What’s in a name? Basic Trademark Concepts You Need to Know

Let us take some time to discuss trademarks and what you, as an entrepreneur, should know about marks.  As you may already know, a trademark is a word, phrase, symbol, or design (or combination of them) that identifies and distinguishes the source of your goods or services from other sources.  In contrast, your domain name is not a trademark, although you can use your trademarked name as all or part of your company domain name as your web page address.  Domain names are registered in a different way and do not confer to you any trademark rights.  In addition, your fictitious name registration, or d/b/a, filed with the Florida Secretary of State does not confer to you rights akin to those provided by your trademark.  So in short, the forming of your business entity, the purchase of your domain name, and the registration of your d/b/a or fictitious name do not confer to you any rights to a trademarked name.

It is also useful to attain a general understanding of the difference between a trademark, copyright, and patent.  When your company invents a new and innovative technology, your company would patent the specific design of the new technology that was first invented by you and is designed in a way that would not be obvious to person having ordinary skills in the industry. There is much more to the ability to obtain a patent, but the general standard is novel, non-obvious, and useful.  Your company would then copyright the original written aspects of the company website.  Finally, your company would register its name and maybe a logo as a trademark so consumers can identify the source of the new patented technology and the goods and services your company provides to customers.

Returning to trademarks, there are two types of marks, a trademark and a service mark.  A trademark denotes the registered use of a mark that is placed on goods and used to sell goods, where a service mark denotes the registered use of the mark associated with the delivery of services. 

Your mark is established by registering either with the U.S. Trademark and Patent Office (the “USPTO”) at the federal level, or, at the state level, in Florida, with the Florida Secretary of State’s office. Even without registration, the actual use of a name and/or logo in the stream of commerce may still establish common law trademark rights.  In a common law trademark situation, the policing and enforcement of the mark poses additional challenges and hurdles that your attorney can work through with you if you are currently in that situation. 

The process of registering your mark establishes a legal presumption of your ownership of the mark and your exclusive right to its use.  Your federal registration provides for the nationwide use of your mark, where your state registration provides rights within the borders of the state in which you register. Your federal registration also allows for enforcement actions to be filed in Federal Court, your ability to register the mark with U.S Customs and Border Protection to prevent importation of infringing foreign goods, and your right to use the federal registration symbol ®.  At any point in which you begin using your name/logo and you intend to claim that name or logo as your trademark or service mark, you can add TM after the trademark name and SM after the service mark.  You must refrain from using the ® until you receive final approval of your federal registration with the USPTO.  Your state registration does not permit the use of the ®, it is only a federal registration symbol.

Your registration process for your trademark with the USPTO office is a legal proceeding that may often become complex and require complying with the requirements of trademark statutes and rules.  Your application is reviewed by a USPTO examining attorney and while the examining attorney may help you navigate through the process, the examining attorney is are not permitted to give you legal advice.  The examining attorney will review your mark for compliance with federal law.  The most common reason for your mark to not be approved is the likelihood that your mark will cause confusion between the mark you are seeking to register and another existing registered mark or prior pending application by another entity.

Your trademark attorney can help you before, during, and after the trademark application.  Your trademark attorney should conduct a preliminary search of other similar uses of the mark, will prepare the application and respond to any additional requests from the examining attorney, and should assist you in policing and enforcing your mark after the trademark application is submitted.  During the application process, your trademark attorney provides advice as to how to optimize the protection of the mark and create the strongest possible mark.  Your trademark attorney understands the scope of your mark and assists you in enforcing your mark.  It is important you understand that the enforcement of your mark after registration is your responsibility.  The USPTO office registers the mark, but enforcement is the responsible of you, the party that registers the mark.

When selecting your mark, you should do so with thought and care.  As noted, not every mark is able to be registered with the USPTO and submitting an application that is not able to be registered results in unnecessary costs for a start-up on a budget.  Even if your mark is able to be registered, thought must be given as to how difficult it may be to protect your mark legally based on the strength of the mark. Not all marks are created equal.

