially when there is not a likely future business relationship in the balance. An accommodating seller will admit their mistake if the goods were damaged, and may accept the risk of loss even if they believe the goods were not damaged when they were delivered to the carrier.

Thursday, May 31, 2012

What is an example of a trade secret?

I have introduced you to the legal definitions and criteria relied on by courts when determining whether information is a trade secret. I have not yet given you a real world example to which to compare the legal criteria.

In 1995, the Seventh Circuit enjoined an employee with confidential information about pricing, marketing and distribution from working with a competing company for a period of time. The employee learned this information and his job skills while in his previous employ and could not help but rely on confidential information in his prospective job. While the employee was eventually allowed to go work for the competing company, the court prevented him from doing so for a reasonable period of time. The court also prohibited the employee from ever divulging any of his previous company's trade secrets. [1]

In determining for how long to grant an injunction, courts never exceed what is "reasonable" under the circumstances. The goal is not to punish wrongdoers, because in many cases there are none. Unless there is a person misappropriating trade secrets in bad faith, both parties may very well believe they are in the right and have legitimate arguments in their favor.

A company will not automatically get an injunction when a former employee with confidential information goes to a competitor. It is not always inevitable that a former employee will divulge trade secrets and rely on them when performing his or her new job.

Trade secrets do not have to be written down, which this example illustrates. While just one example in a body of law, it does help illustrate the sort of information that can be considered a trade secret. In this case: confidential marketing, distribution and pricing information.

PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995).

Wednesday, May 30, 2012

Trade secrets and inventiveness.

As discussed earlier, there are a number of factors that courts examine to determine whether information is a trade secret. Dutifully adhering to these factors is one of the best things a business can do to help in any future litigation involving a trade secret. It is also helpful to have your employees sign a non-disclosure agreement. No factor or non-disclosure agreement is dispositive, however, because the information may be sufficiently general to prevent it from becoming a trade secret.

Courts generally view information learned by employees in two separate classes. "First, an employee may obtain information of a general nature simply by being on the job. An employer would have no reasonable expectation that such information would be treated as a trade secret. An employee is free to use or disclose this type of general information." Second, there is information "which the employer intends to keep secret by, for example, physically hiding it from view or[] . . . requiring confidentiality." [1] The former is not entitled to trade secret protection, but the latter may be.

One can see that a purported trade secret must not be generally known. It must also be economically valuable. But we already knew that. If a trade secret consists of patentable subject matter, it does not need to have the same standard of inventiveness as a patent. [1] Ipso facto, trade secrets need only be in a Goldilocks' Zone -- to steal a term from astrobiology -- between which they must not consist of general information but do not need to be so inventive that a hypothetical patent could be obtained.

Cemen Tech, Inc. v. Three D Industries, LLC, 753 N.W. 2d 1, 7-8 (Iowa 2008).

Friday, May 25, 2012

Is it a sale or lease?

A common mistake that businesspersons who deal in goods may make is to characterize a transaction improperly. At first glance, it would seem that it is easy to delineate what constitutes a sale from what constitutes a lease. If it is a sale, Article 2 will apply. If it is a lease, Article 2A will apply. The line between sales and leases becomes fuzzy when security interests are involved. A sale intended for security occurs when goods are purchased on credit but the seller retains the right to foreclose on the goods if the buyer stops making payments. In such a case, Article 9 also applies.

The "Economic Realities" test offers salient guidance. It posits that a purported lease is actually a sale when the lessor/seller is scheduled to receive the goods back with little or no economically useful life remaining. The UCC goes beyond merely asking whether the putative lessor would receive the goods back with any economically useful life. The UCC does not follow the Economic Realities test, even though the test is subsumed in it.

Article 1 of the UCC distinguishes a lease from a security interest. It defers to the facts of each case. If the lessee/buyer cannot terminate the lease and is obligated to pay for the entire term of it, there is a security interest if: (a) there is no remaining economic life to the goods after the lease expires; (b) the lessee/buyer must renew the lease; or (c) the lessee/buyer has an option to renew the lease for little to no additional payment.

