Protecting Your Intellectual Property in a Wild World

Your company is an “A” player and it has done everything right in the U.S. in protecting its intellectual property (“IP”). You have not just relied upon a “smile.” You’ve invented a unique product called Superstar® widget and it is not yet offered by your competitors. Vast amount of resources have been poured into the development of the Superstar widget. Prior to introducing the Superstar widget, you used due diligence and used the IP Awareness Assessment Tool on the U.S. Patent and Trademark Office website to identify what IP you have, if it has value, and if it can be protected under U.S. law.

Upon identifying your IP, the company retained capable attorneys who were successful in obtaining U.S. trademark registrations on the corporate name, non-functional design, and logo so customers could more easily identify the Superstar widget and its association with the company. Superstar widget packaging correctly evidences all registered trademarks.

You made a wise expenditure on patents and the company has received patents on the Superstar widget process. Further, copyright registrations with the U.S. Copyright Office have been obtained on your website, web video, and associated software and you are giving notice to the world of your ownership by using the appropriate symbol of “©2012 Company.” Continue reading »

Protecting Against the Overseas Theft of Trade Secrets

Part of a series on issues related to Manufacturers, Distributors and International Trade

The overseas theft of trade secrets is a major concern of companies with business operations outside of the United States. A recent decision by the Court of Appeals for the Federal Circuit provides U.S. companies with a new weapon to protect against trade secret misappropriation that occurs completely outside the United States. While welcome news for U.S. businesses, it is important that they remain vigilant in developing and implementing preventive measures for the international protection of their trade secrets.

In TianRui Group Co., et al. v. ITC et al., 661 F.3d 1322 (Fed Cir. Oct 11, 2011), the U.S. Court of Appeals for the Federal Circuit held that the U.S. International Trade Commission (ITC) has the authority to exclude imports of products into the United States that are manufactured outside the United States using a misappropriated trade secret process, even when the misappropriation occurs outside the United States and there are no goods being manufactured in the U.S. using the protected process.

The Court held that in determining whether a trade secret has been misappropriated, the ITC should apply U.S. federal common law of trade secret misappropriation rather than the law of any particular U.S. state or of the country where the misappropriation occurred. The application of federal common law in actions brought before the ITC involving the overseas theft of trade secrets will make it easier in many cases for U.S. companies to prove the theft of their trade secrets, because proving trade secret misappropriation is generally more difficult under the laws of many other countries.

The holding in TianRui has no bearing on the sale or importation of goods outside the United States that were manufactured using misappropriated trade secrets of a U.S. manufacturer. Consequently, U.S. companies will still need to think globally when adopting trade secret protection measures.

The definition of what constitutes a trade secret and the elements for proving trade secret misappropriation vary from country to country. Additionally, there are regional competition laws that affect trade secret protection. Taking into account these laws when drafting confidentiality and non-compete provision is necessary to ensure trade secret protection and the enforceability of the provisions or agreements. Post-employment restrictive covenants need to be drafted to take into account the relevant statutory and judicial law, because if they are drafted too broadly they will be unenforceable.

In many countries a post-employment non-compete clause is not valid unless there is separate compensation for the restrictive covenant (e.g., China and Germany). In other countries, non-compete agreements are prima facie void on public policy grounds, and therefore, particular care is required when drafting a non-competition agreement in order to ensure that it will be considered reasonable under the applicable country’s laws.

To prove access to confidential information, it is advisable for a company to require written acknowledgement of the receipt of company information from employees, consultants, subcontractors and any other third parties at the time of disclosure, as well as having these individuals sign confidentiality agreements. In some countries, having a signed confidentiality agreement is not sufficient to prove access to a trade secret.

As a result of the decision of the U.S. Court of Appeals for the Federal Circuit in TianRui, U.S. companies have a powerful enforcement mechanism to protect against the imports of competitor products into the United States if the foreign manufacturer engaged in conduct that constitutes an unfair trade practice under U.S. law.

However, when drafting confidentiality agreements, trade secret preventive measures and post-employment restrictive covenants, U.S. companies still need to consider carefully the statutory and judicial laws of the relevant foreign country and region.

Posted by Attorney Marcia S. Orgill. Orgill concentrates her practice in the area of business and personal taxation—especially complex domestic and international tax strategies.

Beware: It’s Risky to Misclassify an Overseas Consultant

Substantial Risks Exist for Misclassifying an Overseas Consultant as an Independent Contractor

Part of a series on issues related to Manufacturers, Distributors and International Trade

With both the IRS and the Department of Labor targeting the misclassification of U.S. employees as independent contractors, many companies are re-examining their worker classifications. While most U.S. companies are aware of the costly consequences of such misclassification, they may not be cognizant of the considerable dangers of misclassifying foreign workers as independent contractors.

