Author: Chris Swiecicki

by Chris Swiecicki

Special Update: Supreme Court Ruling on Chevron

The Supreme Court’s 6-3 ruling on Friday, June 28^th 2024, effectively overturned a 1984 decision colloquially known as “Chevron.” This 40-year precedent directed courts to defer to a federal agency’s interpretation of laws passed by Congress that are ambiguous, so long as the agency’s interpretation is reasonable.

What is the Chevron Doctrine?

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. is a landmark Supreme Court decision that centered on the Environmental Protection Agency’s (EPA) interpretation of the Clean Air Act Amendments of 1977. In a 6-0 unanimous decision, the Supreme Court held that when a statute is ambiguous, courts should defer to the reasonable interpretation of the administrative agency charged with implementing the statute. This principle became known as the “Chevron deference.” Although at the time it was not considered as a particularly substantial decision, this ruling eventually became one of the most important decisions in federal administrative law and provided future administrations wide power to issue stronger environmental rules.  Chevron has been the basis for upholding thousands of federal regulations in the 40 years since the Supreme Court made their landmark decision.

The Court’s Decision

Two related cases, Loper Bright Enterprises v. Raimondo and Relentless v. Chamber of Commerce, were initiated by herring fishermen challenging a federal regulation issued by the National Marine Fisheries Service. The agency’s policy required them to pay $700 per day to carry federal monitors on their vessels.

These cases raised a broader question: Whether the Supreme Court should overturn the 1984 Chevron decision. In a 6-3 decision, the Supreme Court overturned the Chevron decision and ruled that courts no longer need to defer to federal agencies’ interpretation of the laws.

In the opinion, Chief Justice John Roberts said courts “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” The court’s holding was based on the determination that the Chevron doctrine was inconsistent with the Administrative Procedure Act, which provides the procedures for federal agencies to follow.

The Administrative Procedure Act states that courts should interpret statutes, which directly contradict the Chevron decision. Chief Justice Roberts indicated that the decision to overrule Chevron would not require earlier cases relying on Chevron doctrine to be overturned; however, going forward it is likely to have far-reaching effects across the federal government by allowing courts to interpret federal regulations without deferring to federal agencies.

Impact

Overturning the 40-year precedent greatly reduces the regulatory power of government agencies. This decision effectively shifts authority away from the executive branch and Congress, giving more power to the courts in interpreting laws and regulations. On one side, supporters of the Chevron deference argue that this grants the courts too much power and creates an imbalance of powers. The Biden administration has defended the Chevron decision and feared overturning it could destabilize the legal system. However, on the other hand, many people argue that the Chevron doctrine allowed the executive branch too much power and that the overturning will lead to a balancing of power.

The Supreme Court’s decision is anticipated to have significant effects on federal regulations across various areas. Federal regulations have a great influence on the food we consume, transportation methods, housing, and the world around us. With the Chevron doctrine overturned, those who oppose regulations now have a more straightforward path to contest them. Regulatory agencies will likely exercise greater caution when formulating rules, making sure the intent of the rule is clear. In addition, regulations based on unclear or ambiguous language in statutes may face increased difficulty in enforcement. Overall, it is expected that this decision will likely trigger a flood of litigation against federal agencies and may impede the regulatory process.

 

Featured images by Phung Touch via Pexels.

by Chris Swiecicki

Tax Court Holds Form Over (Controlled) Substance

I am again both proud and honored to be co-author with Richard Wise on this article, which first appear in the St. Louis Bar Journal. Any errors are mine alone. Readers who want the full version, complete with footnotes, should check out the original published by the Bar Journal.

In 2017, Lonnie Wayne Hubbard, a pharmacist from Kentucky, was found guilty by a jury on multiple charges of distributing a controlled substance. The indictment included a forfeiture provision with respect to the pharmacist’s listed property, more specifically an Individual Retirement Account held at T. Rowe Price. Following the defendant’s jury trial, his IRA was condemned and forfeited to the United States.

T. Rowe Price issued Hubbard a Form 1099–R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the 2017 tax year, reporting an early taxable distribution in the amount of $427,518.00. For 2017, Hubbard did not file an income tax return, thus failing to report the $427,518.00 IRA distribution which was forfeited.

The Internal Revenue Service via its Automated Substitute for Return Program, authorized by § 6020(b) of the Internal Revenue Code, prepared a substitute tax return on behalf of the taxpayer.

In 2020, the IRS sent a notice informing Hubbard of an income tax deficiency for the 2017 tax year of $165,353, an addition to tax of $37,204.00 for failure to file a timely tax return, an addition to tax of $28,937 for failure to timely pay, and an addition to tax of $3,959 under for failure to make estimated tax payments for 2017. In 2021, Hubbard timely filed a notice of petition with the Tax Court contesting the tax deficiency.

Hubbard’s argument was that since the funds were directly transferred to the government, he never constructively received the funds. Furthermore, he argued that he had reasonable cause for not filing his tax return, as he was incarcerated at the time the tax return was due. Lastly, he argued that his wife (now his ex-wife) never forwarded him the Form 1099-R received from T. Rowe Price.

Constructive Receipt

Section 61(a) of the Code provides that gross income includes “all income from whatever source derived.” This includes all accessions to wealth, clearly realized, and over which the taxpayer has complete dominion. Pensions and IRA distributions are generally taxable as income.

Gross income under § 61(a) includes items of income that the taxpayer has constructively received. Under the constructive receipt doctrine, funds or property which are subject to a taxpayer’s unfettered command and which they are free to enjoy at their option are constructively received whether they see fit to enjoy them or not.

Where a taxpayer’s funds are criminally forfeited to the United States to satisfy a forfeiture judgment, the taxpayer is not relieved of the income tax consequences that would have attached to the funds without such forfeiture. By forfeiting the funds, the taxpayer has realized the benefits of the funds, and must recognize the funds as gross income to the same extent as if they had been physically received.

The courts have held that a discharge by a third person of an obligation is equivalent to receipt by the person taxed.

In addition, the courts have previously held that IRA funds constitute gross income as an involuntary distribution when forfeited to a third party. A taxpayer constructively receives the IRA distribution when the distribution is made from the taxpayer’s IRA to satisfy a fine or restitution related to criminal conviction.

In the present case, there were undeniable accessions to wealth, clearly realized, and over which Hubbard had complete dominion. The mere fact that the payments were extracted as punishment for his unlawful conduct did not take away from their character as taxable income to him.

Excuses Not to File Petitioner’s Tax Return

Sections 6651(a)(1) and (2) of the Code provide that additions to tax may be reduced if petitioner can establish that his failure to timely file or failure to timely pay was due to reasonable cause and not willful neglect. Hubbard argued that he had reasonable cause not to file his tax return because he was incarcerated.