The strength of your mark is analyzed on a continuum scale.  Your strongest mark will be fanciful or arbitrary.  The best examples of this type of mark is Apple for computers and Twitter for instant messaging.  These are strong marks because they describe the business with a name that is fanciful or arbitrary, meaning no one thought of computers or phones when they thought of apples many years ago.  And until fairly recently, twitter was a call of a bird or a series of short, high-pitched calls or sounds. At the midpoint of the spectrum are suggestive or descriptive marks.  A merely descriptive mark will often not be able to be registered unless it acquires distinctiveness, which in general takes extensive use for a five-year period or longer, or takes on secondary meaning.  At the end of the spectrum, generic marks are the weakest and most often will not qualify as a legally registered mark.  An example of a weaker descriptive mark would be “The World’s Best Pizza” as a mark for a pizza restaurant.  A generic mark would be Pizza for that same pizza restaurant. 

The cost of a weaker mark can be high over the course of your business because you may face additional costs to enforce a weaker mark and you may end up having to legally stop using the mark and select a new mark if it is successfully challenge by others.  Without proper policing of your mark, your business can lose your trademark rights in your mark. 

The trademark office will also refuse registration for other reasons, such as offensive or disparaging logos or words, an individual’s name or likeness, and descriptive names that may have connotations of illegal activity.

This is just a brief overview of trademarks and the registration of marks. If you have questions from the reading, feel fee to get in touch with me.  I am happy to discuss specific questions with you.

To all the entrepreneurs and emerging small businesses, and all of you aiming to be better today than you were yesterday: Keep striving, keep pushing, and always remember the best is yet to come.

Nine Things to Know About the Revised Florida Business Corporation Act.

This spring the Florida legislature passed the Revised Florida Business Corporation Act (the “New Chapter 607”) to govern Florida corporations and Governor DeSantis signed the New Chapter 607 into law in June. The New Chapter 607 is 700 pages and becomes effective as of January 1, 2020. Here are nine things you should know about the New Chapter 607 if your business is organized or will be organized as a for profit corporation in Florida:

  1. The New Chapter 607 should not have any substantial effects upon your federal or state corporate taxes.
  2. Articles of Correction, starting January 1, 2020, can be filed at anytime and is no longer limited to the first 30 days after you file your Articles of Incorporation. This means you can correct your Articles even if you discover the error after 30 days rather than having to amend the Articles upon the discovery of an error.
  3. The New Chapter 607 also expands the ability of Florida corporations to use electronic transmissions and electronic signatures. This allows for electronic notice and virtual meetings. This includes the authorization of purely virtual shareholder meetings. Note that to take advantage of the new electronic options, Florida corporations may need to amend their bylaws. Further, consents may still be required in some situations.
  4. Currently, the current Chapter 607 Florida Corporation Act does not allow a Florida corporation to maintain or defend an action in Florida. The New Chapter 607 provides a Florida corporation the ability to defend an action even if the Florida corporation fails to identify a registered agent. Under the New Chapter 607, a Florida corporation must still have a registered agent to maintain an action in Florida. The change here allows for the defense against an action, where the current Chapter 607 does not have such a provision.
  5. The New Chapter 607 allows the Board of Directors to delegate, without limits, to a board committee and/or officers the right to make grants of share rights, options, warrants, and awards. Directors may still place limits and good governance would suggest some limits are desirable.
  6. The New Chapter 607 modifies derivative actions by shareholders. Notably, the demand provisions for derivative shareholder actions have been modified. The New Chapter 607 changes Florida’s universal demand approach, which means all shareholder suits must first make demand to the Board of Directors. Now, Florida will utilize a modified futility model, which allows shareholders to skip the demand to the Board if the claim involves a breach of fiduciary duties of the Directors and the Board would be unlikely to take action on behalf of the Shareholder. Such a demand would be consider futile and may not be required.
  7. The New Chapter 607 provides for two non-judicial remedies for deadlocks in corporate governance. The New Chapter 607 provides for the appointment of receiver(s) or custodian(s) in the case of a deadlock or a fraudulent action or irrevocable injury. In addition, the New Chapter 607 provides for the appointment of a provisional director in the case of a deadlock between the members of the Board of Directors.
  8. The New Chapter 607 also clarifies that officers of a Florida corporation have the same standards of conduct, i.e. fiduciary duties, as the Directors. The New Chapter 607 adds reporting obligations known as “up the line” reporting obligations, meaning officers have a duty to report to the directors when standards of conduct are breached.
  9. Finally, the New Chapter 607 includes extensive modifications to the conflict of interest provisions for directors. No long can a conflict of interest be remedied by an approval of a majority of qualified directors (i.e. disinterested directors) or disinterested shareholders. Under the New Chapter 607, the approval of a conflict of interest by the qualified directors or disinterested shareholders merely shifts the burden of proof as to whether such a transaction was fair. The presumption will be that the transaction was fair if approved by the qualified directors or disinterested shareholders, but that presumption is subject to rebuttal.

