Startup Legal Guide
Thinking of starting a business? Even if it's a one-person operation, there are protective standards, laws, and regulations of which you should be aware -- and, for you, we've compiled a summary list of them.
If you don't find the answers to your questions below, contact the startup legal team at Kelly / Warner.
Forming A business
Business Formation Options
A common startup mistake is not forming a business -- and the potential consequences can be catastrophic. Because without the protection a company shell affords, you can be held personally liable for any mishaps. In other words, theoretically, you could lose everything if you fail to register a startup as a business entity. In this post, we outline five basic business registration categories: general partnerships, limited liability partnerships, limited liability companies, and c-corporations.
Arizona's Benefit Corporations
Arizona startups: Did you know that the State offers an additional business formation option? It's called a benefit corporation. A hybrid category, the unique alternative makes Arizona an ideal incorporation jurisdiction for firms that want to "give back" while also profiting. Can out-of-state companies take advantage of Arizona's law? In some cases, yes, parties that don't reside in Arizona may still be able to register a business here.
Startup Operating Agreements
The second biggest mistake startups make is not signing a formal contract with partners. Most people think nothing will sever the startup bond. And that's often the case. Still, it's no excuse not to draw up a formal agreement. In Glengarry Glen Ross, the manager advises his salesmen to follow the ABCs -- "Always Be Closing." Well, if you're a startup, you, too, should follow the ABCs -- "Always Be Contracting." Get it all in writing. It saves future headaches, hassles, and legal fees.
Introduction to Internet Business Law
This blog post is a good place to start if you're just starting out and know absolutely nothing about the laws and regulations that affect businesses with an online presence. Readers are introduced to topics associated with intellectual property, trade secret, contract disputes, and injunction law. If you have a specific question about a legal topic associated with startups, online businesses, or Internet law, get in touch with one of our Internet business law consultants today.
Injunctions and TROs
The startup scene is intense; competition is fierce. As such, injunctions and temporary restraining orders can play a significant role in a company's nascent stages. To be clear, when we say "temporary restraining order (TRO)" we don't mean "a legal action to keep your estranged spouse away." TROs in the business world typically involve forcing a competitor to stop a given action. In this post, we go over the basics of injunction and TRO law as they relate to businesses.
Introduction to Trade Libel
What is trade libel? You can think of it as "business defamation."
In the simplest terms, it's when a business or individual lies about a competitor's products or business. These days, online trade libel is rampant on social media and industry forums. In this post, we review the basics of United States trade libel law, including lawsuit parameters and common defenses.
Introduction to Trade Secrets
Formal intellectual property protections require registration; trade secret protections don't. An attractive option for tech and online businesses, trade secrets are used to keep all manners of things -- from algorithms to expense report procedures -- under lock and key, away from the competition.
In some jurisdictions, startups can crowdfund initial stock investments -- the operative phrase being “some jurisdictions,” not all. Furthermore, restrictions do apply. In these two posts, we cover Arizona’s investment crowdsourcing bill.
Don’t forget, even if you don’t live in Arizona, you may be able to establish a business in the state. Get in touch to discuss the possibilities.
Knighted the “Jumpstart Our Business Startups Act,” the JOBS Act made it easier for startups to…well…startup. How? The act removed some crowdfunding obstacles, making it easier for emerging businesses to attract investment capital.
Internet Laws and Online Marketing Laws
Section 5 of the FTC Act
Section 5 of the Federal Trade Commission Act addresses “unfair and deceptive marketing.” It also gives the FTC authority to investigate and sue parties for engaging in deceptive promotional tactics. Before launching a marketing campaign, startups -- and established businesses -- should familiarize themselves with FTC compliance guidelines or risk a stiff fine. Working with a compliance consultant is also an option -- and probably the safest. We’ve reviewed hundreds of campaigns and know the ins-and-outs of Section 5. Is an FTC compliance audit expensive? No. Remember: preventative legal fees are exceptionally reasonable.
Children's Online Privacy Protection Act (COPPA)
The Children’s online Privacy Protection Act is one of the few federal online privacy regulations. Administered by the Federal Trade Commission, as you’ve probably already gleaned from its name, the law protects minors' online privacy. Specifically, the statute bars businesses from collecting personally identifiable data of children under the age of 13, without the permission of a parent or guardian.
Computer Fraud and Abuse Act
The Computer Fraud and Abuse Act is the go-to statute for the majority of security and digital hacking cases.
First enacted in 1986, the law is controversial because many people feel it doesn’t account for modern day technological realities. Essentially, the statute illegalizes unauthorized access to computers and networks. Think of it as a catchall for all manners of digital security breaches.
