Intellectual Property: A Peloton Story

Most people know Peloton because of their flashy and controversial ads, as well as for revolutionizing the indoor cycling industry. However, as Peloton forges forward in the competitive fitness equipment industry and fights to keep its stock price above its IPO level, they have also been litigating trademark and copyright claims. Recently, a Federal District Court ruled in favor of Peloton in the trademark matter, which means, for now, Peloton will be able to retain its name.

In the case, Move Press, LLC v. Peloton Interactive, Inc., Move Press claimed that Peloton was infringing on their trademark rights because Move Press has a cycling publication named Peloton Magazine. Move Press had registered this trademark with the United States Patent and Trademark Office, and its use of the mark clearly preceded the use by Peloton. However, Move Press did not file the claim against Peloton for well over four years. As a result, Peloton argued that this claim was barred under an equitable legal theory known as laches, which means that Move Press waited an unreasonable period of time to bring the claim. Peloton had to argue laches, as opposed to a statute of limitations, because the Lanham Act, which governs registered trademarks, does not have a statute of limitations. The Federal District Court, after undergoing a rigorous review of the elements in the laches defense, ruled in favor of Peloton.

Had Move Press timely made the claim against Peloton, the result would have likely been in favor of Move Press and the public would know Peloton as something different. For business owners, this raises two important points. The first is that every registered trademark owner has an obligation to police their marks and, should they find someone infringing on their mark, timely bring a claim. The second is that a business, when selecting its name, branding a new product, or re-branding, should review its rights in the marks prior to making a significant marketing investment.

VW Contributor: Alex Rainville
© 2019 Vandenack Weaver LLC
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Copyright Ownership when Using Independent Contractors and Service Providers

Businesses often utilize a third-party for services, especially when directly employing someone to perform the task will not add value to the organization. By way of example, it is common practice for a business to hire a freelance photographer, a marketing company to write advertising copy, or an independent contractor to write specific policies and procedures. For many, the business needs require the decision maker move fast and little consideration is given the intellectual property rights. Unfortunately, this can lead to a number of challenges for both the business and the independent contractor.

Generally, when a business hires an independent contractor, the ownership of the creative work belongs to the hiring business. That means the independent contractor is unable to use the work that they actually created without the permission of the business. By way of example, a freelance photographer is infringing on the businesses copyright ownership when posting the photo they took on behalf of the business to their personal portfolio website. Conversely, if the agreement between the business and the independent contractor provides that the independent contractor will have ownership rights, the business may be limited in how they can use the work that they specifically hired the independent contractor to complete. Even more complicated is when no written agreement exists at all or if the business is operating in certain states that have rules that alter the ownership analysis.

To avoid intellectual property disputes that arise from hiring independent contractors, a business should ensure that they have an agreement in place with each independent contractor. The agreement should address ownership and, in many of the more complex business relationships, ensure that the licensing adequately protects the interests of both parties.

VW Contributor: Alex Rainville
© 2019 Vandenack Weaver LLC
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Copyright Infringement: Will Congress Make it Easier to Obtain a Remedy?

On October 22, 2019, the United States House of Representatives passed H.R. 2426, The Copyright Alternative in Small-Claims Enforcement Act of 2019. The intent of the legislation is to make it easier for copyright owners to seek enforcement of their rights in situations where the overall damages to the copyright owner are minimal. Essentially, the Copyright Office would create a Copyright Claims Board that would adjudicate infringement claims with damages under $30,000.

The rationale behind the legislation is that cost is a significant impediment to a copyright holder bringing a claim against someone infringing on their work. To bring a claim, as recently determined by the United States Supreme Court, the underlying work must be registered with the United States Copyright Office, which takes time and includes certain expenses. Once registered, the copyright owner can only seek a remedy in federal court, since that is the exclusive jurisdiction for a copyright infringement claim. This process is expensive and, although attorney’s fees can be recovered pursuant to section 505 of the Copyright Act, the United States Supreme Court has also recently limited the scope of recovery. The end result is that many copyright owners are unable to seek a remedy.

This legislation passed with near unanimous support in the United States House of Representatives and moves to the United States Senate for consideration. Should this legislation ultimately become law, it will likely have a significant impact on how copyright owners protect their intellectual property.

VW Contributor: Alex B. Rainville
© 2019 Vandenack Weaver LLC
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U.S. Supreme Court Expands Rights of States to Collect Tax on Internet Transactions

by James S. Pieper

Since the dawn of the Internet, online sellers have benefited from a line of United States Supreme Court precedent that prevented states from requiring out-of-state businesses to collect and remit sales tax on sales in states where the seller has no “physical presence.”

On June 21, 2018, the Court discarded its longstanding “physical presence” test, thus opening the door for state governments to impose a broader range of duties on remote sellers, including the duty to collect and remit sales tax.

In South Dakota v. Wayfair, Inc., South Dakota sought to defend its statute that imposed a duty on all retailers with more than $100,000 of sales or 200 transactions within the state to collect sales tax on transactions and remit the tax to the state.  For retailers with no physical presence in the state, the statute was clearly in violation of the historic interpretation of the Commerce Clause of the United States Constitution, which limits the ability of states to regulate “interstate commerce” unless there is a “substantial nexus” between the state’s interests and the commercial activity.