This argument failed, as the Tax Court held that Hubbard knew that he had a duty to file his tax returns. The Tax Court took judicial notice that Hubbard had filed his tax returns in previous years, and that he was aware of the criminal forfeiture. The Tax Court relied on Commissioner v. George, in which it was held that incarceration is not reasonable cause for the failure to file an income tax return.

Lastly, the court addressed Hubbard’s claim that he did not know that he had to file an income tax return because he did not receive the Form 1099-R from T. Rowe Price. Failure to receive tax documents does not excuse taxpayers from the duty to report income, and the courts have held that non-receipt of a tax document does not constitute reasonable cause to prevent the application of a § 6662(a) accuracy-related penalty.

Conclusion

In conclusion, Hubbard had no better luck in his proceedings in Tax Court than he did in his unlawful distribution of controlled substances.

This piece originally appeared in the St. Louis Bar Journal blog.

by Chris Swiecicki

Warning to Real Estate Developers: Get a Lawyer On Board Before You Contract with Engineers and Architects

A large part of real estate development requires entering into contracts with architects, engineers, and construction companies. The contracts can be complex, and worth millions…and if something goes wrong, someone will be left holding the bag—most often the developer.

The best way to avoid such problems is by making sure your contract language is clear and comprehensive. This is usually done by hiring an attorney to help. Such a contract is less likely to be challenged in court, too.

That said, real estate development contracts is one area where a firm’s expertise is essential. Without proper experience, too much can go wrong, given the complexity of these kinds of cases.

For example, I myself am currently representing a real estate developer who is alleging a breach of contract in the development of two properties. We are bringing suit against the engineering firm hired by the developer, and I am also defending the developer against the engineering firm’s countersuit. The complex nature of this case underscores the need for clear, concise contracts that cover a wide array of possible circumstances and eliminate confusion. And since even the best contracts may be challenged, the lawsuit also highlights the importance of having experienced and knowledgeable legal counsel should litigation be necessary.

Details of the Breach of Contract Lawsuit

The lawsuit in question was recently detailed in an article in the St. Louis Business Journal. Our client, Alpha Tulip, LLC was organized in 2017 and in January, 2018, bought vacant land to develop. One property was to be a residential house in Chesterfield, and the other a $7 million senior housing development in Hazelwood. 

Alpha Tulip hired THD Design Group, a company providing civil and geotechnical engineering, surveying, and construction management.

Our Client’s Suit

The current lawsuit was filed on behalf of Alpha Tulip against THD in December 2023 for failure to complete services in both Chesterfield and Hazelwood.

According to Alpha Tulip, when THD was in charge, it failed to have licensed engineers represent the company at site inspections of the Chesterfield residential property. As a result, alleges Alpha Tulip, the project was rejected with 26 objections. Among the issues, they say, was THD’s plan for a retaining wall that was a known violation of the city’s requirements.

In Hazelwood’s public hearings regarding the senior housing development, Alpha Tulip alleges that THD engineers lacked the skills and knowledge to respond to the city’s questions. As a result, the city rejected the project.

In 2019, THD abandoned the project. It did not provide Alpha Tulip with its plans and drawings, forcing the developer to start over with a new engineering firm. Ultimately, the plans were approved.

The Countersuit

In its countersuit, THD claims it ceased work in 2019 due to Alpha Tulip’s failure to pay for engineering services amounting to just over about $7000. They filed a mechanics lien on the residential property for the amount. It was later voided and released in August 2021.

THD insists Alpha Tulip’s claims of breach of contract are meritless and that THD did everything it was required to do with regards to both cities. Further, THD accuses Alpha Tulip of filing suit in the first place as a ploy to avoid paying the outstanding balance. 

The Importance of a Specialist in Contract Law

At the core of this case is the contract between Alpha Tulip, LLC and THD Design Group. Alpha Tulip hired THD to perform a service that was left incomplete. 

THD’s counterclaim focuses on Alpha Tulip withholding payment as a reason for stopping their work. Its attorneys argue that there was nothing in the contract that said payment was contingent upon either project’s acceptance by the appropriate municipality. 

All contracts have an implied covenant of good faith and fair dealing. Beyond that, crafting a contract involves anticipating likely scenarios to mitigate the risk for both parties. As this case works its way through the legal process, attorneys for both sides will assert their interpretations of how the contract defines the expectations and obligations of each party. Ultimately, a judge will weigh in on the final decision.

This is why it is so important for legal help with business contracts. A contract law specialist can draft a strong contract, and if necessary, defend its intended meaning in court.

When You Need a Business Litigation Attorney

Alpha Tulip, LLC has employed Swiecicki & Muskett since its inception. Having a contract lawyer who is also a business litigation attorney onboard should prove to be a definite advantage in both bringing this lawsuit and defending against the countersuit. 

The best time to partner with a business attorney is before problems arise. Their skills are indispensable for setting up a business entity properly, drafting and reviewing contracts, and if it becomes necessary—representing the company in court. 

For help with establishing your business, creating ironclad contracts, or litigating on your behalf, contact Swiecicki & Muskett.

by Chris Swiecicki

Sonny Did Not Rollover: Some Perils of Holding and Transferring Nontraditional Assets in IRAs

I was delighted when asked to be co-author with Richard Wise on this article, which first appear in the St. Louis Bar Journal. Richard is a wealth of information on many topics, and I was happy to contribute my two cents on this particular case. Readers who want the full version, complete with footnotes, should check out the edition published by the Bar Journal.

With the popularity of using Individual Retirement Accounts (IRAs) to hold non-traditional assets such as precious metals, partnership interests, real estate, and other property, a recent case involving James Caan, the actor who played Santino Corleone (better known as Sonny) in the movie The Godfather, illustrates some of the perils of using IRAs to hold non-traditional assets.

What is an IRA?

Section 408 of the Internal Revenue Code is the main Code provision governing IRAs. It was enacted as part of the Employee Retirement Income Security Act of 1974, in furtherance of Congress’s goal “to create a system whereby employees not covered by qualified retirement plans would have the opportunity to set aside at least some retirement savings on a tax-sheltered basis.”

Section 408(a) provides that an IRA is “a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the [requirements enumerated in paragraphs (1) through (6)].” Section 408(h) further provides that for purposes of section 408:

a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

To form a custodial IRA, the taxpayer executes a written custodial agreement that meets the requirements specified in section 408(a)(1) through (6). Once the custodial agreement is executed, section 408(h) treats the custodial agreement as a trust instrument and the custodian as a trustee, which allows for section 408(a) to apply, thereby creating a custodial IRA.