Here’s a scenario: You run a website that allows users to comment or create accounts; one of those users pounds out a defamatory rant and then posts it on your site. Are you responsible for the user's libelous post? Can you be held accountable for online defamation? In the United States, thanks to Section 5 of the Communications Decency Act, you have defenses.
The nation’s primary intellectual property governance vein, the Lanham Act regularly affects legal conflicts involving copyrights, trademarks, and patents.
Updated several times since its inception, the Lanham Act covers both offline and online intellectual property issues. Follow the link to read about various cases, in the news, with Lanham Act aspects.
Anticybersquatting Consumer Protection Act
One of the first Internet laws, the Anticybersquatting Consumer Protection Act gives copyright and trademark holders a bit more control over their online intellectual property -- namely URLs. It’s the statute that won’t allow someone to buy (for argument’s sake) Nike.com and then hold it hostage, Dr. Evil style, for one BILLION dollars. (Muahahahahaha!)
Digital Millennium Copyright Act
The Digital Millennium Copyright Act (DMCA) outlines federal rules for certain Internet intellectual property issues, including a process for removing infringing online content. It also covers various piracy issues.
Also known as the Financial Modernization Act, the GLB includes an online privacy section. Essentially, the law requires businesses to implement certain online privacy protections to ensure customer data is protected from calculable breaches.
Restore Online Shopper’s Confidence Act
Politicians created the “Restore Online Shoppers’ Confidence Act” to curb deceptive and confusing post-transaction online marketing pitches. A mere four pages, the law requires merchants to implement certain types of disclosures, like clear product descriptions, affiliate acknowledgments, conspicuous recurring billing warnings, and more.
Consumer Review Fairness Act
For years, many service businesses (and medical professionals) included gag clauses in contracts that transferred intellectual property rights of online reviews away from clients. That way, if a customer left a bad review, the business or professional could simply enact DMCA takedown procedures and have it removed. To protect free speech rights, politicians passed a federal law prohibiting the practice.
California’s Online Privacy Laws
Unlike the EU, the US doesn’t have a federal universal online privacy law. (COPPA is the closest thing, which only applies to citizens under 13.) However, California does. Do websites and businesses outside of California have to follow the state’s online privacy laws. In most cases, yes, they do? Why? Because if Californians can access your site, you’re beholden to the Golden State’s laws.
Native Advertising Guidelines
After years of debate, the Federal Trade Commission issued guidelines for native advertising (i.e., website promotions made to look like real content). The gist of the guidelines is this: make sure consumers can differentiate native advertising from actual content. What happens to parties that flout the rules? They can be successfully fined by the Federal Trade Commission for “unfair and deceptive marketing.”
Marketing Claims That Cross The Line
All may be fair in love and war, but not in marketing. It’s against regulations to use unsubstantiated, untrue, and highly manipulative statements in promotional materials. For example, it’s not OK to suggest that a given weight loss supplement can “immediately melt pounds without exercise or changing eating habits.” This post goes over “unfair and deceptive marketing” cases to hit headlines.
Business Opportunities (a.k.a., BizOpps) are turn-key operations, which are increasingly online-based and typically marketed towards work-from-home or residual income seekers. Disclosure and bookkeeping rules apply for bizopp sellers to ensure customers aren’t duped into buying a lemon of a business.
Tips to Avoid Listing Hijackings
E-commerce entrepreneurs often must contend with counterfeiters who “hijack” product listings. Unfortunately, there’s no foolproof way to repel them, but you can do a few things to make your products and listing unattractive to counterfeiters. In this post, we review those methods.
Business Setbacks & Litigation
Getting An Injunction
Has a competitor stolen something from you? Perhaps a trade secret or client list? If so, you may be able to get an immediate injunction to stop the bleeding, prior to litigation.
Data Breach Contingency Plans
Did you know that the FTC can fine companies for being hacked? That’s right; if proper protections aren’t in place -- or proper procedures aren’t followed in the wake of a hacking or digital security breach -- businesses can incur a hefty penalty. How do you avoid a financial censure? Establish a security event contingency plan, which includes having an online privacy lawyer on speed dial.
Abandoning A Crowdsourced Project
It’s not OK to peace-out on a crowdsourced project. Or, to put it another way: You can’t take peoples’ money for something and not follow through. Now, do all crowdsourced projects pan out? Of course not. And in those instances, certain procedures must be followed. We go over the steps in this post.
