Watch for employee registration of domain names using employer trademarks

According to one source (http://www.statisticbrain.com/employee-theft-statistics/), the annual amount of employee theft from US businesses is $50 billion, and seventy five percent of employees have stolen at least once from their employer. It’s no surprise that employers have security cameras in stores, and policies in place to reduce the amount of employee theft. What is surprising is that employers are not more careful with other assets.

Although perhaps not technically theft, there is a new employee risk
relating to employer assets in the online world. Some seemingly clever employees have chosen to register their employe
r’s trademarks as second level domain names to enhance the value of the domain names. With registration of the domain names in hand, the employee’s intent may be to sell the domain names back to the employer, offer them on the domain name market to someone seeking a high traffic domain name, or hold them for some misguided leverage against the employer in the future. Any of these  strategies should not be acceptable to an employer as a trademark owner, and appropriate action should be taken.

Trademarks, and the associated goodwill, are valuable assets of employers. Many employer trademarks have been in existence for years, and based on extensive use and effort, have become significant tools for consumer awareness, brand loyalty, and quality consistency. Misappropriation and misuse of trademarks can be very costly for employers, and can damage the valuable goodwill associated with the marks. Having employees compromise the value of the trademarks should be taken seriously.

Although employees owe a general duty of loyalty to their employers, it is not always clear whether the rules for employees registering domain names are different than for an independent third-party registering domain names that include the employers trademarks. Attempting to discipline an employee for using a trademark in a domain name may not be an easy case. Probably the best course of action is for employers to adopt broad policies relating to employee use of trademarks, specifically as they relate to domain names. Also, employers need to be vigilant in monitoring the use of their trademarks in domain names, and in any other way that might impact or compromise the integrity of the goodwill of the marks.

A new tool for employers in the trade secret toolkit—Defend Trade Secrets Act of 2016

Employers are appropriately concerned about the potential damage that can result from the theft or misappropriation of their trade secrets. Sometimes it’s hard to put the genie back in the bottle after secret information has been disclosed, and by the time the misappropriation of trade secrets has been discovered, it’s too late. The trick is to find a way to prevent the disclosure and misappropriation before the damage is done. Remedies now available under new federal legislation may help temper, or at least provide remedies for, any such illegal disclosure.

Congress has enacted the Defend Trade Secrets Act of 2016 (DTSA or Act), which was signed into law by the President on May 11, 2016. The vote in the House was 410 to 2, and the Senate unanimously passed the Act. Under this new federal statute, employers and others have new remedies available in federal court. The remedies are limited in number, but are potentially far-reaching in effect. Protection of trade secrets has long been the purview of states and state courts under common law and the Uniform Trade Secret Act. But now, Congress has entered the arena, and made federal courts available to hear trade secret cases.

The Act benefits employers, but also imposes new obligations on employers. DTSA requires employers to provide a notice of whistleblower immunity to employees, independent contractors or consultants in any contract or agreement with such persons that governs the use of a trade secret or other confidential information. The failure to include such a notice may result in the loss of potentially significant remedies or damages. Going forward, employers should include the applicable notice in all agreements which restrict disclosure of trade secrets, including employment agreements, independent contractor agreements, consulting agreements, separation and release agreements, severance agreements, non-compete and non-solicitation agreements, and confidentiality and proprietary rights agreements.

Under DTSA, federal courts may grant injunctions that limit threatened misappropriation of trade secrets by employees, so long as an employee is not prohibited from entering into an employment relationship, and any limitations are based on evidence of threatened misappropriation, and not merely the knowledge retained by the employee. The Act also acknowledges that federal courts may not issue an injunction that is in conflict with state non-competition law. Double damages and an award of attorney’s fees are available if the misappropriation was willful. If the notice of immunity described above is not given to an employee, the employer may not recover these exemplary damages for willful misappropriation.

Under the DTSA, and regardless of the citizenship of the parties, trade secret cases may now be brought directly in federal court, so long as the trade secret is related to a product or service used, or intended to be used, in interstate commerce. The litigants may enjoy all of the benefits of pleading their case to a federal court judge. Trade secrets are a form of intellectual property, and the Act now brings trade secrets into conformity with the misuse of other forms of intellectual property, including patents, trademarks, and copyrights. Contractual forum selection clauses should be reviewed to confirm that the chosen forum is not limited to state court.