If the IRA is a custodial account, the institution’s duty is to hold and safeguard the investment; there is no duty with respect to investment decisions. The practical distinction is that a custodial account’s investment decisions can be dictated by the IRA owner/beneficiary.

Trust IRAs and custodial IRAs have the same three tax attributes, which together constitute the tax- deferral system that Congress created: (1) cash contributions are generally deductible; (2) accretions from the IRA’s assets are not taxable (except for Section 511 unrelated business income); and (3) distributions are taxable.

Alternative/Nontraditional Asset

IRAs are not limited to holding traditional assets such as cash, bonds, and publicly traded securities; they can still qualify for tax advantages while holding alternative assets.

When an IRA holds alternative assets, however, the IRS requires that the IRA’s trustee or custodian report the fair market value of the alternative assets yearly, valued as of December 31 of the preceding year, i.e. year-end fair market value.

Distributions from an IRA

In addition to creating a tax-deferral system through IRAs, Congress provided for nontaxable rollovers of IRA distributions, by which taxpayers can transfer investments from one IRA to another without incurring tax liability.

When a taxpayer requests an IRA distribution, that distribution is nontaxable if the entire amount received, including money and any other property is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which he receives the distribution.

A taxpayer may also choose to roll over only a portion of the distribution, in which case only the portion that is contributed to another IRA within the 60-day rollover period qualifies as a nontaxable rollover contribution, and the non-contributed portion must be included in income.

Taxpayers are limited to one nontaxable rollover of an IRA distribution per one-year period, whether it be a full or partial rollover.

Distributions of Noncash Property

If the distribution consists of noncash property, the taxpayer must contribute the exact same property in order for the distribution to be considered a nontaxable rollover contribution under section 408(d)(3)(A)(i). In other words, the taxpayer cannot change the character of the noncash property.

Sonny’s Predicament

Caan held a partnership interest in an IRA with UBS serving as the IRA custodian. As part of the UBS custodial agreement, UBS placed the responsibility with Caan to provide a year-end fair market value of the partnership. In 2015, Caan failed to provide UBS with the partnership’s 2014 year-end fair market value. As a result, UBS refused to continue serving as the custodian of the partnership interest, and sent a letter to Caan notifying him of a distribution of the partnership Interest. UBS then issued Caan a Form 1099–R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which reported to the IRS a distribution of the partnership Interest using the 2013 year-end value as the value of the distribution.

Also in 2015, Caan’s financial advisor moved to Merrill Lynch and Caan transferred his IRAs to Merrill Lynch. The partnership interest, however, was not eligible for electronic transfer, so Caan’s investment advisor at Merrill Lynch directed that the partnership be liquidated, and the cash sent to Caan’s Merrill Lynch IRA account. Said liquidation and cash transfer did not occur until approximately a year from the time that UBS notified Caan of UBS’s distribution of the partnership interest.

On his federal income tax return for tax year 2015, Caan reported a nontaxable distribution of his IRA. The IRS Commissioner disagreed with Caan’s position and determined an income tax deficiency of $779,915.00 for tax year 2015. He filed a petition with the U.S. Tax Court for redetermination of his 2015 income tax deficiency.

Shortly before filing the Tax Court petition, Caan requested a private letter ruling from the IRS granting him a waiver of the 60-day period for rollovers of IRA distributions. The IRS denied that request on the grounds that Caan did not meet the “same property” requirement. In other words, regardless of the timing of the rollover, Caan’s liquidation of the partnership interest and contribution of the cash to the Merrill Lynch IRA did not comply with the “same property” requirement. As such, it was not a nontaxable rollover.

The Tax Court sided with the IRS, holding that the partnership interest was distributed in 2015 to Caan, and that Caan did not contribute the partnership interest in a manner that would qualify as a nontaxable rollover contribution under section 408(d)(3) because he changed the character of the property when the partnership interest was liquidated prior to rolling over the property to his new IRA.

Takeaway

When a client holds nontraditional or alternative assets in an IRA, the IRA should be reviewed yearly, and any actions involving rolling over such assets to a different custodian must be taken with care.

This piece originally appeared in the St. Louis Bar Journal blog.

by Chris Swiecicki

Choosing a Legal Ownership Structure for a New Business

In the early stages of a business, a lot is riding on every decision. Choosing the legal ownership structure, for example, can impact taxes, legal liability, and the business’s day-to-day operations. 

While it is possible to change the structure of a business after setting it up, that can involve unnecessary hassle. It is better to understand the pros and cons of each structure and its implications now and in the future—and start out with the most beneficial formation.

Choices For the Structure of a Business

Deciding on a legal ownership structure involves thinking about the business’s goals and potential future events. For example, an individual planning to sell homemade goods at farmer’s markets for a little extra cash does not need the same business designation as a multi-million dollar manufacturing company.

In general, a less formal structure will have few requirements to meet and straightforward everyday management. More formal structures typically offer tax advantages and personal protections but also have more rules to follow.

The structure of a business needs to be chosen before the owner can apply for a tax ID number, register it with the state, or obtain any licenses or permits. Let’s look at the definitions and considerations for the possible designations a business might pick.

Sole Proprietorship

A person can become a sole proprietor simply by deciding to go into business for oneself. They do not have to file any paperwork or register the business in any way, but instead can simply begin selling goods or providing services. 

Because the person is the business, revenue and expenses are recorded on the individual’s income tax return. Sole proprietors may choose a dba (doing business as) and open a separate bank account in that business name to keep things separate from their personal finances, but it is not required. 

The main drawback for sole proprietors is they assume all liability. This means that any debts or legal trouble can put their personal assets at risk. 

A sole proprietorship works well for someone selling crafts on Etsy or mowing lawns. The risk of someone suing these entrepreneurs is low. For other individuals, such as a childcare provider or the owner of a food truck, the possibility of an accident or other mishap could land them in court. Those businesses would receive more protection from another legal ownership structure, such as an LLC (limited liability company) which we discuss below.  

Partnership

If a business fits the description of a sole proprietorship, but there is more than one owner, they may choose a general partnership as the legal ownership structure. Like a sole proprietor, all revenues pass through to the partners and must be reported on their individual tax returns. 

General partnerships do not need to be formally registered unless the state requires paperwork to use a business name. But this structure does require a good deal of trust between owners. For this reason, every partnership, even a family business, should have a partnership agreement to make sure everyone is on the same page. This contract will spell out matters such as the division of profits and losses, who has decision-making authority, how conflicts will be resolved, conditions for ending the partnership, etc. 

Since general partners assume unlimited personal liability for something the business or the other partner does, an LLP (limited liability partnership) may be preferable. This protects partners from being completely responsible for their partner’s actions. In most cases, the amount of liability is limited by the partner’s contribution to the partnership rather than any personal assets. The articles of partnership will spell this out and may also restrict the amount of operational control of some partners. 