Marketing Your Business: Legal Considerations
Buying online reviews
In the not too distant past, buying fake reviews wasn’t exactly legal, but it also wasn’t exactly against the rules. Not any longer. In this post we discuss why purchasing phony feedback violates certain marketing compliance standards.
Text Message Marketing Spam
SPAM is SPAM -- whether it’s deployed via email or text message. To avoid fines, businesses must obtain authorization from consumers before sending mobile marketing promotions.
Online Behavioral Marketing Overview
Tracking online behavior for promotional purposes is commonplace. However, before you do, make sure your sites’ terms and policies clearly outline how your operation works and what information is collected.
Dealing with a bad review
Reviews fuel online sales, and a false review can decimate a business. But, because of free speech rights, it’s a tricky legal area. That said, negligent, purposeful, harmful false statements of fact are defamatory and -- depending on the circumstances -- actionable.
Don’t Give Yourself Great Reviews
Is it OK to give yourself great online reviews? Technically, no; that kind of self-promotion falls under the “unfair and deceptive marketing” umbrella. If caught, you could find yourself on the FTC’s hook and be forced to shell out a hefty fine.
Fake Testimonial Writers Fined
How about getting other people to write and post phony reviews of your product or service? It’s not a wise move. Not only do you risk FTC censure, but you could be sued by the platform on which the phony feedback sits. For example, Amazon regularly files lawsuits against paid and phony review services -- and writers!
Use #ad and #spon Hashtags
Social media marketing rules do apply. Specifically, #sponsored, #paid, or #ad hashtags are the law of the land. Failure to use them could result in an FTC lawsuit. Moreover, brands are responsible for ensuring that affiliates promoting their products are compliant with promotional regulations.
Four unsuccessful marketing defenses
Think you’ve found the perfect loophole to escape FTC censure? Well, if you’re contemplating putting a company in a spouse’s name, blaming counsel, or pleading ignorance of regulations, you may want to rethink your game plan.
Don’t Use Fake News Sites
News stories are a great way to get the word out about products and services. That’s why many businesses and affiliate marketers started creating news sites that cast their wares in a positive light. But we’re here to tell you: Don’t be tempted to make “fake news” websites -- nor encourage affiliates to make them. It’s another tactic that qualifies as “unfair and deceptive marketing.”
Made in the USA Rules
“Made in the USA” isn’t merely a marketing slogan. The phrase -- and variations on the phrase -- are a legal term of art, specifically, a “country of origin” label. Inappropriate use constitutes a regulatory breach — and sometimes fraud.
Intellectual Property Legal Considerations
Entangled in a domain dispute? A combination of laws and international bodies -- like the Anticybersquatting Consumer Protection Act and Uniform Domain Name Resolution Process -- govern URL intellectual property issues.
Does the first person to formally file a trademark automatically get it? Not necessarily. In this post, we discuss such a case.
Most business people know about trademark and copyright infringement, but many entrepreneurs are unaware of trademark dilution. A similar intellectual property tort, trademark dilution is reserved for cases involving widely “famous” marks.
Can you Hold A Domain Hostage?
A competitor lets a domain registration lapse. Can you grab it immediately? In short: no. Owners can reclaim their URLs after a brief gap in registration. Moreover, domains that include a trademarked or copyrighted mark or phrase are protected under the Anticybersquatting Consumer Protection Act.
UK Cookie Law
Under U.K. law, all websites must conspicuously inform users of operational digital tracking mechanisms (“cookies”). Must U.S.-based websites comply with the law? Yes, if the site is accessible in the United Kingdom.
China’s Strict Online Defamation Policy
Do you market or promote your products in China? Is your blog or website accessible in China? If so, be aware that the countries online defamation and marketing rules are much stricter than their U.S. equivalents.
The SPEECH Act
The United States has the most defendant-friendly defamation laws in the world. As such, parties who feel they’ve been unfairly disparaged, by a U.S. citizen, sometimes launch slander and libel lawsuits in other countries (typically Canada and the UK). However, the SPEECH Act protects American residents from having to pay out damages, if found liable in a foreign defamation case that wouldn’t have passed muster in a U.S. court.
Estonia has a fantastic incorporation deal for overseas online businesses
Looking for a place to register your online startup? Believe it or not, Estonia is a great option. In an effort to attract emerging companies, the country instituted several online-business-friendly programs.
Safe Harbor Online Privacy
Online privacy standards in the U.K. and E.U. are substantially more restrictive than in the United States. Residents of those two regions enjoy considerably more online privacy than U.S. citizens. However, U.S. websites can adhere to the stricter standards by participating in a government-approved program.