What’s in a Name? Avoiding Promoter Liability in Pre-Incorporation Contracts in Presley v. Ponce Plaza

A corporation must file the necessary paperwork with the Secretary of State to be incorporated. The incorporation process might take some time, and while this process is pending, the individuals forming the corporation may need to sign purchase orders, leases, or other necessary contracts. The individual who signs any of these contracts lists the corporation’s name, but the corporation is not technically in existence and will not be liable until the corporation adopts the contract.

Any contract entered into prior to the incorporation of a business entity is a possible liability for the “promoter.” A promoter is a person or entity acting on behalf of the corporation not yet formed.[1]  Presley v. Ponce Plaza Assocs., is an appellate case that involved a final summary judgment imposing personal liability upon the appellant for accelerated rent due under a lease agreement in which the appellant supposedly executed on behalf of a professional association.[2] The court reasoned that “[a]lthough the named professional association utilized by the appellant on the lease agreement was not a duly incorporated entity, the appellant maintained that the parties understood that it was merely an abbreviated name for appellant’s duly incorporated entity.”[3] The appellee, however, countered that, at all times, its lease agreement was with the appellant solely as an individual and that, in any event, where the appellant knowingly executed a contract on behalf of a non-incorporated entity, the appellant was individually liable as a matter of law.”[4] The court found that this created a sufficient dispute of material fact to preclude summary judgment and thus summary judgment was in error.[5] The lesson in this case is to avoid potential liability as a promoter, parties to a contract and contract drafters should always use the exact name of the entity already formed to avoid the accusation that the agreement was a pre-incorporation contract with a yet to be formed entity.

The promoter remains personally liable for pre-incorporation contracts he enters into, even after corporate adoption, unless and until there has been a novation.[6] A novation is a legal agreement between the promoter, the corporation, and at least one other contracting party in which each party agrees that the other contracting party that the corporation will replace the promoter under the contract.[7] Therefore, without a novation, if a corporation is formed and the contract is adopted by the business, both the promoter and the business will be liable on the contract. A corporation will become liable on a contract when it adopts the contract by either an express board of directors’ resolution or an implied adoption through knowledge of the contract and acceptance of its benefits.[8] This is known as ratification.[9]

Promoters are personally liable for pre-incorporation contracts because at the time of the formation of a pre-incorporation contract the corporation was non-existent. One strategy is to avoid contracting as a promoter altogether and simply to wait until the corporation is officially formed to enter into agreements on its behalf.  However, there may be situations in which pre-incorporation contracts are unavoidable. Determining the possible liability for pre-incorporation contracts is something that should be discussed with an attorney and the promoter and all liabilities should be analyzed thoroughly before signing on the dotted line. Such contracts should be carefully drafted to limit the danger that the promoter will be held personally liable.

According to Presley v. Ponce Plaza Assocs., in Florida, a creditor seeking to recover from an individual who has supposedly acted on behalf of a nonexistent corporation, the creditor must prove that the individual knew or should have known of the corporation’s nonexistence when he or she so acted.[10] It is, therefore, advisable to consult with an attorney and inquire about the possibility of including in pre-incorporation contracts a novation clause. This would include an explicit acknowledgement by the other contracting party that it understands it is contracting with an individual and the not yet formed corporation and that the contracting party will look only to the corporation, not the promoter, for performance if and when the corporation adopts the contract. Including such a provision in a true pre-incorporation contract can help avoid misunderstanding and save contracting parties, creditors, and debtors alike a great deal of money and frustration.


[1] Promoter, Black’s law dictionary (11th ed. 2020). [2] Presley v. Ponce Plaza Assocs., 723 So. 2d 328 (Fla. 3d DCA 1998). [3] Id at 329. [4] Id. [5] Id. [6] Electro-Protective Corp. v. Creative Jewelry by Kempf, 513 So. 2d 190, 192 (Fla. 5th DCA 1987). [7] Id. [8] Spurrier v. United Bank, 359 So. 2d 908, 910 (Fla. 1st DCA 1978). [9] Id. [10] Presley v. Ponce Plaza Assocs., 723 So. 2d 328, 329 (Fla. 3d DCA 1998).

McConville v. SEC: Widening the Net through Falsities and Scienter

McConville v. United States involved a petition for review of an order of the Securities and Exchange Commission (“SEC”) finding violations of several sections of the Securities Exchange Act of 1934 by the chief financial officer of Akorn Incorporated.[1] Akorn Incorporated manufactured and sold diagnostic and therapeutic pharmaceuticals to wholesalers and end-use consumers.[2] Akorn would process and keep track of its orders using various rates, corporate credits, and payment schedules (e.g. current, thirty to sixty days past due, etc.).[3] Akorn used a system that involved three different financing offices and used different computer programs and record-keeping mechanisms to track its orders and payments.[4] Akorn tried using a new system to improve its record keeping but the system was incapable of tracking all of Akorn’s data.[5] The company switched to another software and it did not transfer the data from the previous software system to the new one.[6]