Much of DTSA is focused on remedies. In addition to granting injunctions, under appropriate circumstances, and if the court is persuaded that irreparable harm will result, a federal court may order seizure of property necessary to prevent the misappropriation of trade secrets. The order may be granted without a hearing and without notice to the defendant. The procedure essentially follows state and federal law for seizure of any other assets without notice and a hearing on the basis that irreparable harm is likely to result from the failure to act, or in situations where notice would give a defendant an opportunity to hide or otherwise handle the assets associated with the trade secrets in a harmful manner.

State court remedies are also still available, but employers and others now have the ability to file in federal court, and seek powerful remedies that may stop, or at last impede, the act of misuse or misappropriation of trade secrets.

Utah’s New LLC Act

Effective January 1, 2014, Utah has a new limited liability company act, the Utah Revised Uniform Limited Liability Company Act (“New LLC Act”).  The New LLC Act will eventually replace the previous limited liability company act, or Utah Revised Limited Liability Company Act (“Prior LLC Act”).  For a two year period, between January 1, 2014 and January 1, 2016, companies formed prior to January 1, 2014 may opt in to governance under the New LLC Act but they are not required to do so.

The New LLC Act substantially changes the Prior LLC Act.  Utah is one of the first states to adopt the New LLC Act in its current form, so it will take some time to work through some of the language and issues raised by the New LLC Act.  Here are just a few examples of changes:

The New LLC Act recognizes oral or even implied operating agreements.  This change could help resolve problems that occur when companies are formed but the members fail to sign a written operating agreement. It could also lead to disastrous results as disputing members of a limited liability company attempt to establish the terms of an oral agreement. Adding to the potential for disputes, the default governance rules which apply under the New LLC Act if not modified by the operating agreement are much less extensive and generally less detailed than those provided by the Prior LLC Act. A well-drafted operating agreement can avoid these disputes.

The New LLC Act imposes duties of loyalty and care on its managers and, in certain situations, its members.  However, so long as the provisions of the operating agreement are not unconscionable or against public policy, an operating agreement may establish the standards by which the performance of these duties are to be measured, and in some cases alter or even eliminate some duties. The New LLC Act also makes the duty of good faith and fair dealing, which is implicit in all contracts entered into in Utah, explicitly applicable to the managers and members.

Under the Prior LLC Act, articles of organization could include limitations on the authority of managers of a company.  If there were no limitations, third parties could rely on the authority of persons named as managers in the State’s records. Under the New LLC Act, companies are no longer required in the articles of organization, which is now a certificate of organization, to identify the members or managers that have authority to act on behalf of the company.  This could limit the company’s ability to enter into contracts, which would hinder its business opportunities.  Similarly, banks may not lend money to limited liability companies without having assurances of the authority of those signing the loan documents.  Fortunately, however, under the New LLC Act, a company may now file a statement of authority identifying the authority, or limitations on the authority, of persons who may bind the company or enter into specific types of transactions, such as real estate transfers.  Third parties engaging in transactions with the company may only rely on the filed statement of authority.

Distributions to members may not be made unless certain financial conditions exist, such as providing for payment of company debts after the distribution.  Under the New LLC Act, however, a member or manager who consents to a wrongful distribution may be personally liable for the amount of the distribution that exceeds the amount that could have been made if the company had satisfied the financial conditions to making a distribution.

A member may make a loan to the company in addition to his capital contribution. Under the Prior LLC Act, the company could not pay a member loan on liquidation of the company unless all third party creditors were fully paid. The New LLC Act treats member loans the same as third party loans. Therefore, if a liquidating company cannot pay all of its creditors in full, the member-creditor can participate in available funds in the same manner as third party creditors of equal rank. If an existing company opts in to be governed by the New LLC Act, it appears that the New LLC Act would apply to existing loans from members. It remains to be seen how sympathetic the courts will be to third party creditors who claim that they had extended credit in reliance on the Prior LLC Act’s treatment of member loans.

While the New LLC Act may not immediately apply to a limited liability company, members and managers will not have much time to determine how the New LLC Act affects them.  As indicated above, the New LLC Act will govern (a) all Utah limited liability companies formed on or after January 1, 2014, and (b) all Utah limited liability companies registered in the state of Utah as of January 1, 2016, regardless of when the company was formed.  Additionally, members or managers of existing limited liability companies can make an early election to have their company immediately governed by the New LLC Act.