Frequently, U.S. companies choose to engage local representatives in their overseas markets as independent contractors rather than employees in order to avoid compliance with foreign employment laws, withholding tax requirements and social welfare/insurance contributions. In many countries, these obligations may be considerably more onerous than they are in the United States.

However, the consequences of misclassifying a foreign worker as an independent contractor are frequently more costly as well.

For example, in Germany an employer is obligated to remit social security type payments for its employees that are equal to about twenty percent of the employee’s compensation to German social welfare and insurance agencies. The employer is also required to withhold from the employee’s compensation the employee’s social security obligations which are also equal to about twenty percent of his/her compensation.

If an employer fails to withhold the requisite amount from the employee’s wages, the employer becomes liable for the employee’s social security obligations. The employer many not seek reimbursement for this amount from the employee, regardless of any contractual agreement that provides for such reimbursement. The look back period for collection of these social security payments is thirty years in some cases.

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The IC-DISC: An Underutilized Tax Savings Provision

Part of a series on issues related to Manufacturers, Distributors and International Trade

There is an increasingly wide divide between Democrats and Republicans on a multitude of issues. However, both parties agree that exports are a key to economic growth.

Last year, President Obama announced his goal to double U.S. exports by 2015, and Republican leaders indicated their desire to work with the President to expand trade to key allies. To encourage exports, the President issued a National Export Initiative that focuses on helping small to mid-sized U.S. businesses export their products and services.

The extension of the qualified dividend rates through 2012 also provides U.S. exporters with the opportunity to save taxes by establishing an Interest-Charge Domestic International Sales Corporation (IC-DISC).

Yet many export companies that could benefit from the tax savings of an IC-DISC fail to do so. According to some estimates, only about 6,000 businesses–a small portion of those that qualify—take advantage of the tax savings of an IC-DISC.

Capitalizing on these tax savings could give Missouri export companies a leg up on their competition. A key to increasing profitability is working smarter not just harder. Less taxes means more money that can be injected into the business to fuel growth and increase profitability.

Candidates for an IC-DISC

Privately held C-Corporations and pass through entities, such as S-Corporations, partnerships and LLCs, that could benefit from the tax savings of an IC-DISC include:

• Manufacturers and distributors of U.S. manufactured products with more than 50% U.S. content and a destination outside of the U.S.,
• Architectural and engineering firms with projects outside of the U.S.,
• Software developers of computer software that is licensed for reproduction outside of the U.S.,
• Agricultural and mineral producers that export products outside the United States, and
• Lessors of new or used U.S. made products to third parties for use outside of the U.S.

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NYSE and Deutsche Boerse (DB) Merge to Survive

Is America’s dominance in capitalism clearly over?

The NYSE merger is one of survival both for the NYSE and for the German securities exchange Deutsche Boerse.

The NYSE is inefficient, i.e. the pit, traders on the floor. Lower fees and better efficiencies created the mess at the NYSE.  The NYSE has too many outdated traditions which created numerous types of inefficiencies, forcing the NYSE into a downward position. Even the NASDAQ was doing better than the NYSE regarding efficiencies via electronic trading.

We live in a global economy. There are trading exchanges all over the world, i.e. China, Tokyo, Brazil , Russia, India, Australia, London, etc. The stock exchanges in China and Brazil are some of the largest in the world. Everybody in the world can access securities exchanges via the Internet.

The dollar is weak right now. Europe has a debt crisis and the Euro is not so stable.

Not long ago, one of Europe’s leading independent forecasters for the Treasury asserted that the Euro could collapse as a result of Europe’s debt crisis. The European Central Bank’s Governing Council Member asserted that it is not up to the bank to save countries where governments run the risk of being insolvent.

Right now, Ireland, Greece, Portugal, Italy, and Spain have a lot of debt problems and plenty of entities are buying more insurance at higher prices to cover potential losses in those countries.

Germany had good growth in 2010 but their economic model is centered around exports, i.e. cars and machines. Asia (China) drove Germany’s growth in 2010. Can Germany sustain their economic model since other European countries (mainly southern Europe) have stagnant economies re: exports and imports? The European debt crisis has pushed the Euro down which has made German exports more competitive.

Right now, US exports are even better than German exports because the US dollar is weak, too.

Since Germany appears to be in the best economic position in Europe more people are putting capital in Germany when investing in Europe. German exporters could take a huge hit if Europe’s debt crisis runs into other European countries.

Who knows what will happen because regulators have to look this over. Also, there are may political issues with this deal starting with a fight over what to name the exchange. Politicians could crush the regulatory process simply because they do not like the proposed name. I suspect it will go through because both exchanges need this for survival.

I think the NYSE deal is a play on a world asset which is undervalued as a result of a weak US dollar.

Ex: InBev could not purchase AB if the US dollar was strong. InBev took advantage of a weak US dollar and is now dealing with a lot of debt and debt service. The strength of the US dollar runs in cycles just like the markets. Will the US dollar stay at its current value forever or remain at lower values when priced against other global currencies? I suspect not.