Between February 28, 1997 and March 20, 2001, Rita McConville (“Petitioner”) worked as chief financial officer (“CFO”) of the company and was responsible for (1) supervising the finance departments, (2) working with Akorn’s auditor, and (3) filing documents with the SEC.[7] In 2000, problems with the company’s financial records came to light.[8] First, Akorn’s auditor alerted the board of problems with the company’s financial record-keeping, e.g. misapplication of credits, failure to review accounts receivables, etc.[9] Second, a dispute arose between Akorn and one of its customers as a result of billing discrepancies amounting to close to $5 million.[10]

Despite these problems, Petitioner assured the auditor that the accounts were being reconciled.[11] Petitioner also participated in the drafting of financial documents during her time as CFO, including the 2000 Form 10-K.[12] Petitioner also signed two letters essentially stating that the financial statements did not need to be adjusted because no events had occurred after December, 2000 and after February, 2001 that had a material effect on the statements.[13] In 2002, Akorn restated its financial statements for the years 2000 and 2001.[14] Akorn reported that it had some errors in their financial statements, among other concerns, that the company had in fact sustained a net loss of $2.4 million in 2000 instead of the gain of $2 million it had initially reported.[15]

In 2003, the SEC started proceedings against Petitioner and the current CFO of Akorn alleging that Petitioner’s mismanagement of the financial department caused the company to file documents that were in violation of the federal securities laws.[16] The SEC found that Petitioner’s conduct violated Sections 10(b), 13(b)(2), and 13(b)(5) of the Securities Act of 1934 (“Act”), among others.[17] After the SEC’s findings, Petitioner filed a petition for review with the United States Court of Appeals for the Seventh District.[18]

Under Section 10(b) of the Act, the Commission must show that Petitioner “(1) made a false statement or omission (2) of material fact (3) with scienter[19] (4) in connection with the purchase or sale of securities.”[20]  The issue was whether there was substantial evidence to support the Commission’s finding.[21]

Petitioner argued that the Commission did not prove the first and third elements by substantial evidence.[22] However, the appellate court found that the Commission proved the first element because Petitioner not only drafted Akorn’s financial statements, but she also reviewed and approved them, including the Form 10-K.[23] She also assured auditors that the documents were accurate and that no events had occurred that would make the documents misleading.[24] Therefore, the court concluded that Petitioner’s substantial involvement in the making of the documents and her statements to the auditors established that she made a false statement or omission.[25]

The court also found that the Commission proved the third element of scienter.[26] The court stated that “the requisite for scienter is an ‘extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.’”[27] Here, the court found that Petitioner was aware of the problems in Akorn’s financial department and that she failed to disclose them in the financial statements.[28] For example, Petitioner stated that all customer accounts would be reconciled by a specific date, but this was not accomplished.[29] Despite this, Petitioner told auditors that nothing had occurred that would have made the financial statements misleading.[30] Therefore, the court concluded that Petitioner’s conduct occurred with recklessness and that the Commission proved the third element.[31] In addition, the appellate court found that there was substantial evidence that Petitioner violated SEC rules 13(b)(2) and 13(b)(5) of the Act.[32] As a result, the appellate court denied the petition for review.[33]

McConville highlights the importance of good record keeping. Purposely submitting inaccurate or false information in documents filed with the SEC is not the only method of running afoul with the commission. Bad tracking and recordkeeping that causes inaccurate reports, even if not intentional, may also lead to violations and charges with the SEC. It is also not necessary for a person to sign a document for it to be attributed to them, it is enough that the person was substantially involved in the process of making the document, e.g. drafting, reviewing, or affirming the document’s accuracy and content.

[1] McConville v. United States, 465 F.3d 780 (7th Cir. 2006). [2] Id. at 782. [3] Id. [4] Id.  at 783. [5] Id. [6] McConville, 465 F.3d at 783. [7] Id. [8] Id. [9] Id. [10] Id. [11] McConville, 465 F.3d at 784. [12] Id. at 785 (A 10-K Form is a document reporting a corporation’s financial health to the SEC.).  [13] Id. [14] Id.  [15] Id. at 786.  [16] McConville, 465 F.3d 786 (Petitioner was the CFO during the preparation of the documents filed with the SEC but was removed shortly before the company filed its financial statements with the SEC. She continued to work gathering information for the financial statements in her new position as corporate controller.). [17] Id. [18] Id. [19] While not defined in the regulations, the United States Supreme Court has described the term “scienter” as proscribing conduct evinced by an intent to deceive, manipulate, or defraud; see, Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). [20] Id. [21] Id. at 787. [22] McConville, 465 F.3d at 787. [23] Id. [24] Id. at 788. [25] Id. [26] Id. [27] McConville, 465 F.3d at 788 (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 600 (7th Cir. 2006)). [28] Id.  [29] Id.  [30] Id. [31] Id. at 789. [32] McConville, 465 F.3d at 789-90 (The opinion also explains how Petitioner violated rules 13(b)(2) and 13(b)(5) but the focus of this article was on rule 10(b)).  [33] Id. at 790.

