The Series LLC: Sure Bet or Risky Business?

Common legal sense dictates that business owners operating multiple businesses, or holding multiple assets, organize each business or asset as a separate entity.  The reason for this is simple: in the event that one of your businesses is sued, you don’t want the other businesses to be exposed to liability (especially if those other businesses have significant amounts of assets).  Before the advent of the series LLC, business owners would have to pay a separate filing fee for each legal entity to the Illinois Secretary of State. Currently, the filing fee for a single LLC in Illinois is $500, and the required annual filing fee is $250.  For the owner of a fleet of 20 taxicabs, these filing fees can be burdensome ($10,000 in initial filing fees and $5,000 in annual filing fees).  Enter the series LLC, a means of lifting (some of) that costly burden.

Like the name suggests, a series LLC is a single limited liability company with multiple series.  Each series within the company is separate and legally distinct from the remaining series.  In other words, each series is insulated from the risks and liabilities of the other series under the same company.  One can organize the different series with separate managers, members, even operating agreements.  Despite the separateness of each series, the Illinois Secretary of State treats the entire series LLC as one entity.  One entity = one filing fee and one annual report.  For our friend with a fleet of 20 taxicabs, this means that although each cab within the fleet can be designated as its own series, the fleet as a whole is only responsible for paying a single series LLC filing fee (currently $750 plus $50 for each series).  To illustrate the significant cost savings, the taxicab company with 20 series would pay $1,750 in initial filing fees, as compared to $10,000 in initial filings for 20 separate  LLCs.

To create a series LLC, one must designate the series in the master operating agreement for the company and file a Certificate of Designation with the Secretary of State.  The operating agreement must explicitly provide for the limitation of liability.   This limitation of liability should be upheld by courts if the following conditions are met:  (1) each series maintains its own records; (2) each series holds its assets separate and apart from the assets of other series; (3) the operating agreement provides for separate accounting of assets and liabilities; and (4) the company provides notice of the liability limitation in its Articles of Organization.  Failure to fulfill these conditions can produce severe results.  For example, a court may completely disregard the separate status of each series and apply all of the assets of the series LLC to satisfy any creditor’s claim.  It cannot be stressed enough that business owners must observe all the formalities and operate each series separately.

Although the series LLC has been around in Illinois since late 2005, there is little precedent interpreting the provisions of the Illinois LLC Act authorizing series LLCs.  While the Illinois LLC statute specifically states that each series is treated as a separate entity in all respects, the application of the statute has not been fully tested by the courts.  Adding to the uncertainly, only seven states currently have series LLC statutes, so an Illinois series LLC cannot be certain that another state without a series LLC statute will honor the separateness of each series in the LLC.  Additionally, the IRS has not yet provided any guidance on how the series LLC should be taxed, and there is little case law addressing series LLCs in bankruptcy.  For these reasons, prudent business owners (and their attorneys) would be be well advised to ensure that the series LLC complies with all the strictures of the Illinois LLC Act and that the conditions discussed in this article are met.

There are a number of other relevant issues and concerns regarding the series LLC in Illinois.  Depending on the nature of your business, the series LLC may or may not be a wise vehicle.    If you are interested in learning more about the series LLC please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by Dominika Szreder Fard, Esq.

Literary Titles and Trademark Protection

Trademark registrations for most book or movie titles (“literary titles”) are difficult to obtain.  While copyright laws protect the actual content of creative works, literary titles are generally not entitled to either copyright or trademark protection.  Even where the literary title is unique, such as The Curious Case of Benjamin Button, the United States Patent and Trademark Office (“USPTO”) and courts typically do not allow trademark registration.  The USPTO and courts alike reason that literary titles are per se “inherently descriptive” unless the title has “wide promotion and great success” or is part of a series of creative works, such as Nancy Drew or Twilight.  See Herbko Int’l Inc. v. Kappa Books, Inc., 308 F.3d 1156 (Fed. Cir. 2002).  Thus, under the current legal doctrine, single literary titles (like The Curious Case of Benjamin Button) are not registerable, while series titles (like Twilight) are registerable.