If you lease goods in your business, you should take care to ensure that your leases are not disguised sales. If they are disguised sales and a security interest is created, you would be remiss to not take advantage of Article 9 by perfecting your security interest. Generally, to perfect, it is necessary for the security interest to "attach" and to file a financing statement with the Secretary of State. Generally, a security interest attaches only when it becomes enforceable against the buyer. Perfecting your security interest helps establish priority over other creditors. A perfected security interest has priority over later-in-time perfected security interests. A perfected security interest has priority over unperfected security interests, even those that attached before perfection.

Wednesday, May 23, 2012

Introduction to Commercial Law.

Commercial law is the body of law governing business and commercial transactions. [1] In the United States, the Uniform Commercial Code ("UCC") is indispensable to the discussion of commercial law. All 50 states have enacted some form of the UCC, even if they have made minor changes. The UCC's scope is wide. Article 1 contains general provisions. Article 2 deals with the sale of goods. Article 2A deals with leases. Article 3 deals with negotiable instruments (e.g., checks). Article 4 deals with banks and banking deposits. Article 5 deals with letters of credit. Article 6 deals with bulk transfers and bulk sales. Article 7 covers warehouse receipts, bills of lading and other documents of title. Article 8 deals with investment securities. Article 9 deals with secured transactions.

If one had to say that there is a "most commonly used" article of the UCC, it would likely be Article 2. As mentioned above, Article 2 deals with the sale of goods. For sales of services, the UCC does not apply. When transactions involve goods and services, there are different rules that may be applied, depending on the jurisdiction in which the case is being tried.

The majority approach is the "Predominant Purpose" test, where courts decide whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Article 2 applies. The UCC will apply to the whole transaction, even the services portion. If the predominant purpose is services, then Article 2 does not apply to any part of the transaction. [2]

Another common approach is the "Gravaman of the Action" test. Under this test, the inquiry is whether the source of the complaint is with the goods or services portion of the transaction. If the source of the complaint lies with the goods, then Article 2 applies even if the predominant purpose of the transaction is services rather than goods. If the source of the complaint lies with the services, then Article 2 does not apply even if the predominant purpose of the transaction is goods rather than services. [2]

Outside the United States, the Convention on Contracts for the International Sale of Goods ("CISG") is indispensable to the discussion of commercial law. Its scope is the same as the scope of Article 2 in the U.S. As of August 2010, the CISG had been ratified by 77 countries, including the United States. [3] The CISG applies when there is a sale of goods between contracting states to the CISG, or when the rules of private international law lead to the application of the law of a contracting state to the CISG.

It is also important to note that parties to a contract can often provide for rules differing from those of the UCC and CISG. Very generally, parties of equal bargaining power can vary the terms of the UCC and CISG. If two large businesses contract for a transaction in goods, a general rule is that the parties can input contractual provisions to modify the UCC or CISG. However, if a transaction in goods is between two parties of unequal bargaining power (sometimes the difference in bargaining power must be profound), then generally the UCC or CISG cannot be modified through contracting. Please note that the point of the general rule is that it does not necessarily hold throughout its sphere of application.

Identifying the major players in commercial law is only the tip of the iceberg. It will take many more posts to reveal more of that hypothetical iceberg.

[1] Wikipedia, Commercial Law, (last visited May 23, 2012).
[2] Lynn M. LoPucki, Elizabeth Warren, Daniel Keating, Ronald J. Mann, Commercial Transactions: A Systems Approach, 12 (Aspen Publishers 4th ed. 2009).
[3] Wikipedia, United Nations Convention on Contracts for the International Sale of Goods, (last visited May 23, 2012).

Tuesday, May 22, 2012

Part 2, Introduction to Trademarks.

If you are a businessperson and are confident that you have an inherently distinctive trade name, or have a descriptive trade name but can prove that it has attained secondary meaning, it is imperative that you verify no one else has already registered the mark in the same class with the USPTO. The Trademark Electronic Search System, or TESS, is the starting point for this inquiry. The "Basic Word Mark Search" is the search that all first-time users should utilize. Upon entering the search term in the parameters, there may be several entries indicating that the mark is registered. If you click on an entry, it will show the mark and particulars such as the attorney of record, the class of the mark, and the mark's limitations.