Racing Against the Clock: How Somers Forces Whistleblowers into Silence or Premature SEC Reporting

On February 21, 2018, the Supreme Court in Digital Realty Trust, Inc. v. Somers[1] narrowly construed the definition of “whistleblower” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Act”) and thus limited who qualifies for the anti-retaliation protections afforded by the Act. The Court narrowly interpreted the Dodd-Frank Act, holding that a whistleblower is entitled to the anti-retaliation protections of the Act only if the employee reports alleged securities law violations directly to the Security Exchange Commission (SEC) while still employed by the issuer[2].[3]

The Supreme Court’s decision in Digital Realty arose after it granted certiorari[4] to resolve a conflict in the courts highlighted in the Ninth Circuit Court of Appeal’s decision in Somers v. Digital Realty Trust (2017) .[5] Paul Somers (Somers) worked as Vice President of Digital Realty Trust from 2010 to 2014.[6] Somers’s complaint asserted that Digital Realty terminated him only after he reported potential violations of the securities laws internally to company management.[7] Somers did not provide this information to the SEC while employed.[8] Somers subsequently brought a whistleblower retaliation claim under the Dodd-Frank Act against Digital Realty for his termination.[9] The company moved to dismiss the claim on the grounds that Somers did not qualify as a whistleblower under the Dodd-Frank Act because he had not reported the alleged securities law violations to the SEC before his termination.[10] The district court denied the motion, reasoning that the whistleblower provisions under Dodd-Frank were ambiguous and, as a result, the SEC’s broader Rule 21F-2, which accorded protection to internal reports, was entitled to Chevron deference.[11] The Ninth Circuit affirmed, concluding that adoption of the statutory definition of whistleblower, as the company urged, would narrow the anti-retaliation provisions to protect only active employees who report possible violations of securities laws both internally and to the SEC, which was unlikely to occur.[12]

On review, the Supreme Court held that a plain reading of Dodd-Frank’s definition of “whistleblower” in conjunction with its anti-retaliation provision, as well as the intent of Congress in enacting the statute, cut against the Ninth Circuit’s expansive reasoning. The issue before the Supreme Court in Digital Realty was the language of the Dodd-Frank Act, which defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established . . . by the Commission.”[13] The Supreme Court unanimously, with two concurrences, overturned the Ninth Circuit’s holding and concluded that Mr. Somers’s failure to make a report to the SEC while employed was fatal to his case.[14]

First, the Court pointed to the explicit statutory language of Dodd-Frank, noting that the specific text of the statute defined a whistleblower as someone who reported to the SEC, and the statutory definition of whistleblower applied to govern the anti-retaliation provisions under the Act.[15] The Court also reasoned that Congress must have intended to use a government-reporting requirement because it incorporated such a requirement into the whistleblower definition but not elsewhere in the statute.[16] Second, the Court relied on the legislative intent, holding that the “core objective” of Dodd-Frank was “to prompt reporting to the SEC” and interpreting Dodd-Frank’s definition of whistleblower strictly furthered that goal, even if it narrowed the field of eligible employees.[17]  Since Congress had directly spoken to the precise question before it, the Court saw no need to accord deference to a contrary view adopted by the SEC in Rule 21F-2.[18]

The Court therefore held that individuals not meeting the threshold requirement of providing pertinent information to the SEC cannot benefit themselves of Dodd-Frank’s anti-retaliation protections; the Court noted that such a requirement is by statutory design.[19] The Court stressed that Congress enacted Dodd-Frank “to motivate people who know of securities law violations to tell the SEC,” and, in connection with this purpose, Congress granted such individuals “immediate access to federal court, a generous statute of limitations . . .  and the opportunity to recover double backpay.”[20] The Court, however, found that the reason for such incentives was to effectuate Dodd-Frank’s narrow objective of motivating individuals to “tell the SEC,” and not to “disturb the ‘corporate code of silence’” and embolden employees to report fraudulent behavior “not only to the proper authorities . . . but even internally.”[21]

In sum, Digital Realty determines an employee is entitled to no anti-retaliation protections if the employee only reports such purported violations internally, utilizing the employer’s internal compliance processes. Time will tell whether the Supreme Court’s ruling will deter or increase the number of whistleblower actions. Employees may either fail to report altogether for fear of unprotected retaliation, or, to ensure protection against retaliation, simultaneously report to both the regulators and internal compliance departments before those teams have a chance to review, investigate, and remediate as necessary. The decision is limited to the Dodd-Frank whistleblower statute involving securities laws and does not appear to affect or mention the numerous other whistleblower protection statutes. In the wake of Digital Realty ruling, employers should review their whistleblower policies frequently, in conjunction with legal counsel, to ensure that employees have multiple avenues to report suspected illegal and/or unethical conduct. Likewise, whistleblower polices should assure employees that such reports will not be met with retaliation.