A good example of an LLP is a pair of attorneys or dentists practicing together. Both names may be on the door, and the partners may share day-to-day decision-making in the office. But neither is responsible if the other partner is sued.

Limited Liability Company (LLC)

An LLC’s main purpose is to shield its members from legal liability. LLCs can have one owner or several. For an individual whose business has a higher risk of legal action, this legal ownership structure is preferable to a sole proprietorship. An example would be someone making a product that could potentially harm someone, or in an industry where it might face a challenge for patent infringement. The LLC, not the individual, will take legal and financial responsibility for any mishaps.

Starting an LLC means registering the business entity with the Secretary of State. Because it holds business assets separate from the personal assets of its members, there must be meticulous record-keeping to keep revenue and expenses separate too. 

That said, an LLC is still a pass-through corporation and does not need a tax return of its own. Each member is required to report their earnings from the company on their tax returns. They are also considered self-employed and must also pay self-employment tax which goes toward Medicare and Social Security.

Individual entrepreneurs and large companies may both benefit from the protections of an LLC. One thing to consider, however, is owning multiple LLCs. Receiving income from several pass-through entities can create a tax burden that is greater than if the legal ownership structure was a corporation.

Corporation

A corporation can be a C corp or an S corp. Both provide the strongest protection of its owners’ personal assets. Corporations are legal entities that are completely separate from their owners. As such, the company earns profits or suffers losses and files a corporate tax return. Profits are distributed to shareholders in the form of dividends. 

A C corp is subject to “double taxation,” because the company pays taxes on its profits, and the shareholders pay taxes on their dividends. This can be avoided by forming an S corp instead, which allows profits to pass through to shareholders without paying a corporate tax. Companies must meet certain IRS requirements to become an S Corp, however. 

There are many rules that corporations must follow. Setting one up requires articles of incorporation, a board of directors, annual shareholder meetings, and strict record-keeping and reporting. But there are many benefits as well. Corporations can sell stock and raise capital, and shareholders can sell their shares without affecting the corporate structure. 

Forming a corporation is beneficial to large companies with plans to grow exponentially, go public, or to be the subject of a merger or acquisition in the future. But it can be an appropriate structure for a small business too depending on the circumstances.

Which Legal Ownership Structure is Right for You?

In choosing the structure of a business, there are several aspects of the business and its owners to consider. 

Protecting Personal Assets. For an individual owner in a business where there is little risk of lawsuits or bankruptcy, a sole proprietorship is usually sufficient. But only LLCs, corporations, and some partnerships protect personal assets from liability. 

Control and Management. If day-to-day decisions for company operations are shared, a business should at the very least have a partnership agreement. Forming a corporation with articles of incorporation will formalize the details for larger, more complex companies.

Tax Implications. There is nothing wrong with a corporate structure with pass-through income unless the applicable tax rate results in a huge tax burden. A tax attorney can weigh the pros and cons of pass-through vs. a corporation’s double taxation.

Funding and Capital. If selling stock and raising capital is part of the current or future business plan, a corporation is the best structure option. 

Scalability and Flexibility. Big plans for the future, such as expanding to a new region or launching an IPO should be considered before deciding on a legal ownership structure.

Legal Requirements. If an LLC’s protections are sufficient, it doesn’t make sense to form a corporation and jump through all the hoops required with incorporation. Similarly, an individual with a low-risk business does not necessarily need to fill out the paperwork to become an LLC.   

Legal Advice for a New Business

The decisions you make about the legal ownership structure of your new business can have a huge impact on its future. The best way to determine the appropriate structure is to discuss it with a business attorney like Swiecicki & Muskett. 

Chris Swiecicki’s diverse experience helps identify each business’s unique needs when it comes to business law and taxation. Contact him today to discuss what will be best—and most profitable—for you.

by Chris Swiecicki

When is the Right Time to Bring in an Attorney for a Business Contract?

Every business, no matter how small, will eventually need to enter into some type of transaction that requires a formal contract. Small business owners may be tempted to draft a contract themselves or choose from online sources that promise easy-to-use contract templates. They may not feel the need to involve an attorney unless something goes wrong. 

While we understand the desire to save time and money with a DIY approach, a one-size-fits-all solution can not possibly capture the nuances of every unique business transaction. There are very good reasons for contacting an attorney early in the process rather than waiting until there is a dispute, even if only for a quick review. Understanding when it’s best to involve a professional will help prevent errors, misunderstandings, or omissions that can lead to costly outcomes.

Four Key Times to Involve an Attorney

Unless a business is big enough to have its own legal department or a corporate attorney on retainer, the question of when to bring in an attorney for a business contract is bound to come up eventually. Even in-house counsel sometimes brings in an outside specialist. Some contracts might need the expertise of a patent lawyer or tax attorney, for example.

While having a lawyer draft or review every single contract might mitigate the majority of risk for a company, it isn’t always feasible—or necessary. Executing simple contracts like a bill of sale or a standard lease agreement may not require a professional’s help.

In general, a more realistic answer of when to call an attorney is whenever a contract involves complex ideas or when the terms of the agreement have high stakes. For example, ironing out the complicated details of a merger or acquisition is something that definitely needs an attorney’s expertise. So does something like negotiating the terms of a licensing agreement for an invention. In both examples, a mistake in the contract could cost millions of dollars, lock one or both parties into an unfavorable situation, or put the company’s future at risk.

We have identified four times when it is in a business owner’s best interest to get professional contract help. 

1. When Asked to Sign a Contract

When presented with a contract, the need to have a lawyer review it increases along with the stakes or dollar amounts involved. For example, a multi-year service level agreement with a retailer for your company’s product merits an experienced lawyer’s opinion. On the other hand, an agreement with an independent contractor for a single project in exchange for a set fee is fairly cut and dried. 

Still, there is value in having an attorney review a contract to make sure there are no surprises. They can explain the terms so their client completely understands their rights and obligations as well as what will happen if one party does not meet their part of the bargain. If a business owner foregoes the help of a professional, there could be unanswered questions. For example, can the independent contractor in the above example be compelled to complete the work? When is payment due and what type of penalty or interest will be charged if it is not paid on time? 

2. When You Want to Formalize an Agreement 

An oral agreement can be legally binding. But you’ve probably heard the saying “A verbal contract is not worth the paper it’s written on.” Written contracts lay out the details of an agreement to avoid confusion and safeguard the interests of both parties in a court of law. As soon as it is evident that an agreement with another party needs more than a handshake and a promise, it is time to draft a formal contract.

As with #1 above, the need for an attorney will depend on the importance and complexity of the transaction. Hiring an attorney to draft the document will ensure that nothing is missed and that the terms have the intended results for both parties. As an alternative, a business owner could ask a lawyer to review and recommend changes to a document the business owner drafted.