The above merely highlights some of the changes in the New Chapter 607 that may be of interest to existing Florida corporations. As the end of the year approaches, Florida corporations may want to review these changes with their legal counsel and consider the efficacy of amending their bylaws in anticipation of the provisions in the New Chapter 607.

Blockchain Application: The language in the New Chapter 607 regarding electronic transmission and electronic signatures leaves open the question regarding the use of distributed ledger technology for director and shareholder votes and the tracking of stock certificate and the maintenance of corporate capitalization tables. This is an area that could be advanced by the newly formed Florida Blockchain Task Force and proposed to the committee and the legislature. The ability to vote and record those votes on a blockchain and the authority to issue digital certificates tracked on distributed ledger technology would be a welcome amendment to the New Chapter 607 in the coming legislative session.

What You Need to Know about Opportunity Zones Before the End of 2019

The 2017 Tax Cuts and Jobs Act (the “Jobs Act”) created a tax deferral and savings opportunity for U.S. taxpayers with realized capital gains in the last 180 days.  The tax benefits come from an investment in a Qualified Opportunity Zone Fund (“QOZ Fund”). 

To maximize the savings opportunity, taxpayers with capital gains should consult with their tax advisor and consider the benefits of investing in a QOZ Fund by December 31, 2019.  The Jobs Act allows taxpayers with capital gains to invest those gains in qualified opportunity zones (“QOZ”) and defer the payment of tax on the capital gains until 2026.  The tax benefit comes with an additional 15% reduction in the capital gains tax due, if the taxpayer keeps the funds in the QOZ Fund for the full seven years.  To qualify for the 7-year, 15% savings taxpayers must invest the gain realized in the last 180 days in a QOZ Fund.  After December 31, 2019, taxpayers will still qualify for a 5-year, 10% savings if the qualifying capital gains are invested in a QOZ Fund by December 31, 2021.

The following are some highlights regarding QOZ investments and QOZ Funds.

  • QOZ’s have been designated by each county and subsequently approved by Treasury Department.
  • Investment in QOZ occurs through QOZ Funds:
    • QOZ Fund may be a Corporation or Partnership
    • QOZ Fund must invest 90% of funds in QOZ Stock/Partnership, QOZ Businesses, or QOZ Properties
    • The QOZ Fund self-certifies every 6 months by filing Form 8996.
    • The next 90% test date is December 31, 2019
    • The QOZ Fund has 31 months to invest cash once invested in the QOZ Fund.
  • Taxpayer can invest capital gains realized on the sale of appreciated assets, reinvesting within 180 days of the sale in a QOZ Fund
  • Taxpayer may defer capital gains on invested capital until Dec 31,2016 or upon sale of fund interest.
  • Taxpayer files Form 8949 with 2019 tax return.
  • There is no need to keep funds with a third-party intermediary upon sale of the initial asset.
  • The gains are not required to be immediately and directly invested into the QOZ Fund (as long qualifying capital gains are invested with 180 days of the realized capital gain).
  • 10% tax reduction after 5 years
  • 15% tax reduction after 7 years (must invest by December 31, 2019, as noted above.
  • Tax-free stepped-up basis on all gains within the QOZ Fund after 10 years.
  • Eligible interests for investment by QOZ Fund
  • Equity interest in QOZ Fund or QOZ Business
    • Stock or Partnership Interest in QOZ Fund or QOZ Business
    • LLC Membership interest included
  • QOZ Business
    • At least 50% of gross income of QOF must be derived from conduct of trade or business within OZ.
    • Substantially all intangible property used in active conduct of business (70%) located in OZ
    • Less than 5% of average aggregated unadjusted bases of the property of such entity is attributable to nonqualified financial property.
  • QOZ Property
    • Substantially improved existing building = the improvements double owner’s basis in the building only – land not included.
    • Allocate X to land, X to building, the value of the building improvements must exceed the initial value of building
    • Substantial improvement will not cause property to fail to qualify just for not being completed.
    • Improvement to basis must exceed the adjusted basis within 30 months form the start of improvements.   
    • Ex. If an OZ Property is valued at $880,000 for the land, $1,120,00 for the building, then to qualify as a QOZ Property the QOZ Fund must make $1.3 million improvements within 30 months of the acquisition of the QOZ Property.
  • Some properties are excluded, such as golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, gambling, no alcohol for offsite consumption.