[1] Dig. Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018). [2] “Issuer” is a term which refers to an organization offering one or more securities for investment. [3] Id. at 778. [4] The Supreme Court grants certiorari when a party challenges the decision of a lower court and the Court decides to review the case. It’s effectively like asking for a manager and having the manager decide to closely review the subordinate’s work. [5] See, Somers v. Digital Realty Tr., Inc., 850 F.3d 1045 (9th Cir. 2017). [6] Id. [7] Id. at 1047. [8] Id. [9] Id. [10] Somers, 850 F.3d at 1047. [11] The scope of the Chevron deference doctrine is that when a legislative delegation to an administrative agency on a particular issue or question is not explicit but rather implicit, a court may not substitute its own interpretation of the statute for a reasonable interpretation made by the administrative agency; see, generally, Thomas W. Merrill & Kristin E. Hickman, Chevron’s Domain, 89 Geo. L.J. 833 (2001); see also, Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984). [12] Somers v. Digital Realty Tr. Inc., 850 F.3d 1045 (9th Cir. 2017). [13] 15 U.S.C. § 78u-6 (a)(6). [14] Dig. Realty Tr., 138 S. Ct. at 772. [15]Id. at 775. [16] Id. at 777. [17] Id. at 780. [18] Id. at 781-82. [19] Dig. Realty Tr., 138 S. Ct. at 781-82. [20] Id. at 778. [21] Id.

A No-Brainer: Protecting Your Website Under the DMCA

In the United States copyrights are federally protected under the Copyright Act of 1976.[1] Unaddressed under the Copyright Act of 1976,  exponential advances in technology in the nineties led to the proverbial “opening of the floodgates” for a deluge of a variety of infringing activity. To address these activities and to expand upon the rights of copyright owners in the modern age, the Digital Millennium Copyright Act[2] (DMCA) was passed in 1998.

In light of the liability several provisions of the DMCA imparted upon certain parties, such as online service providers, Congress further embedded the Online Copyright Infringement Liability Limitation Act[3] within the DMCA. The Online Copyright Infringement Liability Limitation Act, which is commonly referred to as the “Safe Harbor” provisions of the DMCA, provides immunity to online service providers from being liable for copyright infringement so long as the requirements and criteria of the Safe Harbor provisions are adhered.

The Safe Harbor provisions are divided into separate sections to address different circumstances.[4] For instance, the Safe Harbor provisions address Transitory Digital Network Communications,[5] System Caching,[6] Information Location Tools,[7] and Information Residing on Systems or Networks At Direction of Users.[8] However, only the “Information Residing on Systems or Networks At Direction of Users” provision requires that service providers designate an agent in order to receive DMCA takedown requests.[9]

DMCA Takedown Requests

Within the Copyright Act, the term “service provider” is defined as a party who, upon a user’s request, facilitates the transmission of requested material without modifying the content that is being transmitted, as well as those individuals or organizations who provide online or network service access.[10] This includes most websites that allow users to post or store material on a service provider’s systems, such as search engines and directories, as well as internet service providers.

In order for a service provider to be exempt from liability from copyright infringement, the service provider must not have actual knowledge or be aware of the circumstances surrounding the allegedly infringing material or activity or, upon obtaining knowledge or awareness of such infringing material or activity, must expeditiously remove or disable access to the material.[11] One of the most common methods a service provider gains knowledge or awareness of infringing material or activities is through what is referred to as the “notice and takedown system” or a “DMCA takedown notice.”

DMCA Takedown Notice Requirements

The requirements for a valid takedown notice are set forth in § 512 of the Copyright Act[12] and include:

  1. A physical or electronic signature of the owner of the allegedly infringed material, or an authorized agent of such owner;
  2. Identification of the material that that is allegedly being infringed;
  3. Identification of the allegedly infringing material or activity that is sufficient to allow the service provider to locate the material;
  4. Contact information of the complaining party;
  5. A statement that the complaining party has a “good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law”; and
  6. A statement that “the information in the notification is accurate, and under penalty of perjury, that the complaining party is authorized to act on behalf of the owner…”[13]

Notably, where a service provider is in receipt of a takedown notice which does not meet all of the notice requirements but at least identifies the protected work that is allegedly being infringed, the infringing material, and the complaining party’s contact information, the service provider is under a duty to take reasonable steps to contact the complaining party to obtain a proper notice in order for the Safe Harbor immunity to apply in such situations.[14]

Defective DMCA Takedown Notices

Within the Safe Harbor provisions, the requirements for preparing a valid DMCA takedown notice are meticulously set out.[15] Additionally, the Safe Harbor provisions provide that a defective notice, one which fails to substantially comply with the takedown notice requirements, shall not be considered as providing the service provider with knowledge or awareness of the infringing material or activities.[16] The result of such a defective notice is that it rends from the notice any power it would have had to put an infringer on notice of that infringement. In essence, despite receipt of a defective notice, in the eyes of the law a service provider is regarded as not having actual knowledge or awareness of such infringing activities or material, which in turn provides the service provider with immunity from liability.[17]