For many, this legal doctrine is both confusing and frustrating.  The vast majority of creative works do not reach the high level of promotion and success necessary (also known as “secondary meaning”) to overcome the per se “inherently descriptive” designation by the USPTO, and few creative works actually evolve into a series.  The denial of trademark protection for single literary titles is significant and arguably unfair.  Literary titles can be valuable assets, used as bargaining chips in lucrative licensing opportunities for related merchandise.  A valid trademark registration for a literary title can make an appreciable difference in the ultimate value of a licensing agreement.

With a little creative lawyering, however, one can bypass the USPTO’s hard stance on single literary titles and secure trademark protection for works otherwise unregisterable.  Although a single literary title may not be registerable for the literary work itself, one can secure trademark protection for the title of the work by registering it for use in connection with other goods or services. For example, while the USPTO would likely deny registration for The Curious Case of Benjamin Button for use in connection with a movie, the USPTO would likely grant registration for the same title for use in connection with clothing or other  merchandise.

Though perhaps a bit crude, another approach is to simply intend on writing another book or producing another movie reasonably close in time to the release of the first literary title.  With this approach, one may file an Intent to Use Application with the USPTO after publishing the first literary title.  Even if one doesn’t ultimately write that second book, the Intent to Use Application can buy the precious time needed for the literary title to garner secondary meaning, thereby overcoming the USPTO’s restriction on registration.  Significantly, while the Intent to Use Application is pending, third parties are deterred (but not enjoined) from using that particular literary title.  Thus, the Intent to Use Application may provide an effective hedge that keeps third parties from using your literary title while you either write your second book or acquire the secondary meaning.

There are a number of other approaches one can take in securing protection, including state and foreign trademark registration.  Depending on the factual predicate of your case, one approach may be better suited than the other, or a combination of approaches may be most effective.  If you are interested in learning more about securing trademark protection for your literary title, please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by Dominika Szreder Fard, Esq.

Square Peg, Round Hole: Preventing the “Tortification” of a Contract Claim

The vast majority of legal practitioners are familiar with the parol evidence rule, which prevents a party to a written contract from contradicting, or supplementing, the terms of a contract by introduction of evidence outside the four-corners of the document. An example of this extrinsic (or outside) evidence is found in oral or written representations made before the final contract is executed. To prevent the introduction of extrinsic evidence, parties frequently negotiate “integration” clauses into a contract; that is, a clause which defines the written contract as the entire agreement between the parties, superseding all prior negotiations and agreements. Thus, where a contract contains an integration clause, the parol evidence rule may be successfully invoked, and the party challenging the contract barred from introducing extrinsic evidence.

But, what happens when the party challenging the contract boot-straps a fraud claim to a breach of contract claim? Does the parol evidence rule apply to bar extrinsic evidence? The answer is “NO,” as the parol evidence rule is a principle of contract law, with no application to tort based claims. Indeed, many perceptive attorneys have recognized this loop-hole, and have circumvented the parol evidence rule by crafting fraud based claims out of facts that support nothing more than a garden variety breach of contract claim.  These attorneys are the flag bearers of what Judge Kozinski so eloquently called the “tortification of contract law” in Oki America, Inc. v. Microtech Int’l, Inc., 872 F.2d 312 (9th Cir.1989).

So, is the sanctity of a contract lost, and extrinsic evidence introduced, whenever the party challenging the contract alleges a fraud occurred in the negotiations leading up to the contract? Not necessarily, according to Judge Richard Posner in a recent Seventh Circuit Court of Appeals decision in Extra Equipamentos E Exportacao Ltda. v. Case Corp., 541 F.3d 719 (7th Cir. 2008). In Equipamentos, the court addressed the enforceability of a “big boy” clause, which in legal parlance is referred to as a “no-reliance clause.” A typical no-reliance clause states that the parties have not relied upon any oral representations leading up to the execution of the contract. Reliance is, of course, a critical element of any fraud claim, so the inclusion of a no-reliance clause may defeat such a claim. The plaintiff in Equipamentos sued the defendant for fraud, maintaining that he signed a release based on false statements and promises made by the defendant. In response, the defendant argued that the no-reliance clause precluded any such fraud claim. In holding that the no-reliance clause defeated the plaintiff’s fraud claim, the court cautioned that big boy clauses may not be enforceable if one of the contracting parties is not actually a “big boy,” like an unsophisticated person or a party not represented by counsel. In such a scenario, a court will conduct an inquiry into the circumstances surrounding the negotiations to ensure that the unsophisticated party understood what  rights he or she was waiving in the no-reliance clause.