Prior court decisions concluded that a state could have no “substantial nexus” with a seller that had no “physical presence” in said state.  As a result, online sellers with no “brick-and-mortar” presence or employees working in a state were free from the obligation to collect tax on their sales.

In South Dakota v. Wayfair, the Court rejected its prior interpretations of the Commerce Clause and held that a “substantial nexus” could be created by online sales alone despite the lack of “physical presence.”  The decision was decided with a bare 5-4 majority.

As a practical matter, the majority of online sales already entail the collection of sales tax due to either requirements that were valid under prior law or voluntary compliance by larger online retailers (including amazon.com).  Some retailers with no physical stores, however, will lose the advantage of being able to undertake transactions without collecting tax (including the respondents in the case, wayfair.com, overstock.com and newegg.com).

It will be up to each state to set the parameters of which remote sellers might be exempt from collecting tax due to a lack of significant sales, and the Court did not set a constitutional standard for what level of sales would constitute a sufficient “substantial nexus” to allow a state to impose duties (only that South Dakota’s standards were more than sufficient).

Perhaps more importantly, by jettisoning the “physical presence” standard as inappropriate in an era of “substantial virtual connections,” the Court has raised the prospect of greater opportunity for individual states to tax and regulate the actions of businesses whose only connection to said state is via online presence.

All businesses that connect with customers in other states via online connections will need to have heightened awareness that state tax and regulatory requirements in those other states may now apply to those interactions due to the Court’s new reading of the scope of a state’s authority under the Commerce Clause.

© 2018 Vandenack Weaver LLC
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IRS Adopts Simplified Form for Small Nonprofits

By James Pieper

The Internal Revenue Service (IRS) has adopted a new, shorter online form for small charitable organizations seeking nonprofit status.

The Form 1023-EZ reduces the existing 26-page form to three pages for qualifying groups.  Organizations with gross receipts of $50,000 or less and assets of $250,000 or less will be able to use the streamlined process.

In a media release, IRS Commissioner John Koskinen stated: “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well. The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new form can only be completed online and will help the IRS clear its backlog of more than 60,000 pending nonprofit applications.

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A Business Entity on the Rise: The Public Benefit Corporation

Until recently, many entrepreneurs were struggling to use their businesses to create a positive social change, mainly because traditional corporate laws require a corporation’s purpose to focus on maximizing shareholder value. However, the public benefit corporation is a newer business structure that is legally required to consider how its decisions will affect the general public, in addition to how its decisions will maximize shareholder profits. Thus, public benefit corporations can serve the best interests of society while creating value for stockholders.

Approximately thirty-two states recognize benefit corporations. In 2013, Delaware adopted legislation that recognizes the public benefit corporation as an entity and it is currently one of the most popular states for incorporation. Delaware corporation laws require a public benefit corporation to have the corporate purpose of operating in a responsible and sustainable manner. Further, the benefit corporation must identify one or more public benefit purposes. Last, Delaware benefit corporations must report biennially to shareholders about the corporation’s overall impact on the shareholders’ financial interests and on the interest of those identified in the public benefit corporate purpose.

In 2014, Nebraska joined the ranks of the other states that recognize benefit corporations as a legal entity. Nebraska benefit corporations have the purpose of creating general public benefits and may also have specific public benefit purposes, such as the purpose of promoting the arts and sciences. Additionally, the benefit corporation must prepare an annual report for the corporation’s shareholders that identifies the ways in which the benefit corporation pursued a general public benefit during the year and any circumstances that hindered the creation of a general or specific public benefit.

Ultimately, lawmakers hope public benefit corporations will create jobs, improve communities, and use innovative approaches to solve society’s most challenging problems.

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Selecting the Right Entity for Your Tech Startup

Nebraska, and neighboring Midwest states, have developed a reputation as the “Silicon Prairie,” a prime location for technology startups. The recent tech startup boom in the Midwest can be attributed to the lower cost of living, knowledgeable tech labor force, and willingness of the community to embrace the startup. For many of these startups, besides the intense need to develop and protect the technology, a common issue is picking the right business entity structure.

 

In picking the right entity for the startup, several considerations should be weighed, including the need for liability protection, how the company will fund operations, and the most beneficial tax status. For example, if a tech startup is developing a product that will take a substantial period to produce, and likely need multiple rounds of equity financing involving institutional investors, with other funding coming through debt, the demand for classes of shares, preferences, and conversion rights, may require that the startup to form as a C-corporation, with corresponding tax status. On the other hand, if the startup only intends to have one round of equity financing, through a “friends and family” offering, a limited liability company may be appropriate, providing additional flexibility to select tax status.

 

Picking the right type of entity is important for the success of a tech startup, with many considerations to weigh. Ultimately, as facts change, it may be possible to change the structure of your company, but initial selection should not be taken lightly and can reduce problems as your company grows.

© 2017 Vandenack Weaver LLC
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