If two or more entities have the same mark, it does not mean that there was a mistake. It does not mean that the USPTO erred in issuing multiple registrations on the same mark. It simply means that the marks are in different classes. For example, "Delta" is a registered mark for a faucet and other bathroom fixtures, a manufacturer of electrical power products, an airline and many more.

Due Diligence, for purposes of a trademark search, includes searching for live and dead marks, and how litigious the mark holders are even if they are not in the same market. "Patent trolls" are individuals or entities that have multiple patents and do not implement them, only surveying the market to sue other companies they feel might be infringing. The results of a particular trademark search might reveal that a company with the same or substantially similar trademark might commonly bring suit against similar and not so similar marks. Even if the suit has little merit, it must be defended. The presence of a "trademark troll" with the same or similar mark can result in a large amount of legal fees.

Due Diligence also includes researching the dead marks and inquiring whether the marks are still used. A "dead" trademark does not mean it is no longer being used. It only means that for one reason or another, the registration was not maintained. This could result from the company making a mistake in the renewal process, the mark being cancelled, or a number of other things. It does not necessarily mean that the mark is no longer being used in commerce.

Search Engines are also powerful tools in determining whether an entity is using a trademark in commerce. There are a multitude of small businesses that do not register or seek to register a mark, but nonetheless conduct business with a particular trade name. They could have common law rights in a particular mark that could not be revealed without using a search engine.

While it is possible for an individual to do their own trademark search to determine whether a prospective trademark would pass muster with the USPTO, an attorney is the most adept at using various methods to determine the risk of litigation when attempting to protect a particular mark.

Monday, May 21, 2012

Introduction to Trademarks.

There are two types of trademark protection: State and Federal. State trademark protection is typically through common law, but many states do have statutes and a registration process. Federal trademark protection is through the Lanham Act in Title 15 of the U.S. Code. Tautologically speaking, state trademark rights only extend to that state's border, whereas federal rights cover the entire United States.

If an entity does not have a mark registered with the United States Patent and Trademark Office ("USPTO") or in the state or states where they do business, there still are remedies likely to be available. Unfair competition laws will be available in any state, and suit can be brought in federal court under the Lanham Act under the provision for "False Designation of Origin." Remedies for violations of state common law trademark rights may also be available.

There are five types of marks: Generic, Descriptive, Suggestive, Arbitrary and Fanciful. "Generic" marks refer to a set of which a particular product is a subset. For example, "Beer" as a trademark for the alcoholic beverage beer would be generic. "Computer" for computers would also be generic. Generic marks are never registrable with the USPTO, and they should never be protected in any state.

"Descriptive" marks are those that describe a quality or characteristic of the goods. Descriptive marks are protectable only when they have attained "secondary meaning." "Secondary meaning" means that there is an association in consumers' minds between a mark and product. If a descriptive mark does not have secondary meaning, it is not protectable. "Suggestive" marks require a degree of imagination in order to determine the product to which a mark refers. There is no description of the product in the trademark, only a suggestion of it. Suggestive marks are inherently distinctive, and protectable without evidence of secondary meaning.

"Arbitrary" marks use common words in new and unique ways. The best example of an arbitrary mark is "Apple" for electronic devices. Arbitrary marks are inherently distinctive and protectable without secondary meaning. "Fanciful" marks are words invented for use as a trademark. They are inherently distinctive and protectable without secondary meaning.

Basically, the more creative a trade name is, the more easily protected or protectable it is as a trademark. If a businessperson or entity comes up with a trade name and it is easy to determine the field or industry in which the business competes, it is probably not a good trademark. If you are a person or business that already has come up with a trade name that happens to be descriptive, you can still have a protectable mark if you can prove that the mark has gained secondary meaning. If you have a generic trade name, it cannot be protected as a trademark.

Friday, May 18, 2012

Part 2, Introduction to Trade Secrets.

In my last post, I discussed what a trade secret was. My succinct definition was that a trade secret is something that must derive actual or potential independent economic value from not being well-known and not easy to figure out without using dishonest means, and must be kept reasonably secret under the circumstances.