The lesson of Equipamentos is clear: it behooves legal practitioners – and business owners – to consider “big boy” clauses in their contracts to head off fraud claims where the actual dispute involves nothing more than a breach of contract. If you are a business owner interested in learning more about no-reliance clauses, in the transactional or litigation realm, please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by Bardia Fard, Esq.

Non-Compete Agreements and the Sale of a Business

In utilizing a non-compete agreement as a condition to the sale of a business, it is critical to recognize two nuances:  (1) restrictions on competition are enforceable only to the extent they’re reasonable; and (2) a covenant not to compete could have significant tax implications for both buyer and seller.

Typically, non-compete agreements state that in exchange for compensation, which is usually part of the sale price, the seller will promise not to enter a similar business, within a geographic area, for a limited time period. Courts will only enforce such an agreement if it is reasonable in scope and duration. What qualifies as reasonable depends on the industry and the state in which the agreement was entered into, as states have different standards for evaluating reasonableness.

In negotiating the business sale price, buyer and seller must decide upon  the monetary worth of the non-compete agreement.  In a typical asset sale of a business, each sold asset is treated separately for tax reasons. Currently,  assets treated as capital gains are taxed at an appreciably lower rate than those treated as ordinary income. Notably, gains on some intangible assets, such as non-compete agreements, aren’t usually eligible for capital gains treatment.   Thus, they are usually taxed as ordinary income.  It follows that in allocating the business sale price to all tangible and intangible assets, the buyer and seller should be mindful that assigning a portion of the sale price to the  non-compete agreement could lower  the after-tax profit for the  seller.

Because of these tax implications, buyer and seller alike should carefully structure any non-compete agreement and its monetary value.  If you have any questions regarding the structure of a business sale or a non-compete agreement, please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by  Dominika Szreder Fard, Esq.

Acumen Law Renovating New Offices

Acumen Law is moving its offices to the second floor of a commercial building located at 2338 West Belmont in Chicago, Illinois.  The new offices are currently undergoing renovations, all of which are scheduled for completion in summer 2009.  The new location will provide readily available street parking for our clients.

General Counsel

Acumen’s General Counsel Subscription tailors a flat monthly fee to the legal needs of your business.  Our business attorneys work as closely with your business as you need, addressing those legal matters most important to your business’ continued success.

The advantages of our General Counsel Subscription include:

• The opportunity for significant cost savings, since we do not bill your business for time at our hourly rate
• A predictable monthly fee, which makes it easier for your business to budget for legal services
• A preventative approach to legal concerns, which frequently reduces exposure to liability in the future
• Security that your legal questions can be quickly answered without incurring additional costs
• A close relationship with an Acumen business attorney, who you can call on at any time

Common legal services include:

• Audit to Ensure Compliance with Relevant Rules, Laws, and Regulations
• Business Formation
• Joint Ventures/Strategic Alliances
• Commercial Leases
• Commercial Notes
• Contract Drafting and Negotiation
• Copyright Matters
• Corporate Governance/ Maintenance
• Operating and Shareholder Agreements
• E-Commerce and Internet Matters
• Employment Law
• Independent Contractor Agreements
• Sale/Purchase Transactions
• Technology and Licensing Agreements
• Trademark Protection
• Trade Secrets

To discuss the General Counsel Subscription for your business with one of our attorneys, please schedule a free consultation by calling us at (312) 212-3863.

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