WHAT IS INTELLECTUAL PROPERTY?

Until recently, it seemed that only authors, inventors, and corporations and their lawyers had any occasion to encounter intellectual property laws. With computer technology and the Internet available to practically everyone, these laws and their protections have become much more relevant, making it worthwhile to have some knowledge of the subject. "Intellectual property" involves three major areas: patents, trademarks, and copyrights.

Patents

A patent is the grant of a property right by the federal government to an inventor. A patent lasts 20 years from the date on which the application for it was filed. A patent gives "negative" rights to its owner. Instead of the right to make, use, sell, or import an invention, a patent is the right to exclude others from these activities.

A person who "invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent." Collectively, the items that can be patented encompass most man-made products and the processes for making them. "Usefulness" means having a useful purpose and, in the case of a machine, being operable for the intended purpose. The subject of a patent must be nonobvious. "Nonobvious" means that the invention is different enough from existing technology and knowledge that it would not be obvious to a person with skill in the field.

Our courts have set the limits on what can be patented, excluding laws of nature, physical phenomena, and abstract ideas. A patent can be granted for a new machine, for example, but not on the idea or suggestion of the new machine. A complete description of the subject matter for which a patent is sought is a required part of the patenting process.

Trademarks

A trademark is a word, phrase, symbol, or design, or a combination thereof, that identifies and distinguishes the source or origin of goods or services. A service mark is like a trademark except that it refers to a service instead of a product. Trademark rights can be used to prevent others from using a confusingly similar mark but not to prevent the making of the same goods or selling such goods under a nonconfusing mark.

The filing of a registration application with the federal Patent and Trademark Office is one way to establish rights in a mark, but rights also can arise simply from the actual use of a mark. There are greater benefits from registration, however, such as a presumption that the owner of the registered mark is, in fact, its owner and is entitled to use it across the country. Unlike patents and copyrights, trademark rights can last as long as the trademark is used to identify goods or services, although the registration must be renewed every 10 years and certain information must be filed with the government to keep the registration alive.

Copyrights

A copyright protects the writings of an author of "original works of authorship" from unauthorized copying. Published and unpublished works of a literary, dramatic, musical, or artistic nature are protected by copyright law. Copyrights are registered in the Copyright Office in the Library of Congress, but a copyright is secured automatically when the work is fixed in a copy or phonorecord for the first time.

Federal law gives the owner of a copyright the exclusive right to do, or to authorize others to do, the following things: reproduce the work in copies or phonorecords, prepare derivative works, distribute copies or photorecords to the public, perform the work publicly, display the work publicly, and, for sound recordings, perform the work publicly by means of a digital audio transmission. Generally, any work created after January 1, 1978 is protected for the author's life, plus 50 years.

CASE BY CASE

It's Settled: Homeowners Are Covered

When the temperature in James's and Jane's basement dropped below freezing, an underground pipe leading from a well to the house froze and burst, saturating the ground beneath the foundation of the house. Soon, one corner of the house settled about three feet, causing a "twisting" of the house and a variety of serious problems. When the couple filed a claim for the damages under their homeowners insurance policy, the insurer denied coverage.

The policy was an "all risks" policy, meaning that it covered all perils not specifically excluded by the policy language. The insurance company relied on an exclusion in the policy for "settling, shrinking, bulging, or expansion, including resultant cracking of pavements, patios, foundations, walls, floors, roofs, or ceilings." There was no dispute that the house had "settled," but James and Jane argued, and the court agreed, that the term "settled," as used in the exclusion, meant a gradual sinking of a structure resulting from the natural condition of the soil, to which practically every building is subjected. In the case at hand, the settling was caused by an abrupt, unexpected event: the burst pipe. This was an incident that James and Jane reasonably expected to be covered, in light of the terms of the policy.

The court looked not just at the language in the "settling" exclusion itself but also at its larger context in the policy. The exclusion was one of eight in a paragraph that dealt only with exclusions entailing natural or environmental concerns, including basic wear and tear. It was reasonable for the homeowners to interpret the "settling" exclusion as referring to the "natural" settling of a structure and not to a condition attributable to an external, sudden cause such as the burst water pipe.