3. When a Business Changes

The two previous examples involve new contracts. Existing contracts should be reviewed periodically, especially when either party undergoes a major change. For example, a company expanding its services to include delivery might consider tweaking the terms spelled out in its client contracts. Will they promise delivery in a certain time frame? Will there be an additional fee? What recourse does a customer have if they do not receive their items? A contract attorney can make sure the wording still represents the company’s best interests while covering all new considerations. 

4. When a Market or Industry Changes

Just as with company changes, similar adjustments should be made to contracts when a business owner anticipates industry changes. Consider 2023’s labor dispute between the Writers Guild of America and Hollywood studios. The increased use of Artificial Intelligence in the industry triggered the WGA to demand changes in how their work was represented and compensated.

Similarly, any company might see changes ahead for the type of work it does. An experienced contract attorney can structure a contract and adjust its language to accommodate changes when necessary.  

Pitfalls of a Poorly Drafted Contract

A good contract safeguards the rights and clarifies the obligations of both parties. A poorly drafted one, however, could result in a number of unpleasant outcomes. There could be few options in the case of a breach. A business might not get paid, may be forced to provide unanticipated products or services, or could end up in litigation. 

All of these situations could end up more expensive and disruptive than hiring an attorney to draft or review the contract in question. By bringing in an attorney for a business contract—and bringing them in early in the process, business owners can rest assured that their contracts won’t have the following issues:

• Ambiguity. Every contract can be subject to interpretation, but clear, concise professional language will eliminate confusion.
• Not enforceable. Contracts must follow the laws of the jurisdiction to which they apply. For example, requiring a non-disclosure agreement from an employee in a state where NDAs are not legal, would not hold up in court. 
• Omitting key points. Attorneys know how to close loopholes and will think of issues their clients might not anticipate. For example, adding an arbitration clause to a contract allows disputes to be handled out of court. And a termination clause gives parties a way out in certain situations.
• Unforeseen risks. Not considering a variety of eventualities can increase risk exposure. That said, a written contract naturally includes an Implied Covenant of Good Faith and Fair Dealing for both parties’ protection.

While any contract can suffer from issues that could lead to litigation, a professional contract attorney is less likely to make a mistake than a layman. Lawyers understand the meaning and implications of contract language and how the document should be structured. 

What a Contract Lawyer Brings to the Table

Hiring a contract attorney puts business owners at an advantage over those trying to draft a document themselves. An experienced lawyer will take the time to understand their client’s goals and the purpose of the contract. They can prevent a business owner from entering into an agreement that does not serve the interests of the company, or worse, harms it.

It is important to find an attorney familiar with the local jurisdiction and who has participated in litigation when contracts are breached. This experience gives them the ability to craft a strong document that provides the assurances and protections the company needs. 

A Contract Attorney Can Safeguard Your Business Interests 

Whether a business contract is an occasional necessity or part of day-to-day operations, these documents and their contents should not be taken lightly. Errors, vagueness, or the exclusion of important points can lead to costly mistakes and even litigation. Often the expense and inconvenience are much greater for a company than hiring a lawyer from the start. 

For all but the simplest agreements, contact an attorney who specializes in contract law like Swiecicki & Muskett. The higher the stakes of a transaction, the more important it is to get professional advice. The future of your business could depend on it.

 

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by Chris Swiecicki

Looking for Business Contract Templates? Read This First

In the world of business, contracts keep transactions running smoothly. Contracts define the rights and obligations of the parties involved and provide the legal framework for business relationships. Online contract templates offer businesses an accelerated, often inexpensive way to get some legal coverage and ensure their interests are represented. After all, having a written contract is generally better than not, and having some legal protections is better than having none.

Still, there are potential shortcomings that online contract template sites don’t always disclose. Businesses need to be aware of these before they choose to gamble their business on a templated contract.

Where Online Contract Templates Fall Short

To be clear, I am not saying that online business contract templates always fail. If you have a small business and you need a contract for a simple, repeatable, common task, then an online contract might well cover all the necessary bases and be a valid approach. However, if there’s anything more complex about a business situation, be it the deal itself or something unique about your business structure or practices, it’s unlikely that a templated contract will adequately cover those unique facets. A good contract protects the interests of the business, especially when the other party acts in bad faith. Here are some specific areas where a contract template might not fully cover your business:

Risk Mitigation

Contracts are about more than rights and obligations. They can be powerful tools for risk management. However, risk isn’t universal. What might be non-risky for the average business could be an existential threat to yours. A templated contract is written with the average business in mind and may miss areas where your company is uniquely legally exposed. For example, all contracts expire or have a termination date at which point all provisions cease. Companies may need what’s called a “survival clause,” which continues after the contract’s expiration, and may cover things like confidentiality, indemnification, warranties, and intellectual property rights. Without having a lawyer draft or review your contract, you may inadvertently open yourself up to substantial risk. 

Addressing Unique Needs

Of course, there’s more to contracts than risk. Every business has unique circumstances and goals, and contracts can help advance those. One of the most significant advantages of having lawyers write your contracts is the human element. Lawyers can get to know you and your business and ensure that the final contract is tailored to your specific needs. Not only does this result in a legally stronger contract, but it ensures that your contract is comprehensive and relevant and minimizes the potential for disputes in the future. For example, you may be selling a business but plan to keep a handful of customers for yourself after the sale. A standard online contract template might not cover this type of transaction. 

Protecting Intellectual Property

If your company has any intellectual property (IP), such as patents, trademarks, or copyrighted work material involved in a project, then it’s a good idea to make sure that it’s protected. You don’t want to sign a contract that gives over your IP to another party—or even opens the door for a dispute. Even if you ultimately prevail in an IP case, handling one can be a huge distraction for your company, moving you from innovation and efficiency to a desperate fight to protect what’s rightfully yours. Given the range of what IP can include, from inventions and artistic works, to brand names and logos or trade secrets like formulas and practices, it’s uncommon for online contract templates to fully and effectively protect businesses in this area.

Legal Precision and Compliance

Like any legal document, contracts need to comply with relevant national, state, and local laws. Failure to comply could result in penalties or, in certain circumstances, render the contract null and void. So, while the contract you find online might be compliant in one jurisdiction or another, it might not be compliant in yours. For example, many states allow non-compete clauses in employment contracts, but they’re essentially outlawed in most cases in California. Even if an online template can handle that nuance, there’s a chance that laws have recently changed, and using outdated language can get you in just as much trouble. By hiring a lawyer, you can ensure that you’re getting a contract that’s up-to-date and compliant.

