United States: Making Your Passion Your Paycheck: Legal Issues For Entrepreneurs

Whether your passion is rock climbing, camping, skiing, yoga or scuba diving, starting a company that combines your passion with the opportunity to pay your bills can be exciting and overwhelming. Perhaps the scariest part of any such endeavor is that we simply cannot know what we don't know. One place where entrepreneurs struggle to get a foothold is around the legal issues that are common in starting a business.

On November 9, Lewis Roca Rothgerber Christie will be presenting a webinar discussing the most common legal issues for start-up companies in the outdoor recreation space. Here, we suggest a few topics that we will revisit in more depth during that webinar.

Intellectual Property

Building your brand name is the most obvious way to differentiate your products and services from those of your competitors. Trademarks or service marks are the most common legal tools used to identify the brand owner, or exclusive source, of a product or service. These provide the owner of the mark an exclusive right to use that mark in connection with those goods or services. However, there are two different types of trademarks, and the rights associated with each type of mark are not equal.

A common law, or unregistered, trademark provides significantly less protection than a registered trademark, i.e., one that has been registered with the United States Patent and Trademark Office (USPTO). Unlike a common law mark, a registered trademark will allow the trademark owner to enforce the trademark rights in all fifty states, and sue for monetary damages and an injunction for infringement of that that mark.

Another form of protection businesses need to consider is patent protection for new and innovative products, or methods of manufacturing those products. For example, a company may develop and receive patent protection for an innovative molding process for creating handholds for a climbing gym that saves time and costs while producing a more durable product. Such a process may qualify for patent protection through the USPTO. Further in this example, if the handholds themselves are innovative, such as providing a better grip surface in the face of sweaty palms, they may merit separate patent protection.

Like a registered trademark, a patent is sought through the USPTO and provides the patent holder a right to sue for monetary damages and an injunction in all fifty states for infringement.  Patents can be sought for virtually any product or process that is new and innovative, including clothing (for example, seamless sports bras or wicking material for work out clothing), equipment (skies, golf clubs, tents), and manufacturing processes.

Employment and Confidentiality Issues

One not-so-obvious but potentially costly pitfall to avoid is inadvertently "stealing" a competitor's technology or, conversely, having your technology stolen. The most common way this occurs is by hiring employees that either knowingly or unwittingly pass on information to your company from their previous employer when they are under an obligation to keep such information confidential.

As a general practice, it is always advisable to obtain a non-disclosure agreement from any employee that will be working with any technology or data (for example, customer lists, financial data and business plans) that you would not want disclosed to a competitor. Some companies go one step further and seek non-compete agreements from key employees, which have different considerations for enforceability depending on the jurisdiction. However, on the flip side, when an employee is hired into a new key position it is often because of specific desirable experience that employee has obtained from previous employment in that or a similar role. While this itself is not legally wrong, if that employee discloses information in their new role that was learned in confidence from a previous employer, the new employer may face an unwanted lawsuit for unfair competition or trade secret misappropriation.

Manufacturing and Supply Agreements

Being able to timely deliver products to your customers is essential in maintaining your business. For any product that you plan to sell, key agreements specifying objective criteria for the quality of the product and its supply must be in place. Some key issues to consider in these agreements are the right to inspect the manufacturing facilities and products, the price and time for delivery, the right to return or not accept products that do not meet objective specifications, liability protections in the event a product later malfunctions or breaks, and the right to terminate the agreement in appropriate circumstances. Developing a general template for these agreements for your specific needs may also be desirable as your business scales up.

Safety and Liability

For particular outdoor recreation businesses, safety is a key concern. Preparing strong, correctly drafted liability waiver documents (sometimes called a release of liability) at the outset is fundamental to your financial interests. The most common reason waivers fail is because they are poorly drafted. In that regard, waivers are generally governed by state law. Some states have very lenient requirements for enforcement of these agreements, while others have strict standards or do not enforce them at all (especially for minors). Many states require specific language for the waiver to be enforceable—failure to omit a single word can render the waiver unenforceable. It is important therefore to understand that waivers are not all created equal. Developing a customized waiver for your business in the state in which you operate is the best single risk-management tool available to you (other than the prevention of injury).

Leasing or Purchasing Space

Selecting a space for your business represents a major financial investment for a growing business. There are pros and cons for both arrangements. Buying space allows owners to capture tax deductions and additional income (through renting extra space to other businesses). With a set mortgage term, you know your future fixed costs. On the flip side, real estate is not always cheap, and you are locked in to a mortgage. If you outgrow your space, there is less flexibility to move.

Leasing space also has its pros and cons. Leasing allows you to free up capital, to rent in the location you prefer, and (depending on your lease) to focus on running your business instead of maintaining your property. But, when you lease, you have no equity in your property and you may be subject to rent increases and higher costs when your lease expires.

In conclusion, starting a business that capitalizes on your passion for a sport or activity is the epitome of a dream come true. Knowing a few foundational legal principles can catapult that dream and prevent it from becoming an unnecessary nightmare. We will discuss these and other issues in greater depth on November 9.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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