A Lucky Mulligan

An advertisement for a golf tournament offered a $10,000 prize for making a hole-in-one on the first hole. To raise money above and beyond the entrance fee, the tournament also sold mulligans, which are extra shots usually taken after a particularly bad shot. One participant bought a mulligan and used it on the first hole when his first shot did not end up in the cup. For this golfer, practice made perfect, as the second attempt was a hole-in-one.

When the prize winner went to collect, the tournament refused to pay and the dispute ended up in court. The tournament organizers argued that the prize was only available for a regular shot, not a mulligan. The court was not persuaded because the golfer was never informed that he could not use the mulligan he bought to go for the big prize. When the tournament made an offer to each golfer to pay the $10,000 prize, the only term to be met was that a golfer hit a hole-in-one on the first hole. When a participant satisfied that term, whether or not with a mulligan, the tournament became contractually obligated to pay the prize.

EMPLOYEE OR INDEPENDENT CONTRACTOR?

Classifying a person as an employee rather than as an independent contractor has wide-ranging legal consequences. For example, an employer generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes, while hiring an independent contractor requires no such duties. Likewise, an employee might be entitled to benefits such as pensions, insurance, sick leave, and vacation pay while an independent contractor would have no such expectations.

How do you determine whether a worker is an employee or an independent contractor?

In answering this question, our courts focus on the relationship between the worker and the business, generally, and issues of control and independence, in particular. Even these issues get broken down into narrower inquiries relating to behavioral control, financial control, and the type of relationship the parties have.

Behavioral control refers to the when, where, and how of working. A court is more likely to find an employer-employee relationship when it finds that the employer controls factors such as: what tools or equipment will be used, what workers are hired to assist with the work, where supplies or services are purchased, who will perform specific tasks, and in what sequence the work will be done. Training a worker to perform services in a particular manner also indicates an employer-employee relationship.

Financial control entails the right to make decisions on the business aspects of a job. Employees are more likely than independent contractors to have expenses reimbursed and are less likely to have a significant investment in facilities used in the work. Employees have less freedom to seek out personal business opportunities. Guaranteed payment of a regular wage for a specified time period is usually a sign of employee status, while only an independent contractor will be in the position to realize a profit or a loss.

Other aspects of the worker's relationship with a business can also help to separate employees from independent contractors. Of course, how the parties themselves describe the relationship in any written contracts carries some weight. Employees are more likely to receive benefits like insurance, a pension plan, vacation pay, and sick leave. Hiring a worker with an expectation of carrying on a relationship indefinitely, instead of for a specific project, is evidence of an employer-employee relationship. If a worker's services go to the heart of the business's activity, as opposed to being at the periphery of the business, it is more likely that the arrangement will have the kind of direction and control that characterize how employers and employees operate.

What the parties call themselves is a factor, but courts are not bound by such labels if the facts point to a different conclusion. The substance of a relationship is most important when determining whether a worker is an employee or an independent contractor.

WEBSITES AND JURISDICTION

Before a nonresident person or business entity can be sued in a given state, the defendant must have taken some action that indicates a submission to the authority of that state's courts. Traditionally, this has meant "minimum contacts" with the state. The laws that set these ground rules are called "long-arm statutes," a term that describes the reach of the courts into other states. The term, like the body of court decisions on the subject, may need modernizing in the age of the Internet.

The issue of long-arm jurisdiction has been adapted previously to technological advances in business, and courts again are setting new standards for its use when a plaintiff attempts to bring an out-of-state defendant into court on the basis of the defendant's website activity. These cases fall at various places along a spectrum. At one end are "passive" websites, which are akin to advertisements in national magazines or newspapers. They allow no real interaction between a business and potential customers. By themselves, passive websites will not subject their creators to jurisdiction wherever the site can be seen.

Midway along the spectrum are websites that allow some interaction by permitting the exchange of information between the site owner and users in another state but where the interaction falls short of transacting business. In such circumstances, the nature and level of information exchange will govern the jurisdiction issue.

For example, a New York bank was allowed to sue a competitor based in another state for trademark infringement in a New York court. The defendant's website allowed customers in any state to apply for loans online. Customers also could "chat" online with a representative or send e-mailed questions to which they would get a response within an hour. It was ruled that this Internet commercial activity brought the defendant within the jurisdiction of New York. However, while this online activity was both significant and clearly commercial in nature, there was some doubt as to whether customers actually could complete transactions online.