Clarity and Avoidance of Ambiguity

One reason that many people use contract templates is that legal language can be dense and difficult to parse. It’s not that lawyers love big words, but rather that being clear and resolving ambiguity is critical for avoiding disputes and winning them if they do arise. Templates often use generic language, which may or may not be truly effective at ensuring clarity. Such generic language can actually increase the odds of a misunderstanding down the line.

Furthermore, your online contract template generator isn’t going to be able to advise you on the best path for negotiation and dispute resolution. In some cases, that might be arbitration or mediation, saving you time and money. In others, that might not be legally viable or not desirable for various reasons. No matter how good your online tool is, it’s never going to be able to understand the broader context in which a contract is being created, so it won’t be able to help you drive the outcomes that you’re seeking.

When to Enlist a Lawyer for Contracts

A theme in these shortcomings in online contract templates is that contracts aren’t one-size-fits-all. Instead, to be truly effective, they need to be customized to the specific circumstances at hand. That’s not to say that a failure to do so represents an existential threat to your company. In some cases, poor phrasing in a contract could lead to your business having to spend more time and money to complete a project, destroying your margins in the process.

You never want to be forced to choose between that scenario and a possible breach of contract. Ultimately, using online contract templates is sometimes safe. But, if you find that your business or the particular contract you need falls into one of the categories we covered above, then it’s a good idea to hire a lawyer to take a second look, to make sure you’re covered and to avoid mistakes like the misplaced comma that cost Lockheed Martin $70 million.

How Swiecicki & Muskett Help with Business Contracts

At the end of the day, it’s important to invest your resources wisely. However, if you’re having a lawyer review the contract, why not just have them write it for you in the first place? In that case, you’ll get a custom contract for your business with the legal precision, risk mitigation, and clarity needed to protect your interests and reduce the likelihood of a costly dispute down the road. That’s far better than what you’ll get from any of the online legal document alternatives. You’ll also have a lawyer to help navigate the negotiation process. If your company needs a solid contract to help keep its interests protected, contact Swiecicki & Muskett today for a free, no-obligation consultation. 

by Chris Swiecicki

Keep it in the Family? Why Family Businesses Need a Good Attorney, Too

A family business can become a lasting legacy, passed down for generations. But professional and personal interests don’t always mix as well as everyone hopes. Even the closest families can find themselves at odds. 

While some might prefer to keep family conflict to themselves and resolve issues privately, it is better to find a lawyer to help out a family business. A family business lawyer can be a neutral, unbiased advisor who keeps the company on track and maintains family harmony. 

Safeguarding a Family Business

Family businesses come in all sizes—from a mom and pop shop or siblings’ startup to a multi-million dollar company with thousands of employees. Their defining feature is the fact that two or more family members operate the business and have majority ownership and control of its operations. Roughly 19% of companies in the U.S. are family-owned.

While family ties and shared values are often at the heart of these businesses, those things won’t guarantee success. Only 30% of family businesses survive into the second generation. Only 12% are intact by the third. 

It’s easy to guess why this is true. In addition to all of the issues that any company faces, a family business also faces family dynamics that make business decisions more complicated. Conflicting ideas, egos, and personalities are not just matters for the HR department—they can be deeply personal matters that can harm both the business and close relationships.

Sometimes there is a desire to keep family issues private, but that can compound the problem. A better option is to find a business lawyer who the family members trust. A family business attorney can help structure the company and its operations to withstand disagreements and drama that can come with a family business. 

A Catalog of Common Family Business Challenges

Launching a new business with a family member, or bringing a child or sibling into an existing business should be handled carefully—because, unfortunately, the initial sense of camaraderie and togetherness can sour with time. 

These are some of the issues to consider when family is involved:

• Old grudges, sibling rivalries, and trust issues can come to a head when family members have to work together. 
• Conflicts with non-family employees can arise if there is nepotism or members of the family are held to lesser standards.
• Being related can make reprimanding or firing someone difficult.
• Disagreements about the company’s direction can interfere with important business decisions (for example hiring and firing, business expansion, selling assets, mergers and acquisitions).
• Unclear boundaries can lead to business matters spilling over into personal life, and vice versa.
• Personal events (birth, death, illness, marriage, or divorce) can complicate the structure and ownership of the company. 

Anticipating and planning for potential problems like these can increase the chances of a family business’s long-term success. Preparing by getting legal advice should be considered realistic, not pessimistic. 

It’s human nature to think that one’s own family is different and would never let personal feelings stand in the way of success. But no one can predict what will happen over time. A parent might need to reprimand or even fire their child. One sibling might decide they want to leave. Two cousins could both assume they’ll take control when the owner passes away. Or an ex-spouse (or other non-family member) could inherit part ownership due to a sudden death.

Having a lawyer to help out a family business is beneficial. They can plan for possible future scenarios like these so the company and its employees are protected.

The Role a Corporate Lawyer Can Play in a Family Business

There are several ways in which a corporate lawyer can make life easier for family businesses:

Structuring the Business. How the business is structured will affect how much say each family member has in the company. How much does each person want to be involved in day-to-day operations? Will they be active partners or just investors? Will the levels of ownership be equal? Will major decisions be made by a primary person, by the majority, or will everyone need to agree?

These are all things an attorney can help make official. Ideally, this should happen when the business is formed. But a lawyer can be brought in at any time to consult and get things set up properly.

Drawing up documents. A business lawyer can advise whether the business should be an LLC or a corporation and assist in drawing up  or revising the necessary documents such as articles of incorporation, bylaws, operating agreements, non-disclosure agreements, and shareholder agreements. 

Attorneys will also recommend and write various contracts directly related to family businesses. For example, family employment policies, exit provisions, conflict resolution protocols, shared capital strategies, and even prenuptial agreements. Having these instruments in writing can help to diffuse future arguments by providing a blueprint for what should happen or who should make decisions should a crisis arise.  

Solidifying succession plans. In a broader sense, it is important for a lawyer to help out a family business in clarifying their vision for the future and put policies in place to ensure it. One of the most important, yet most neglected things to consider is succession planning. Only 34% of family-run businesses have a documented succession plan. In other words, there is no plan for transitioning from the current owner to the next if that person retires or passes away. Not only have family business owners not thought about how they will hand over the reins, most have not even decided who will take over. A survey taken of business owners who expect to retire within five years found that 47% had not yet named a successor. 

This can leave family members in limbo about the future. (The entire hit TV series Succession is based on this premise.) And it can be catastrophic if something happens unexpectedly to the primary owner. A family business lawyer will see that there is a clear plan in place and that wills and powers of attorney are current. This allows the company to carry on with a smooth transition, despite a tragic event.