Misrepresentations in DMCA Takedown Notices

However, in instances where a sender has knowingly sent a takedown notice which materially misrepresents the infringing nature of the material or activity, then such sender shall be liable to the service provider “for any damages, including costs and attorneys’ fees, incurred . . . as the result of the service provider relying upon such misrepresentation.”[18] Such “misrepresentation” can arise in many different circumstances, including when a sender of a DMCA takedown request fails to consider the “fair use” defense, acknowledged in the landmark case Lenz v. Universal Music Corp., where Universal Music had wrongfully sent a takedown request for a video of a child who was dancing to Prince’s song “Let’s Go Crazy” without considering whether such activity was protected under the fair use defense.[19]

DMCA Registered Agent

The Safe Harbor provisions further provide that “[t]he limitations on liability established in this subsection apply to a service provider only if the service provider has designated an agent to receive notifications of claimed infringement.”[20] Furthermore, service providers must make the designated registered agent’s name, physical address, phone number, and email address publicly accessible as well as to provide the U.S Copyright Office with such information.[21]

It is required that a service provider appoint a DMCA registered agent in order to be able to avail itself of the DMCA Safe Harbor protection. Indeed, courts have held that service providers were unable to invoke the section 512 Safe Harbor with respect to any infringing conduct occurring until it has a designated agent registered with the Copyright Office.[22] A service provider may only designate one DMCA agent, who may be an individual, a person or position within the service provider’s organization or an independent third-party entity.

In an effort to further facilitate the ease of appointing and managing a service provider’s designated DMCA agent, in 2016 the U.S Copyright Office launched the DMCA Designated Agent Directory which allows service providers to designate a DMCA agent and to pay the requisite fees online.[23] With the potential substantial consequences of failing to designate DMCA registered and the affordability and ease in which a service provider can register a designated DMCA agent, it is imperative that any website owner fully comply with the DMCA Safe Harbor requirements so as to ensure protection from potential liability for infringing material or activities that are made available through your website.

[1] 17 U.S.C. §§ 101-810 (1998). [2] 17 U.S.C. §§ 512, 1201–1205, 1301–1332 (2020); 28 U.S.C. § 4001 (2020). [3] 17 U.S.C. § 512. [4] Id. [5] 17 U.S.C. § 512(a). [6] 17 U.S.C. § 512(b). [7] 17 U.S.C. § 512(d). [8] 17 U.S.C. § 512(c). [9] Id. [10] 17 U.S.C. § 512(k)(1). [11] 17 U.S.C. § 512(c)(1)(A). [12] 17 U.S.C. § 512(c)(3)(A). [13] Id. [14] 17 U.S.C. § 512(c)(3)(B)(1). [15] 17 U.S.C. § 512(c)(3)(A). [16] 17 U.S.C. § 512(c)(3)(B)(1). [17] See, e.g., UMG Recordings v. Shelter Capital, 667 F.3d 1022 (9th Cir. 2011), modified at 718 F.3d 1006 (9th Cir. 2013). [18] 17 U.S.C. §§ 512(f). [19] See, Lenz v. Universal Music Corp., 801 F.3d 1126 (9th Cir. 2015). [20] 17 U.S.C. §§ 512(c)(2). [21] Id. [22] See, e.g., Oppenheimer v. Allvoices, Inc., 2014 3:14-cv-00499-LB (N.D. Cal., June 10, 2014) (indicating that “Section 512(c)(2) ‘plainly specifies that a registered agent is a predicate, express condition’ that must be met and that ‘the safe harbor will apply “only if” such agent has been designated and identified to the Copyright Office for inclusion in the directory of agents.’” citing Perfect 10, Inc. v. Yandex N.V., No. C 12-01521 WHA, 2013 U.S. Dist. LEXIS 65802, 2013 WL 1899851, at *8 (N.D. Cal. May 7, 2013)). [23] 37 C.F.R. § 201.3 (2020).

Permanent Establishment through Agent: Dangers of Unintentionally Submitting to Foreign Jurisdiction

Businesses with global operations often pursue and maintain relationships by relying on their globally mobile employees to initiate and sustain relationships with their foreign customer bases. These practices may have developed over a number of years in line with the growth of the business and frequently without any consideration being given to the potential tax consequences of such assignments. Where such employees are regularly conducting business in other jurisdictions, there is a risk of the business creating a permanent establishment and therefore becoming liable for local taxes.

Permanent establishment is a concept defined by a country’s tax laws or by their international treaties. The Organisation for Economic Co-operation and Development (OECD) has published a model convention on income tax entitled “Model Tax Convention on Income and on Capital 2014” (Convention). The Convention defines permanent establishment as “a fixed place of business through which the business of the enterprise is wholly or partly carried on.”[1]  This definition is simply a model, and every income tax treaty has its own variation on this concept. This definition is simply a model, and every income tax treaty has its own variation on this concept. Under the 2014 treaty[2] definition of permanent establishment, the threshold of activity of an enterprise in one jurisdiction that results in the creation of a permanent establishment in another jurisdiction is determined by two forms of presence.[3] The first form of presence is the fixed place of business test. An enterprise has a permanent establishment in another territory if it has a fixed place of business there through which it carries on its business, subject to several specific activity exemptions.[4] The second form of presence is the dependent agent test. Currently, a permanent establishment arises when an agent, acting on behalf of a foreign enterprise, habitually exercises authority to conclude contracts in the name of the enterprise, unless the agent is an independent agent (legally and economically independent from its principal) acting in the ordinary course of its business.[5]  Since the previous definition was limited to the formal conclusion of contracts, the OECD widened the scope of the definition to also include situations in which an agent habitually plays the principal role leading to the conclusion of contracts that are then routinely concluded without material modification by the enterprise.[6]