In a case at the opposite end of the spectrum from passive websites, a Texas eyewear company was permitted to sue an out-of-state company in Texas because the defendant was effectively carrying on business in Texas by means of its website. This decision was clear-cut because users of the defendant's website could purchase sunglasses on the website with order forms containing credit card and shipping information. The outcome was not affected by the fact that the computers hosting the defendant's website were not located in Texas.

Businesses with websites can limit their susceptibility to the jurisdictional reach of courts in other states by: (1) using a "clickwrap agreement" in which website customers agree that any litigation will occur in the courts of a designated state; (2) including a disclaimer that the company will not sell its products to customers in a particular state or states; or (3) disabling a website so that it will not handle orders or shipments for such states.

ESTATE PLANNING

New Rules for IRA Withdrawals

New rules have been adopted as to the calculation of mandatory withdrawals from an Individual Retirement Account (IRA). The general rules are still in effect that funds deposited in an IRA are tax deferred until withdrawals are made and that such withdrawals must begin by April 1 of the year following the IRA owner's attainment of age 70 ½ . The changes that have been implemented allow the owner greater flexibility and control over the rate of withdrawal from the IRA, resulting in greater tax deferral.

The primary change is that the beneficiary upon whose life expectancy the amount of annual distributions will be based need no longer be designated as of the date on which distributions must begin (April 1 of the year following the owner's attainment of age 70 ½). Under the old rules, the amount of each year's distribution would be based on the joint life expectancies of the owner and the beneficiary named as of the required beginning date, and, after the owner's death, would be based on that beneficiary's life expectancy. Even if the owner had later named a younger beneficiary, that beneficiary's longer life expectancy would not affect the distribution calculation. Under the new rules, the owner need not choose a beneficiary at age 70 ½ .

The amounts of minimum withdrawals that must be made each year while the owner is still alive are based on a single schedule of life expectancies that will apply to nearly everyone. The new schedule, known as the "Uniform Table," is based on the joint life expectancies of the owner and a designated beneficiary who is 10 years younger than the owner. An exception to the use of the table applies if the owner's spouse is the sole designated beneficiary. In that case, if the spouse is more than 10 years younger than the owner, the minimum amount that must be withdrawn is based on the joint life expectancies of the owner and the spouse. Thus, this exception is to the owner's advantage because it applies only if the required distribution will be less than that called for by the table.

After the IRA owner dies, the minimum withdrawals are based on the life expectancy of the oldest named beneficiary as of December 31 of the year following the owner's death. This means that an IRA owner can replace a beneficiary with a younger one and the amount of withdrawals that must be made after the owner's death will be based on the younger beneficiary's life expectancy.

Even though the pressure will now be off in the sense that there is no age 70 ½ deadline for designating a beneficiary, the IRA owner still needs to make that decision, or possibly alter a prior decision, and any such step should be made only after consultation with a qualified advisor.

TAX TREATMENT OF VACATION HOMES

Special tax rules apply to income and expenses for a vacation home that is sometimes used by the owner and sometimes rented to others. The tax treatment depends on the extent to which it is used for personal reasons. If the owner does not put the home to any personal use, all of its income is included on the owner's return and all expenses associated with the home are deductible. For a home that has some personal use, but not enough to reach a threshold set by the "de minimis personal use test," all rental income is taxable and the owner allocates expenses as either personal or rental. In either case, deductible rental expenses can exceed gross rental income, leading to a loss.

Under the de minimis personal use test, a dwelling is considered a "residence" during the tax year if it is used for personal purposes more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental price. If personal use meets this test and the owner has a net loss in operating the home, the deduction for rental expenses is limited to the amount of rental income for the year. A fair rental price is what an unrelated person would be willing to pay, not a price that is substantially less than that charged for similar properties.

The counterpart to the de minimis personal use test is the de minimis rental use test, which requires that the home be rented out a minimum number of days before rental expenses can be deducted. If the owner uses the unit as a home and rents it out for fewer than 15 days in a year, the owner cannot include any of the rent as income nor deduct any of the rental expenses.

Rental income from a vacation home can take forms other than a rental check. Income may also include payments from a tenant for canceling a lease, the fair market value of any property or services received in lieu of rent, and payments made by a tenant under a rental agreement giving the tenant the right to buy the property. On the expenses side of the ledger, typical deductible items include: repairs (but not improvements, which are recovered through depreciation), insurance premiums, mortgage interest, charges for utility services, and travel expenses incurred to collect rent or manage the property.