Important Disclosure:  DLT Law Group, P.A. assisted in the founding and formation of Core X OZ Fund I, LLC, a qualified opportunity zone fund formed in Florida.  This post is for information purposes and is not legal or tax advice, nor is it intended as an advertisement or promotion for Core X OZ Fund I, LLC.

Social Purpose and Benefit Corporations in Florida

In 2014, the Florida became one of many states to permit social purpose or benefit corporations, popularly referred to as B-Corps. These two corporate forms are governed under the Florida Business Corporation Act, Chapter 607, Part II (Social Purpose Corporations) and Part III (Benefit Corporations). The purpose of these entities is to allow socially conscious entrepreneurs and investors to form profit corporations to engage in activities that are beneficial to society beyond the traditional benefits of profit corporations.

These corporation are profit corporations, but with a few differences. In addition to its purpose to generate profit, each social purpose or benefit corporation takes on an additional statutory purpose to advance public benefits. Further, the officers and directors of the corporation take on a statutory obligation to consider the effects of the corporation and ensure the corporation is taking steps to achieve its intended purpose or benefit. Officers and directors are held accountable to the shareholder, not just to maximize profits, but to take measurable steps to fulfill its obligations to advance the stated social purpose or benefit. The officers and directors must describe those efforts in the annual report to the shareholders.

The difference between a benefit corporation and a social purpose corporation is one of specificity. A benefit corporation aims to achieve a more broadly stated general public purpose for society as a whole, where as a social purpose corporation may have a single, specific, and more limited purpose. Specific public benefits of a social purpose corporation include, but is not limited to, promoting low-income of undeserved individuals with beneficial products or services, promoting economic opportunity (beyond just the creation of jobs), protecting or restoring the environment, improving human health, promoting arts and sciences, and increasing flow of capital to entities that has similar stated purposes.

One impact of these corporate forms is to impose an obligation on directors to consider how the corporations actions impact the corporation’s ability to accomplish its purpose and consider the effect of corporation actions not just on shareholders (i.e. maximize profit), but also employees, suppliers, customers, communities in which the corporation conducts business, local and global environments and the short and long term interests of the corporation. See https://www.floridabar.org/the-florida-bar-journal/now-its-easier-being-green-floridas-new-benefit-and-social-purpose-corporations/

In exchange for the officers and directors obligations to ensure the corporation executes on its purpose, the statue limits officer and director liability in a few ways. The obligation on the management of the corporation no longer comes down exclusively on the fiduciary duty to assure that the corporation maximizes profit. Rather, a duty exists to also achieve or advance the stated purpose, although this is not a requirement but merely a mandate to consider the effects of corporation actions. Shareholders may pursue a benefit enforcement proceeding against the corporation for a failure to pursue a public benefit. Such actions may be brought as derivative actions.

Measuring and reporting the effectiveness and success of benefit and social purpose corporations poses additional challenges for directors and corporate management, as well as investors. For a good article touching on the challenges associate with reporting the success of value based entities. see https://www.mckinsey.com/business-functions/sustainability/our-insights/more-than-values-the-value-based-sustainability-reporting-that-investors-want?cid=soc-app

Crypto as the New Orange? Timing May Be Everything In Coin Issuance/Distribution

The SEC moved to stop Telegram and its wholly owned subsidiary TON Issuer, Inc. from continuing its ongoing offering of the digital-asset “Grams”. According to the SEC, the offering of Grams was an illegal offering of securities. Telegram sought to issue a substantial number of Grams no later than October 30, 2019.

In summary, the SEC holds that Telegram’s distribution of Grams was a public offering of securities and devised a plan to distribute Grams as securities prior to a functional blockchain (‘TON”).   This view is further advanced through the citing of evidence suggesting the initial purchasers acquired the right to buy Grams for the purpose of quickly selling them for a profit through a distribution to the general investing public, i.e. retail investors.  The SEC maintains such distribution was essential to ensure Grams are sufficiently decentralized and for the initial purchasers to realize a profit.  Viewing the entire process of issuance and distribution, the SEC views Telegram’s distribution of Grams as a public offering of securities because the contend that Telegram always intended for the block of securities to ultimately come to rest in the hands of the investing public. The SEC maintains there is no exemption available for this public sale of Grams.