To determine whether the presence of a representative abroad creates a permanent establishment in another country, the scope of activities undertaken by the representative for that business are essential. Not every activity carried out on behalf of the company will result in the creation of permanent establishment. Activities carried out by a potential dependent agent must be of regular and permanent character. The Convention provides that concluding contracts on behalf of the company does not include only the final stage of signing a contract, but also includes determining terms and conditions of a contract.[7] Therefore, negotiating powers given by a company may be sufficient to recognize such a person as a dependent agent for tax purposes. An important issue is that the person acting on behalf of the foreign enterprise must maintain independence and autonomy. If the agent does not fall into the self-employed category, the agent does not bear the risk arising from contracts concluded, and if the employer is entitled to issue binding instructions and commands, the risk of the foreign establishment is largely reduced.

In Action 7 of the Base Erosion and Profit Shifting (BEPS) Project, the OECD attempts to tackle common tax avoidance strategies used to prevent the existence of a permanent establishment, including through agency or commissionaire arrangements instead of establishing related distributors.[8] Action 7 also aims to prevent the misuse of specific exceptions to the permanent establishment definition, which relate to activities of a preparatory and supporting nature.[9] A company’s supporting activities, such as preparatory work that does not generate revenue does not trigger permanent establishment status.[10] The burden of proof is with the company to demonstrate that the activities are auxiliary and do not warrant a permanent establishment status.[11]

What makes permanent establishment a risk?

The presence of a permanent establishment in the territory of a state is the “combination to the safe” in taxing the business profits of a foreign enterprise. The activities of an agent in a foreign country, can unintentionally trigger permanent establishment.   When a business has permanent establishment in a country and some of its employees working there becomes taxable in that country.[12] Without permanent establishment, some of its employees would not be taxed. The exponential rise in controversy over permanent establishment is the subject of frequent disputes between taxpayers and tax administrations.

Depending on the jurisdiction and the specific terms of the income tax treaty, in the event of noncompliance, companies and some of their employees may be subjected to additional taxation, and there is the possibility that employees could be stopped at the border and prohibited from entering the country, resulting in a lost opportunity or loss of business.[13] In addition, companies may be subject to fines, penalties, and other legal action from a foreign government. This could be a costly result and may also negatively impact reputations and status with other business partners as well as customers.

Permanent establishment rules vary across jurisdictions and it would be necessary to obtain advice locally in order to ensure compliance. To prepare for new regulations, employers with a global footprint should review their existing structures or planned procedures. Particularly, enterprises should review the activities performed by their foreign agents determine whether their roles and responsibilities may lead to permanent establishment in a foreign jurisdiction.

[1]Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [2]The most recent version, as of the date of this article, was published on April 25, 2019 and is entitled “Model Tax Convention on Income and on Capital 2017”. [3] Id. [4] Id. [5] Id. [6] Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [7] Id. [8] Org. for Economic Co-operation and Dev., Additional Guidance on the Attribution of Profits to Permanent Establishments, BEPS Action 7 (2018). [9] Id. [10] Id. [11]Org. for Economic Co-operation and Dev., Multilateral Convention To Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, (2016). [12] Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [13]Id.

Avoiding the Unauthorized Practice of Law in Florida: The Basics

Like most jurisdictions, the unlicensed practice of law (“UPL”) is prohibited in Florida.[1] Therefore, distinguishing lawful services from those which are unlawful is crucial.  The unauthorized practice of law is the practice of law by a person who is not a lawyer licensed to do so.[2] Specifically, it is the performance of acts or duties that are restricted to the members of the legal profession.[3]

Every state has its own interpretation of what constitutes UPL.[4] In Florida, a person who is not licensed or otherwise authorized to practice law in the state, and practices law in the state commits a felony of the third degree.[5] The Supreme Court of Florida has inherent jurisdiction to prohibit the unlicensed practice of law.[6] On the other hand, the Florida Bar Association is the entity in charge of considering, investigating, and seeking the prohibition of matters pertaining to the unlicensed practice of law and the prosecution of alleged offenders.[7] However, while traditional legal services like representing a client in court are easily defined as UPL, determining whether a service constitutes the unauthorized practice of law can be tricky and difficult. In fact, even the Supreme Court of Florida has expressed that defining what constitutes the practice of law can be difficult.[8]

There is a general societal understanding that the performance of services in representing another before the court is the practice of law.[9] The supreme court explained that the practice of law also includes giving legal advice and counsel to people as to their rights and obligations under the law and preparation of legal documents, although such matters may not then or ever be the subject of proceedings in court.[10] However, the court has provided some guidance in distinguishing benign advice or services from the unauthorized practice of law. The Supreme Court of Florida has stated that:

if the giving of such advice and performance of such services affect important rights of a person under the law, and if the reasonable protection of the rights and property of those advised and served requires that the persons giving such advice possess legal skill and a knowledge of the law greater than that possessed by the average citizen, then the giving of such advice and the performance of such services by one for another as a course of conduct constitute the practice of law.[11]

In other words, for a person’s conduct to constitute the practice of law two things need to be present. First, the person is giving advice or performing services that affect important rights of a person under the law. Second, to protect those rights, the type of advice given is that which requires legal skill and knowledge greater than what an average citizen would have.