Other Ways a Business Lawyer Assists Family Businesses

Many family business lawyers become trusted confidants and valued members of the team. As such, they might be called upon to provide guidance on various business matters. These are just some of the services families might take advantage of:

• Formalizing family members’ roles and responsibilities and the leadership structure.
• Assisting members in separating their business and personal finances.
• Creating exit plans and non-compete agreements for family members leaving the company
• Advising on tax implications of things such as opening a new location, buying or selling assets, going public, or a corporate lawsuit.
• Crisis management and litigation when necessary.
• An unbiased sounding board and go-between to facilitate communication among members.

A Business Lawyer Should Be Part of the Family Business Team

Every business should have an attorney who can help them create the necessary documents and establish the corporate structure. For a family business, the need is even greater because of the possibility of personal conflicts interfering with business operations.

There is much more invested in a family business than just money. There is a greater sense of pride and dedication that can make it something special. But there are also personal feelings and emotions that can be its downfall. 

Chris Swiecicki’s extensive experience in business law, taxation, and employment law has given him a deep understanding of what it takes to make a family business succeed. He is happy to discuss strategies that will help keep your family business legacy intact for the next generation and beyond.

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by Chris Swiecicki

What is the “Representations and Warranties” Section of a Purchase Agreement for, and Why is it Important?

When buying or selling a business, an accurate representations and warranties section of a purchase agreement is critical for ensuring a smooth transition. Any size entity, whether a small family business or larger corporation, is bound to the facts stated in the agreement in order to close the transaction.

Because there are so many legal details that could result in indemnification (compensation for loss and harm) for either party if not accurate, it’s always best to have a trustworthy attorney by your side who can explain what everything means during all contract negotiations.

What Are Representations and Warranties?

Representations and warranties are contractually binding statements assuring both parties of a sale that the business is what the buyer believes it to be. They give both parties legal recourse if the transaction does not go through as expected. Both the buyer and seller make representations and warranties, but the majority of them are made by the seller. 

Representations

A representation is an assertion that everything in a contract is true as stated. Especially in M&A transactions, sellers must include information about the target company or business and the stock or assets and liabilities being transferred. 

Warranties

A warranty can result in indemnification, or compensation, if the assertion is false. The seller will warrant information given to the buyer during the diligence process, such as that:

• The business is in compliance with all relevant government regulations.
• All financial statements are true and accurate.
• All property—whether tangible or intangible—is free of any encumbrances.

The buyer will need to make warranties as well, such as that:

• They have enough money on hand to pay the purchase price.
• They are a duly formed corporation with the power to execute the contemplated transaction. 

Exceptions 

Representations and warranties are drafted as general statements in most M&A transactions. The seller must disclose exceptions to those statements in a disclosure schedule attached to the purchase agreement. As long as the exception is properly disclosed, the buyer has been given official notice of the fact. If a seller fails to make a disclosure, it may result in a claim of fraud against the seller.

For example: Except as set forth in Section 1.1 of the Disclosure Schedule, the Company has no current litigation. Disclosure: A claim for XXX was filed in the Superior Court for Perry County on March 3, 2020, under Case No. 1234.

Remedies and Enforcement

The indemnification obligations of the parties, provided in the purchase agreement, is what enforces the representations and warranties. Indemnification language typically states that for a limited time after closing, the parties can indemnify each other for breach of or inaccuracy in the representations and warranties provided by that party.

For example, if a deal closes and the buyer discovers that the seller’s financial statements are inaccurate, the buyer can seek indemnification for losses incurred.

Because of the repercussions that can happen if any inaccuracies occur, it’s extremely important to have a lawyer help craft the deal at an early stage. A simple mistake made here can actually have larger ramifications on if the deal goes through, or whether a seller can get paid if it doesn’t.

Representation and Warranties Insurance

Insurance to protect both parties of an M&A transaction has become fairly common, although it is more often requested by the seller as protection from post-closing indemnity claims. Because the policies pay out claims that arise from breaches in the representations and warranties, those covered by insurance tend to be less concerned about deal friction and closing issues. 

The insurance issuer is involved in due diligence and negotiation of the representations and warranties. Every policy has different exclusions and conditions under which the policy will not cover indemnification claims. Exclusions are determined based on the insurance company’s due diligence review, and usually include issues the parties knew of prior to closing and other extraordinary risk issues.

What Information is Included in Representations and Warranties?

In general, the seller and target of the M&A will include the following information in this section of the purchase agreement. 

Financial Information

Financial Statements

This ensures that financial statements delivered to the purchaser:

• Are true and complete.
• Were prepared from the financial records of the target.
• Were prepared with sound accounting principles.
• Reflect actual transactions and have been maintained in accordance with sound business practices.

No Liabilities

This states that there is no debt or liabilities other than:

• Those disclosed in or reserved against in the aforementioned financial statements.
• Those incurred in the ordinary course of business since a particular date.

Tax Matters

This clarifies all information about taxes, stating that:

• The target has filed all required tax returns. 
• All tax returns are true, complete and correct in all material respects.
• All taxes have been paid in full and there are no liens or contests.

Ownership Issues

Authority

This states that the target and each seller party has:

• The full legal right and authority to execute the purchase agreement.
• Authorizations, consents and approvals required by law.

Corporate Power

This states that the target and each seller party has the power and authority to:

• Own, lease, operate and use its assets and properties. 
• Perform all its obligations under its contracts.

Ownership of Target Company; No Subsidiaries

This states that the seller owns the issued equity interests of the target and that:

• They are free and clear of all liens, encumbrances and rights of third parties. 
• There are no subsidiaries of the target. 
• All issued equity securities of the target were issued in compliance with federal and state laws.

Title and Sufficiency of Purchased Assets

This states that each seller party owns the goods sold, and that:

• At closing, the seller will transfer and deliver to the buyer all purchased assets.
• All goods and assets will be free and clear of liens and rights of third parties.
• Purchased assets constitute all of the material assets, properties and rights necessary. 
• The tangible personal property is in good operating condition and repair, except for with the exception of normal wear and tear. 
• All items of tangible personal property are located at the target’s premises.

Laws

Legal and Authorized Transactions

The purchase agreement constitutes the legal, valid and binding obligation of the target and each seller party. 

Compliance with Laws 

There are no violations by the target of any law relating to the target, its equity, assets or the transaction.

Licenses and Permits

The target has all required licenses and permits.

Litigation

There are no claims, lawsuits, investigations or judgments relating to the target.

Organization

The target and each seller party is in good standing under the laws of its jurisdiction of organization. 

Full Disclosure 

This explains that the purchase agreement does not contain any untrue statement or omit any information that would make the statements false or misleading.