The initial purchasers under the Gram Purchase Agreements, according to the evidence from investors outlined by the SEC, intended to distribute Grams at a profit and do not appear to have entered into the private placement Purchase Agreements for their own long-term investment. The opportunity presents the initial purchasers with a quick profit through the distribution of Gram to the general public without registration and without providing sufficient public information regarding the investment; this information asymmetry deprives investors of material information relating to their investment. Rule 500 provides a substantive prohibition to such a plan or scheme to avoid registration, regardless of whether an exemption is technically complied with by the issuer. The SEC seems to be suggesting without stating it that Telegram planned to avoid registration by taking this path with the limited number of large initial purchasers acting as distributors of Gram securities to the general public. The key here seems to be the premature distribution of Grams under the private placement Reg D Purchase Agreements before the Grams were able to be utilized on TON, before TON was fully functional, and before Grams could be used for their intended purpose. As a result Grams continue to be securities and the corresponding quick sale and distribution of Grams to the general public is a public offering of securities without an exemption. The SEC seems to take the view that Telegram is distributing Grams to the initial purchasers as only a first step because Grams had to be more widely distributed to the public to be sufficiently decentralized. The SEC maintains that TON was designed from the beginning to require the Initial Purchasers to immediately distribute their holdings to the public. The SEC references the high public interest in purchasing Grams by retail investors as a substantial factor. In fact, future interests in Grams are already being traded in an IOC in Asian markets on Liquid.com, albeit without apparent involvement of Telegram or its affiliates.  Key to this analysis is  the premature distribution of Gram to the public to sufficiently decentralize prior to a functioning TON and without adequate public information.

Telegram’s lawyers responded that Gram is not a security but rather a currency or commodity. Telegram seems to maintain that Grams, unlike the purchase contracts, will not be securities once the TON Blockchain launches. A factual issue arises as to whether the TON Blockchain is functional, and, if functional, if it is sufficiently functional.  Telegram cites SEC Director Hinman’s speech in which he stated that a digital currency all by itself is not a security just as orange groves by themselves are not securities. This, of course, is well understood and accepted precedent from Howey. However, in Howey the orange groves existed. The key here seems to be timing and the SEC maintains TON is not yet functional. Telegram, in its brief, and admittedly not an attempt at a complete defense, does not address this timing question. Telegram’s lawyers simply maintain that Grams are not securities, maintaining that crypto is the new orange.  The all important facts and circumstances driving the analysis change if Telegram substantially plants the orange grove before distributing the oranges, i.e. builds a substantial functioning and useful TON blockchain before issuing Grams. It comes down to timing and Telegram’s self-imposed deadline with investors boxed Telegram into a corner without a functional TON.  

With the announced delay of the launch until April, Telegram has time now to expedite and complete the substantial planting of a decentralized orange grove prior to issuing Grams. The industry would certainly welcome clarity from the SEC or the courts in establishing SAFT’s as investment contract, blockchains as orange groves, and cryptocurrencies as oranges to be harvested and sold as commodities. If Telegram takes that path, the SEC action or litigation might well afford the industry some important guidance from the regulator or the court with respect to these issues of timing and decentralization. 

As of now, the Court postponed the hearing until Feb. 18–19, 2020.  Judge Castel ruled Telegram may not distribute Grams prior to the hearing and until the court can make a decision.  As mentioned, Telegram already planned to delay the launch until April 2020.  This may be a good opportunity for Telegram to finish the Orange Groves.

Welcome to a Deeper Dive with DLT!

DLT Law Group welcomes you to a Deeper Dive with DLT. This blog aims to provide insights from the lawyers at DLT Law Group. We hope you enjoy the content and look forward to feedback and comments. As lawyers in the emerging world of FinTech, there is often much to discuss and things emerge quickly. We also plan to mix in fundamental business law insights to aid you in your organizations journey. Innovation grounded in well developed legal fundamentals. Risk management and liability assessment remain fundamental to our approach to counseling. Welcome to DLT. We look forward to assisting with your business success as you serve your growing community of clients and customers.