To determine whether information is a trade secret, courts consider a variety of factors. Again, courts in different jurisdictions may consider different factors. However, if a state adopted the UTSA, their factors are probably similar to what Iowa uses. First, a court looks at the extent to which the information is known outside of the business. Second, they look at the extent to which it is known by employees and others involved in the business. Third, they look at the extent of measures taken to guard the secrecy of the information. Fourth, they look at the value of the information to the business and its competitors. Fifth, the courts look at the amount of effort or money expended in developing the information. Sixth, they look at the ease or difficulty with which the information could be properly acquired or duplicated by others. [1]

One can see that there are numerous factors that a court examines when determining whether information is protectable as a trade secret. If you are a businessperson and think you may have a trade secret, you may be asking yourself, "how can I get protection for a trade secret?" Well, one cannot get protection for a trade secret, a priori, meaning that one cannot get protection for a trade secret before there is a lawsuit. When one has a valid patent or trademark, that is prima facie evidence of a patent or trademark. As a result, when it comes to the lawsuit, one does not need to prove that it is protectable. With trade secrets, there is a fairly large gamble, because there is no register or process one can go through to prove that they have a trade secret. If one thinks they have a trade secret, they have to treat it as such, and sit back and wait for a misappropriator to come along before they can prove it in court.

It is a gamble, no doubt. It is also cheaper than getting a patent. It all comes down to an economic analysis: If you think your company can make more money in the long-run from keeping your formula, pattern, compilation of data, computer program, device, method, technique, process, or other form or embodiment of economically valuable information secret, then a trade secret may be for you. This assumes that another company will not reverse engineer or otherwise stumble across your secret through proper means. Reverse engineering is a proper means of discovering a trade secret. If you have information that is likely to be discovered in the amount of time it would take for a putative patent to expire, then you would want to go through the patent process. That way you could at least earn fruits from your labor when another company reverse engineers your trade secret.

[1] See Kendall/Hunt Pub'g Co. v. Rowe, 424 N.W. 2d 235, 246 (Iowa 1988).

Thursday, May 17, 2012

Introduction to Trade Secrets.

Forty-six of the 50 states have enacted some form of the Uniform Trade Secrets Act ("UTSA"). The UTSA was written by the Uniform Law Commission in 1979 and amended in 1985. [1] There are a number of Uniform Acts written by the ULC in order to streamline the legal process in the United States. For obvious reasons, there are benefits to having substantially similar laws throughout the states.

There is a tension between the grant of patent rights and a trade secret. Patents must be disclosed while trade secrets must not be. Even if a trade secret is improperly disclosed, once it is out it is out. There is no getting it back. You can sue whomever responsible for damages, but your secret is no longer protected.

The prefatory note to the UTSA explicates this dichotomy. "A valid patent provides a legal monopoly . . . in exchange for public disclosure of an invention. If, however, the courts ultimately decide that the Patent Office improperly issued a patent, an invention will have been disclosed to competitors with no corresponding benefit. In view of the substantial number of patents that are invalidated by the courts, many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection." [2]

Unlike patents which are covered by federal law, trade secrets are protected under state law. States that have enacted the UTSA may have some variations over what they consider a trade secret. They will have case law that has developed independently since their state adopted of the UTSA. Nevertheless, most have the following definition of a trade secret or something substantially similar to it:

A "trade secret" is information including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that: (a) derives actual or potential independent economic value from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use; and (b) is subject to reasonable efforts under the circumstances to maintain its secrecy. [2]

So, there you have it. A trade secret must derive actual or potential independent economic value from not being well-known and not easy to figure out without using dishonest means, and must be kept reasonably secret under the circumstances. As long as they are kept secret, they are theoretically protectable in perpetuity.

When hiring new employees, a small business may be unsure of whether their formula, pattern, compilation, program, device, method, technique or process is legally protectable. Sometimes, they will have an employee sign a nondisclosure agreement to prohibit them from competing after their employment ends. Other times, the employer may just take it on faith that the employee will not surreptitiously steal information or otherwise abscond with valuable company information.

Future posts will include more information on trade secrets and how a business can approach their treatment. They will also cover several other fields of law related to business and commerce.


[1] Wikipedia, Uniform Trade Secrets Act, (last visited May 17, 2012).
[2] University of Pennsylvania Law School, Uniform Trade Secrets Act with 1985 Amendments, (last visited May 17, 2012).