To provide context, an effective strategy is to review examples of which types of conduct the supreme court has found to constitute the “unauthorized practice of law” and which types of conduct it has  not. The Florida Supreme Court has expressed that the drafting of living trusts and related documents by a corporation or other nonlawyer constitutes the unlicensed practice of law.[12] The supreme court stated that the assembly, drafting, execution, and funding of a living trust document constitutes the practice of law.[13] The court also stated that a lawyer must make the determination as to the client’s need for a living trust and identify the type of living trust most appropriate for the client.[14] The supreme court explained that because a living trust document involves the disposition of property at death, it requires legal expertise and must be performed by a lawyer.[15] However, the simple gathering of the necessary information for the living trust does not constitute the practice of law, and therefore, nonlawyers may perform this activity.[16]

On the other hand, the Supreme Court of Florida has stated that it is not the unlicensed practice of law for nonlawyers to engage in communications with clients for the purposes of completing the “Notice to Owner” forms and preliminary notice forms.[17]  The supreme court explained that the forms required only a minimum amount of information that could be easily obtained from the customer or the public records.[18] The court also stated that there had been no showing that the public was being harmed by the preparation of these forms by nonlawyers.[19] However, the supreme court noted that nonlawyers may not give legal advice in connection with the preparation and service of the notices.[20]

In addition, there are instances in which a person who is not licensed in Florida may practice in law within the state.[21] For example, attorneys licensed in another state may represent someone in a court proceeding in Florida with the court’s permission and in arbitration proceedings in the state.[22] The Florida Bar’s Foreign Legal Consultancy Rule allows a foreign attorney to advise clients on the laws of the country under which the attorney is admitted to practice.[23]

Avoiding the unauthorized practice of law boils down to avoiding two pitfalls: (1) avoid providing consulting or other advice which may affect the ultimate rights of another person or entity; and (2) don’t give advice which requires advanced legal knowledge or skill.

[1] Fla. Stat. § 454.23 (2012); [2] Unauthorized Practice of Law, The Wolters Kluwer Bouvier Law Dictionary (2012). [3] Id.  [4] See, e.g., Unauthorized Practice of Law, The State Bar of Cal., https://www.calbar.ca.gov/Public/Free-Legal-Information/Unauthorized-Practice-of-Law (last visited June 3, 2020). [5] Fla. Stat. § 454.23 (2012). [6] Unlicensed Practiced of Law, Fla. Dep’t of State: Div. of Library & Info. Services, https://dos.myflorida.com/library-archives/services-for-libraries/community/legal-risks-for-libraries/unlicensed-practice-of-law/ (last visited June 3, 2020). [7] Id.  [8] The Florida Bar v. Brumbaugh, 355 So. 2d 1186, 1191 (Fla. 1978). [9] State ex rel. Florida Bar v. Sperry, 140 So. 2d 587, 591 (Fla. 1962). [10] Id. [11] Id. [12] See Fla. Bar Re Advisory Op.-Nonlawyer Preparation of Living Trs., 613 So. 2d 426 (Fla. 1992). [13] Id. at 428. [14] Id. at 427-28. [15] Id. at 428. [16] Id. [17] See Fla. Bar re Advisory Opinion-Nonlawyer Preparation etc., 544 So. 2d 1013, 1016 (Fla. 1989); Fla. Stat. § 713.06(1) (2020) (A “Notice to Owner” is a written notice from a laborer (who is not dealing with the owner directly) that advises the owner of improved real property that the laborer has a right to place a lien on the property for any money that is owed to him (the laborer) for labor, services or materials furnished and that remains unpaid). [18] Fla. Bar re Advisory Opinion-Nonlawyer Preparation etc., 544 So. 2d 1013, 1016 (Fla. 1989). [19] Id. [20] Id. at 1016-17. [21] Unlicensed Practice of Law, The Fla. Bar, https://www.floridabar.org/public/upl/ (last visited June 3, 2020). [22] Id. [23] Id.

Can a Trademark Owner Force Me to Change My Company’s Name?

Knowing when your company’s brand may be at risk could help you save the identity of your business.

One day, you’ve managed to come up with the perfect name for your company, product or services, the next day you receive a cease and desist letter from someone claiming to own the rights to your brand name. When something like this happens, how do you know if they do, in fact, own the rights to the name? Can someone actually force you to change your company’s name that you’ve already invested money and time into?

While every case is unique and there may not always be a straightforward “yes” or “no” answer to these questions, there are a few basics about trademark law that could help you steer clear of these kinds of situations.