Contracts

This states that except what is included in the disclosure schedule, the target is not bound by any contract or other agreement. The contracts set forth on the applicable disclosure schedule:

• Are a legal, valid and binding obligation of the target and the other parties.
• In full force and effect in accordance with its terms.
• May be assigned to the purchaser and will continue after closing.

Other Information

The representations and warranties section may also include information regarding:

• Product Warranties to Customers.
• Customer Credits.
• Intellectual Property and Confidential Information.
• Employee and Labor Matters.
• Environmental, Health and Safety Matters.
• Inventory.
• Real Estate.
• Insurance Matters.

A Knowledgeable M&A Attorney Should Be Involved in All Parts of a Purchase Agreement

Regardless of why you are buying or selling a business, it is best to have an M&A lawyer at the earliest stages of the deal. They should be the ones obtaining a valuation and crafting the agreement, along with ensuring the representations and warranties are complete and accurate. Instead of waiting until a deal is on the table and contracts are already drafted, contact  Swiecicki & Muskett, LLC to help you navigate your merger or acquisition.

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by Chris Swiecicki

Is There a Statute of Limitations on Patent Infringement?

Does your business have a patent that another company has infringed upon? Or are you being blamed for stealing someone else’s idea or product? In either case, you may be wondering how long you have to take legal action. 

I myself have been co-counsel on a patent-infringement case having to do with a piece of technology (a parking app, to be precise). That said, it’s important to state: Handling a patent issue is something that should be done by someone admitted to the patent bar. So, if pursuing a patent case, make sure you have a patent attorney on board first.

While I am not a patent attorney myself, there is some readily available information that patent attorneys will commonly share with potential clients. This includes crucial information on the statute of limitations for patent infringement cases—and the timeframe you actually have for bringing forward a case.

The Ins and Outs of Patent Infringement

Patents are issued by the U.S. government to protect the invention or technology of an individual or business. When someone legally obtains a patent, they have the right to “exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” (35 U.S.C. §154)—at least for a set period of time.

Two types of patents offer intellectual property protection. Design patents cover an object’s design or unique appearance, and last for 15 years. Utility patents cover unique machines, processes, or chemicals. These patents last for 20 years.

An invention does not need to be completed in order to be protected. During the process of making it, inventors can apply for a provisional patent for one year, which means it’s in the “patent pending” phase. This gives developers time to refine details and determine if there is a market for their product while letting others know that their idea is in the works and that it can’t be copied.

After the provisional patent has expired, the owner can either move on with their invention and file for a non-provisional (permanent) patent or allow it to lapse altogether. After that time, competitors can file for a patent using that same idea. 

What is Patent Infringement?

Patent infringement happens when someone copies a patented idea to create a product without the patent holder’s permission. “Stealing from” a patented product can happen in a number of ways:

Direct Infringement 

Producing, using, selling or attempting to sell, or importing a patented item without first obtaining a license from the patent holder.

Indirect Infringement

Infringing on a patent, but doing so only after another company or individual has done so. For instance, if another business copies a patented product, and you distribute their product, you could be sued for patent infringement. 

Contributory Infringement

When an individual or company purchases or imports a part that goes into creating a product that’s already patented by someone else. 

Willful Infringement

When someone shows blatant disregard for the patent. For example, if someone else’s patented product is found within your business where you are making a similar product, you are willfully violating their patent.

Induced Infringement 

Aiding another infringer by providing parts or assisting in the manufacturing of the patented item.

Not all cases of patent infringement call for legal help. Sometimes, a patent holder who is aware of someone using their product can inform the offending party and ask them to stop. If that doesn’t work, it may require business litigation where a patent attorney steps in. 

The Statute of Limitations on Patent Infringement

In the United States, the statute of limitations for patent infringement is six years. This means from the time a person who has a patent learns that someone is using their idea, they have six years to file a lawsuit. Each year, about 5,000 patent infringement cases are filed, and 97% of them are settled outside of court. 

After six years have passed, the patent holder cannot take legal action or collect financial damages. This is why it’s so important to contact a patent attorney as soon as one knows their idea is being stolen (unless they’ve successfully asked the accused to stop). 

Defenses to Patent Infringement

From what other patent attorneys have confided in me, there is a range of cases of patent infringement, with different sorts of difficulties involved. In some cases, proving someone is using a patented idea is easy. But in more difficult situations, a lawyer must carefully formulate a plan to defend the accused. These means that there is no simple “cookie cutter” defense to be had.

However, some common defenses a lawyer might use in patent infringement cases are: 

Non-Infringement

In simple terms, the product or process in question is not the same as the patented one.

Invalidity

The patent is invalid and should have never been approved, because another invention like it already existed prior to the patent, or it provides an obvious solution to a simple problem. 

Inequitable Conduct

The patent owner misled the examiner, withheld important information, or was dishonest. This defense also aims to prove the patent is not valid. 

First Sale Doctrine

The person accused of infringement is reselling an item that was legally sold to them. 

Licensing

The patent holder granted permission for the accused to use the patent, and that person used the invention in compliance with that permission.

Estoppel 

One of two forms of this defense may be used. File Wrapper Estoppel claims the inventor waived rights or admitted to limitations of rights in their patent application. Equitable Estoppel means the patent holder led the accused to believe the patent would not be enforced and allowed them to continue with the project.

Experimental Use

A patented invention can sometimes be used if related to the development of information. This exception is often granted to universities in their research.

Protecting Yourself From Patent Infringement 

The easiest way to avoid being charged with taking someone else’s invention is to research existing patents before beginning production. The Patent Public Search Tool on the U.S. Patent Office’s website (USPTO) lists products that are already patented. If a developer finds a similar invention listed but is unclear whether further development of the product would lead to patent infringement, an intellectual property attorney can identify the risks.   

Being found guilty of patent infringement can come with millions of dollars in fines, plus any accrued royalties. It is well worth the investment of hiring an attorney to avoid those costs.

On the flip side, if a business or product knows of someone who has violated their patent, they must take legal action immediately. Under the statute of limitations for patent infringement, there are six years to file a lawsuit. Waiting any longer could mean watching someone else profit from years of the originator’s hard work. A successful lawsuit will not only stop the infringement but could result in significant financial compensation.

To Patent Infringement Attorneys: It Pays to Have Someone Who Knows Business

Patent cases need to be handled primarily by an attorney admitted to the patent bar, of course. But these cases can get complicated, and it helps to have co-counsel with someone who understands the business contexts of these kinds of cases. This is especially true when technology is involved.

At our firm, we have extensive experience with business litigation, as well as with contract negotiation and corporate transactions. This means that we can put a patent infringement case within its broader context—for example, if a patent is in dispute after a merger, or as part of an employment contract.

So, if you are a patent attorney seeking co-counsel for a business case of patent infringement, we would be happy to help—just reach out.