The World Bank has predicted a global growth of 3.3% for 2011. Europe’s debt crisis is a huge factor which could derail any global recovery.

The European Central Bank has asserted that inflation may be around for months in Europe which would probably require a European interest rate hike which would make borrowing from global banks tougher than it already is.

However, major companies are lean and mean now and sitting on trillions of dollars of cash. In addition to inflation and a debt crisis, the 17 member European nation is still facing 10% unemployment which was after a recent drop. Also, housing prices continue to drop in Europe although it appears that it has bottomed out.

Is America’s dominance in capitalism clearly over? I would say no since nothing is clear right now with global economies, global financial markets and global debts and debt service.

With U.S. Exports on the Rise, Distributor Terms Increase in Complexity: Some Things to Watch For

Part of a series on issues related to Manufacturers, Distributors and International Trade

Recent figures released by the U.S. Bureau of Economic Analysis show there was a 17% increase in U.S. exports of goods and services during the first ten months of 2010.

In an effort to increase their profitability and growth, many U.S. businesses are taking advantage of the export initiatives launched by the U.S. administration to achieve its goal to double U.S. exports by 2014—a goal that President Obama announced last year and reiterated in his State of the Union address last month.

There are numerous options for U.S. businesses to structure the export of their goods and services internationally.  One of them is the appointment of international distributors to market and sell their products.

 An essential ingredient for the successful distribution of U.S. products internationally is a well formulated distributor agreement that takes into account the laws of the country or region where the products are distributed.  Surprisingly, many businesses skip this step when appointing distributors to represent their products overseas.

 Some U.S. businesses choose to operate under oral agreements with their international distributors, mistakenly believing that termination of the distributor will be easier if the relationship does not work out or that they will not be subject to a foreign judgment. Other businesses, when entering into an international distributor agreement, use a standard distributor agreement that was written for their U.S. distributors. However, when establishing an international distributor agreement, U.S. businesses should be aware of foreign legislation that may protect distributors, competition laws of a country or region that may void standard distributor agreement provisions, and other foreign law and cross-border challenges.

 Below are a few of the key considerations and issues that apply to international distributor agreements.

Competition Laws and Regulations

U.S. businesses exporting their products overseas frequently want to limit an exclusive foreign distributor of their products from selling competing products.

 In drafting a provision restricting such competition, it is critical to establish whether and to what extent the laws of the country where the goods are being distributed limit or prevent such a restriction. For example, in the European Union, this type of non-competition clause violates European Commission (EC) competition laws and is void from the outset if the restriction from selling competing products is for an indefinite period or exceeds five years. A non-competition obligation that is tacitly renewable beyond a period of five years is considered of indefinite duration.

 Additionally, certain territorial restrictions contained in a distributor agreement that prevent a distributor from selling a supplier’s products outside of a territory may invalidate the entire agreement, if the restriction is not limited to active sales into territories appointed to other distributors or the territory reserved to the supplier. For example, EC regulations control the ability of a supplier to restrict a distributor from making passives sales of its goods to customers outside a distributor’s appointed territory.

Choice of Law

Some countries have mandatory provisions of law that govern distribution agreements.

 If a choice of law clause in a distribution agreement states that U.S. law (or a particular U.S. state’s law) exclusively applies to the agreement, a U.S. jurisdiction clause in the agreement may not be respected if an action is brought by the distributor in the foreign country where the product was distributed. In order to avoid this unwanted consequence, a better alternative is to draft the choice of law clause to state that U.S. law exclusively governs the agreement, except with respect to any issue involving application of such mandatory foreign law.

Termination Compensation

Some countries have protective legislation or principles established through case law that may make termination of the distributor relationship difficult and costly if the agreement is not structured properly.

 Upon termination or expiration of an exclusive distributor agreement, it is not uncommon for distributors outside of North America to make a claim for termination or goodwill compensation. The requirements for termination or goodwill compensation are country specific, as is the ability to contract out of this type of compensation through choice of law and other contract provisions.

Fixed Term Agreements

In most cases, agreements of fixed duration terminate automatically at the end of the period specified in the agreement. However, some countries have laws that protect distributors, and unless the agreement has been terminated with a requisite period of notice before the expiration of the agreed contract term, the agreement is automatically renewed. 

 Under Belgian law, this requisite period of notice is between three and six months. Additionally, Belgian distributor legislation provides that an agreement that is renewed more than twice becomes a contract of indefinite duration. A distributor agreement of indefinite duration may only be terminated with reasonable notice or payment of an indemnity in lieu of notice.  What constitutes reasonable notice may not be determined by the parties in the distributor agreement, but must be agreed upon by the parties after the agreement is terminated.

These are a few of the additional considerations for U.S. businesses seeking to export their goods through international distributors. One-size-fits-all distributor agreements simply won’t work.