Similarity & Confusion

Trademark infringement is the unauthorized use of a trademark or service mark in connection with goods and/or services that is likely to cause confusion, deception, or mistake about the source of the goods and/or services.[1] In the landmark case, A&H Sportswear, Inc. v. Victoria’s Secret Stores, Inc., the court confirmed that the appropriate standard for determining whether infringement has taken place is the “likelihood of confusion” test.[2] The likelihood of confusion test actually dates back to 1961 in what’s referred to as the Polaroid case.[3] In that case, the court set out eight factors that can be used to determine whether a likelihood of confusion exists between different trademarks.[4] Since then, the likelihood of confusion test has been adopted in one way or another by all thirteen federal circuits in the United States.[5]

Although the actual tests across the country may vary, there are generally two key considerations in any likelihood of confusion analysis: (1) the similarities between the compared marks and (2) the relatedness of the compared goods.[6] In addition to these two key considerations, there is also the universally accepted practice of analyzing these factors on a sliding scale basis, meaning that the strength of one factor can offset the weakness of another factor in determining whether a likelihood of confusion exists between trademarks.[7]

In analyzing similarity, the trademarks are compared in their entireties for similarities in appearance, sound, connotation, and commercial impression.[8] In applying these principles, it turns out that similarity means more than being identical to one another or even having a similar spelling. Whether a trademark looks the same, sounds the same, or feels the same are all factors that can weigh towards a finding of a similarity between the brands.

Senior Users vs. Junior Users

Generally, in the United States the first user of a trademark is considered the “senior” user in the geographical area where the trademark is used. The senior user of a trademark has priority rights over any subsequent, or “junior,” user of the trademark in that area of use. Additionally, a party who files a valid federal trademark application for a mark that is in use and in commerce is provided with such priority use rights throughout the country.[9]

Determining who is the senior user and who is the junior user can be easy in some cases and quite difficult in others. Where one or both parties have a federally registered trademark, the first use date will be included in the trademark registration.[10] However, when dealing with an unregistered trademark, determining who has the priority of use adds additional complexity to the dispute.  In making this determination, some courts look not only at when the first sale of a product or service was made, but also at when the brand was used in advertising brochures, in catalogues and newspapers, and in press releases and trade publications.[11]

Consequences, Remedies & Court Orders

Where a party’s use of a brand name infringes upon the trademark rights of another party who has the senior priority rights of use over the infringer, a court may order the infringer to cease using the trademark, among other forms of remedies which may be available to the senior user.[12] In the United States, trademarks are protected under federal law through the Lanham Act, also known as the Trademark Act of 1946.[13] The Lanham Act provides that in cases where a party has infringed upon another’s trademark that, a court may grant injunctive relief, or order a party to refrain from using another party’s trademark.[14] Additionally, a court may order that the prevailing plaintiff in such case be awarded; (1) the defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.[15]

Additionally, the recent 2020 Supreme Court decision in Romag Fasteners, Inc. v. Fossil Group, Inc., has resolved a previous split between federal circuits by holding that a plaintiff in a trademark infringement suit is not required to show that a defendant willfully infringed the plaintiff’s trademark as a precondition to an award of profits.[16]

With the holding in Romag Fasteners, Inc., the risks that run with engaging in trademark infringement have never been higher and, in turn, the importance of ensuring that your company’s name and the brand of your products and services are unique have never been greater.

[1] 15 U.S.C. § 1114 (2020). [2] A&H Sportswear, Inc. v. Victoria’s Secret Stores, Inc., 37 F.3d 198 (3d Cir. 2000). [3] Polaroid Corp. v. Polarad Elecs. Corp., 287 F.2d 492, 495 (2d Cir. 1961). [4] Id. (Factors included “. . . the strength of his mark, the degree of similarity between the two marks, the proximity of the products, the likelihood that the prior owner will bridge the gap, actual confusion, and the reciprocal of defendant’s good faith in adopting its own mark, the quality of defendant’s product, and the sophistication of the buyers.”). [5] See generally, 1 Trademark and Unfair Competition Law 6B (2015). [6] Herbko Int’l, Inc. v. Kappa Books, Inc., 308 F.3d 1156, 1164-65 (Fed. Cir. 2002). [7] In re E. I. Du Pont de Nemours & Co., 476 F.2d 1357, 1362 (C.C.P.A. 1973). [8] Stone Lion Capital Partners, L.P. v. Lion Capital LLP, 746 F.3d 1317, 1321 (Fed. Cir. 2014). [9] 15 U.S.C. § 1057(c) (2020). [10] 15 U.S.C. § 1057(a) (2020). [11] Malcolm Nicol & Co. v. Witco Corp., 881 F.2d 1063 (Fed. Cir. 1989). [12] See, 15 U.S.C. § 1051-1129 (2020). [13] 15 U.S.C. §§ 1051-1129 (1946). [14] 15 U.S.C. § 1116 (2020). [15] 15 U.S.C. § 1117(a) (2020). [16] Romag Fasteners, Inc. v. Fossil Grp., Inc., 140 S. Ct. 1492 (2020).