Busn Exam 4: insider trading, PROPERTY INTELLECTUAL PROPERTY, Trademarks, Copyrights. Patents

What are the two options for insider trading?

disclose to the public or abstain ( re Cady, Roberts & Co. (40 S.E.C. 907))

Howey Test states that an investment can be regulated as a security if…

1. There is an investment of money.

2. The investment is made into a "common enterprise."

3. The investors expect to make a profit from their investment.

4. Any expected profits or returns are due to the actions of a third party or promoter.

Securities and Exchange Commission (the SEC)

-to regulate insider trading

-Because corporate insiders (officers, executives, large shareholders) could trade on information no one else knew

-there were few applicable anti-fraud laws, insiders reaped profits from exploiting their own "inside information."

-Public outrage forced Congress to create the SEC and the U.S.'s first comprehensive insider trading laws

What contributed to the stock market crash of 1929?

Rampant market manipulation and insider trading in the 1920s

 Securities Act of 1933

-first federal legislation to regulate the U.S. stock market, an authority that was previously regulated at the state level

-anyone who wishes to sell investment contracts (corporate securities) to the public must publish certain information regarding the proposed offering, the company making the offering, and the principal figures of that company

-intended to protect the investing public from deceptive or misleading marketing practices

- company and its leading figures are strictly liable for any inaccuracy in its financial statements, whether intentional or not

SEC Rule 10b-5

prohibits corporate officers and directors or other insider employees from using confidential corporate information to reap a profit (or avoid a loss) by trading in the Company's stock.

This rule also prohibits "tipping" of confidential corporate information to third parties.

SEC v. Texas Gulf Sulphur Co. in 1968

expanded the scope of what counted as insider trading. Now, anyone possessing material nonpublic information must either disclose it to the public or refrain from trading.

What is an insider?

An insider can be a low-level employee or a temporary employee.

It is anyone who has a duty to the company.

An insider can be the company's lawyer or accountant.

It can be someone not formally affiliated with the company who acquires nonpublic information.

• Corporate insiders: Officers, directors, and employees of a company.

• Significant shareholders: Those who own more than 10% of a company's securities.

• Temporary insiders: Individuals who receive material, nonpublic information under a duty of trust and confidence, such as lawyers, accountants, consultants, or other professionals working with the company.

What is material information?

• Information which, if known, could reasonably be expected to affect the value of the Company's stock, or which would affect the investment judgment of a person making a decision to buy or sell the stock.

• Information is considered "material" if there is a substantial likelihood that it would be considered important by a reasonable investor in deciding whether to purchase or sell stock, or other securities, or if the information would be viewed by the reasonable investor as having significantly altered the total mix of information available to the investor before making the purchase or sale

• The information need not be the determining factor, but must assume actual significance in the investor's deliberations.

What is nonpublic information?

This information hasn't been disseminated to the general public and is not readily available through ordinary research or analysis. It's confidential or restricted to a select group of individuals within a company or those with a special relationship to the company.

"Tipping"

This involves an insider sharing confidential information with another person (the "tippee"), who then trades on that information. Both the tipper and the tippee are liable for insider trading violations.

Misappropriation

This is the word used when individuals who are not traditional insiders, such as lawyers or consultants, obtain confidential information through their work and use it for trading purposes

Front-running

A broker or analyst uses advance knowledge of a pending order to trade for their own account before filling client orders.

Shadow Trading

Using material nonpublic information about one company to trade in the securities of another company

SEC v Panuwat, 702 F. Supp. 3d 883 (ND CA 2023)

Matthew Panuwat, a former Medivation executive, was found guilty of using confidential information about his own company's acquisition to trade in Incyte Corporation securities, a comparable company in the same industry.

Dodd-Frank Act of 2010

 established a whistleblower program that provides monetary incentives for individuals to report securities law violations, including insider trading.

It established a mandatory bounty program under which whistleblowers can receive from 10% to 30% of the proceeds from a litigation settlement

 broadened the scope of a covered employee by including employees of a company's subsidiaries and affiliates, and extended the statute of limitations under which whistleblowers can bring forward a claim against their employer from 90 to 180 days after a violation is discovered.

Stop Trading on Congressional Knowledge Act (the "Stock Act")

It required lawmakers (or their spouses) to disclose when they trade individual stocks over $1000.

In 2012 President Barack Obama signed it

§ 18.2-435. Giving conflicting testimony on separate occasions as to same matter; indictment; sufficiency of evidence.

It is perjury in Virginia to give sworn testimony one way on one occasion, and given substantially differing testimony on a different occasion.

You cannot talk, bribe, or convince another person into committing perjury under Virginia law. If you do, it's the same as committing perjury yourself.

18 U.S. Code § 1621 - Perjury generally

Whoever—

(1)having taken an oath before a competent tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered

(2) in any declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, United States Code, willfully subscribes as true any material matter which he does not believe to be true; is guilty of perjury

aka don’t lie or declare information you do not believe to be true

Federal law: Lying under oath=up to _____ years

five

Tell the truth

Tell the whole truth

DO NOT GUESS

DO NOT SPECULATE

No jokes.

No sarcasm.

If you can't remember exactly, say "I can't remember."

