July 2010 Archives

July 29, 2010

The Advantages and Disadvantages of Arbitration Clauses In Business Contracts

Arbitration clauses are typical in business contracts for several reasons. Most importantly, they allow businesses to settle disputes in a timely and cost-effective manner, without entering into costly, time-consuming litigation. Arbitration significantly limits discovery costs such as interrogatories, depositions, and pretrial motions that often constitute the bulk of litigation expense. In addition, arbitrators are often specialists in their various fields and tend to be more knowledgeable than juries.

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Arbitration may be binding or non-binding. Non-binding arbitration involves the determination of liability without the dispensation of an award. While the arbitrator may suggest possible awards, parties are not legally obligated to accept the suggestions. Binding arbitration, on the other hand, involves not only the determination of liability, but also the terms of the award for the wronged party. Moreover, the arbitrator's determination is final (with few exceptions), and precludes further dispute and appeal. In California, an arbitration clause may be disregarded where all parties agree, where the clause exists as part of an invalid contract or where third parties are involved in the litigation (where third party claims arise out of the same transaction or series of related transactions).

Binding arbitration has significant advantages to both small and large business. Avoiding costly litigation is priceless to small business owners especially because they are typically priced out of litigation by large corporate entities. Large corporate entities like binding arbitration because they fear the uncertainty of jury trials. Putting the decision in the hands of an experienced arbitrator assists larger businesses in anticipating outcomes. In addition, binding arbitration is faster and less formal. On the other side of the coin, small businesses give up the right to a jury trial in exchange for affordable conflict resolution and large businesses give up their ability to steam roll smaller opponents. Other cons include the potential for being stuck with a bad arbitrator, being stuck with a bad and/or legally incorrect decision that cannot be appealed and having less time to properly investigate claims. Either way, courts, bar associations and state bar entities across the country are encouraging parties to look to informal resolution before resorting to the court house steps.

It's important that businesses consider these pros and cons carefully and enter into contracts that clearly set forth the terms of arbitration. Significantly, in order to put teeth into a binding arbitration clause, it needs to specifically state that binding arbitration is mandatory. Arbitration law in California is evolving and now allows for judicial review of "legal" errors by arbitrators where the parties specifically contract for it. In addition, contracts may include language that: requires claims be made within certain time limitations; requires parties to first negotiate in good faith before demanding arbitration; requires the party demanding arbitration advance arbitrator fees (which can be substantial); requires the losing party to pay the other side's attorney fees; requires the parties to comply with pre-set procedural rules created by entities such as the American Arbitration Association; and/or puts limits on the types of damages allowed (such as prohibiting punitive damages). A contracts attorney will assist San Diego businesses in navigating the pros and cons of arbitration clauses and ensure that they are drafted appropriately.

July 26, 2010

Trademark, Trade Name, Service Mark, Fictitious Name, Corporate Name, What's In a Name?

Most existing San Diego businesses rely heavily on name recognition but it is surprising how many fail to protect this invaluable commodity.  This is due in part to the fear most business owners have with the idea of consulting an attorney and in part to a lack of understanding of the protections available to them.  The hesitation in hiring an attorney is understandable and needs no explanation.  This article focuses on delineating the steps businesses should take, and emphasizes the importance of obtaining Federal Trademark protection.  

iStock_000011229024XSmall.jpgThe first step any business takes is to form a business entity.  If the business entity is a formal entity registered with the State of California such as a Corporation or Limited Liability Company (LLC), the business' name automatically becomes "Business, Inc." or "Business, LLC" and, assuming the name is not already in use, no one else in California can form the same business entity with the same name.  In some instances, corporations and LLCs operate under different names.  For example, "Business, Inc." may run a clothing outlet called "Boutique".  To protect the name "Boutique", the corporation will register a Fictitious Name ("Doing Business As" or "DBA") with the County in which the company will do business.  The DBA allows the corporation to open a bank account for "Boutique" and prevents local competitors from registering the same fictitious name.  Sole proprietors and partnerships that are not registered with the State of California also obtain "Fictitious Names".  Most business owners either form a formal business entity or obtain a DBA.  They understand the protections formal business entities offer and know that at the very least a DBA is necessary to open a business bank account.  Unfortunately, most businesses stop here leaving their business name vulnerable to attack.  To avoid costly litigation and protect the goodwill and earned clientele associated with the business name, businesses should consider obtaining federal trademark protection.  

Long time business owners that have established a distinctive name first are offered some protection through what is termed a "common law" trademark, at least within the geographical area that the name is used.  However, any first in time federally registered trademark will take precedence over your mark regardless of the geographical area of use.  The creation of a federal trademark creates a rebuttable presumption that the trademark has priority over all other claims nationwide.  So on the pyramid of protections, the federal trademark is the ultimate protection.  Even where common law trademarks are enforceable, they will be limited to the geographic area in which they were in use prior to the registration of a federal trademark.  This obviously places limitations on the expansion of your business.  Moreover, with emerging and uncertain internet law, a business' ability to protect its name and mark on the internet is constrained further.  It is unclear today whether a local San Diego business can operate a website using its common law protected name where another company holds a federal trademark for the same name.  The San Diego website is obviously accessible nationwide.  

The significance of obtaining federal trademark protection cannot be understated.  Filing for and obtaining a federal trademark provides you with the ultimate protection and it should be sought as soon as practicable.  You can protect not only your name but your name's likeness.  A trademark is defined as any word, name, symbol, or device, or any combination of a word, name, symbol or device, used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others, and to indicate the source of the goods.  A service mark is essentially the same thing except that it identifies and distinguishes the services of one provider from services provided by others, and to indicate the source of the services.  The issues surrounding the identifying features (your mark) involve complicated intellectual property issues.  However, one can find examples of marks, the different designs and features that can be protected by a federal trademark at the United States Patent and Trademark Office's website.  You can perform a preliminary search here and see who else is using your business' name or a similar name and the registered designs.  States also offer their own Trademark Protections.  However, in most cases it is wise to obtain federal protection.  An attorney can help you make the right choices for your business.

July 14, 2010

Understanding Your Lease - Common CAM Exclusions

Common CAM expense exclusions include:

  • Initial cost of the land or the construction of the original buildings, parking and other improvements;
  • Mortgage principal, interest and related expenses; 
  • Refinancing costs;
  • Ground rent and related costs;
  • Depreciation and amortization of property and equipment;
  • Cost of complying with government regulations including compliance with environmental laws; 
  • Costs, fines or penalties incurred by landlord for violation of government regulations and costs for correcting code violations or defects; 
  • Interest or penalties from landlord's late payments;
  • Advertising, renovation, improvements and other costs associated with seeking and obtaining new tenants and retaining existing tenants;
  • Brokerage commissions;
  • Tenant alterations and alterations made to leasable space;
  • Capital expenditures; 
  • Costs reimbursed by other tenants;
  • Costs reimbursed by insurance and/or warranties;
  • Costs reimbursed by government agencies; 
  • Special services for specific tenants;
  • Legal services relating to leases with other tenants or with the transfer, sale or disposition of land or buildings located on the property;
  • Off site management personnel and overhead;
  • Operation of services or amenities for which landlord charges a fee to third parties;
  • Costs associated with remedying construction defects;
  • Utility costs directly payable by tenants or other occupants;
  • Salaries and benefits of landlord's executive officers;
  • Excessive costs for sculpture, paintings and other fine art;

This is not an exhaustive list of exclusions. See Understanding Your Lease - Common Area Expenses for a summary of important common area expense considerations.