"If I remember correctly," is a one way to begin an answer

"Personal property”

Things you can hold or touch, or that you can move around

Real property (or "realty") is

land and everything permanently attached to it

If you own land you can sell it you can lease it out you can mortgage it.

A mortgage refers to financing or a loan on real property.

intellectual property is …

a property right

A trademark is a

mark that identifies a business service or product. ™

In the United states trademark rights originate from the common law.

Trademark Act of 1946 (known as the Lanham Act) is

the statutory authority for the federal trademark system.

The Lanham act of 1947

allows a trademark to be registered with the United

States Patent & Trademark Office.

What to do with a trademark

• Develop your trademark

• Use it in commerce

• Register it

The US trademark system is a "First to Use" system.

Thus, the first business to adopt and use a distinctive and nonfunctional mark in connection with goods or services has the superior claim to rights in the mark Most other major trademark systems in the world use a "first to register" system.

To register trademark with the PTO, you

Submit a drawing of your mark

State when it was first used in the interstate commerce

And describe how it was used (interstate commerce)

The PTO will register a trademark if it is not

Deceptive

Descriptive

Immoral

Generic

Similar to another’s trademark

The name of a person whose permission has not been obtained

"Likelihood of confusion"

Sometimes a business wants to register a mark that is in some way similar to another business's mark.

The main issue in determining whether a registration is proper is whether consumers are likely to be confused by two marks.

This has to do with the similarity of the products or services, how sophisticated the consumers are, and even whether it appears to be the intention of one of the registrants to deceive confuse consumers.

Distinctiveness

• Without distinctiveness there is no mark.

• Distinctiveness is not the same as "original."

• For example the word "apple" is not new, but it is still distinctive under trademark law when it's used for a computer rather than for a piece of fruit

Distinctiveness also does not mean that the mark is creative.

• The phrase "frosted flakes" isn't creative, but after it was used in the marketplace for a while, it became recognized as distinguishing both the maker's goods and identifying its source

• "Frosted Flakes" is therefore distinctive.

Abercrombie & Fitch Co. v. Hunting World, 537 Fed. 2nd 4 (2nd Cir. 1976)

Modern courts analyze distinctiveness by looking at where a mark should fall on the "spectrum of distinctiveness."

Fanciful marks are coined words or phrases created solely for use as marks such as Xerox for photocopiers.

Registration (not required, but good to do)

Registration is available only to marks that are used "in commerce" under the Lanham Act.

An action for infringement can only be brought against an alleged infringer who is engaging in unauthorized use "in commerce."

"In commerce" means Interstate Commerce under the Lanham act

Any action you bring to enforce your trademark rights under the Lanham Act should be brought in federal District Court under the Lanham Act § 39

To prove a case under the Lanham act §$ 32 and 43, the plaintiff must show… 

• Unauthorized use by the defendant, of the plaintiff's valid registered or famous mark, giving rise to a likelihood of confusion by consumers

If you register your trademark with the PTO

then you may recover monetary damages against anyone who infringes against your trademark.

Even if you do not register your trademark you can

get a court to enter an injunction forbidding the use of your trademark by someone else.

What IS copyright protection?

The right to stop someone else from publishing your work, and, if your copyright is registered, the right to recover damages.

Copyright protects …

the fixed form of an expression of an idea. You can't copyright a bit of history, or a concept, or an idea.

To be a "copyrightable work"

• it must be in a fixed format (set out in a tangible medium of expression such as a recording, a writing, a drawing, or a design)

• it must be original (it must not be a copy of someone else's work)

• it must be something creative

do you have to register a copyright?

It isn't necessary to register a copyright, BUT if you distribute your work without notice that it is copyrighted, it is possible it will fall into the public domain and lose copyright protection.

You can register a work with the Library of Congress. By doing so, you can be entitled to damages if your copyright is infringed.

The copyright symbol is not required, but it informs others that your copyright exists, and can deter others from infringement.

Obstruction of Justice

"To be guilty of obstructing justice, a defendant must have knowledge or notice of a pending judicial proceeding, and must have acted with the intent to influence, obstruct, or impede that proceeding in its due administration of justice." United States v Littleton, 76 F.3d 615, 619 (4th Cir. 1996).

PUBLIC DOMAIN

The term of copyright for a particular work depends on several factors, including whether it has been published, and, if so the date of first publication.

A work can enter the public domain if its creator dedicates it to the public domain.

"Dedicated to public domain"

Loss of Copyright From Lack of Copyright Notice

Under copyright laws that were in effect before 1978, a work that was published without copyright notice fell into the public domain. If the work did not include the word "Copyright" or a © and the name of the copyright owner, the work would enter the public domain.

For works first published after March 1, 1989 copyright notice is no longer required to prevent the work from falling into the public domain.

COPYFRAUD

Trying to get licenses for public domain works

Thaler v Permutter

case that determined: Are 100% Al generated works copyrightable?

Al can still create, and Al's creations can still be sold, even if the works aren't copyrightable.

But, as of now, no one can stop someone else from publishing the Al's work or recover damages for infringement.

Fair Use Doctrine

Portions of copyrighted works can be used for news, reporting, teaching, commentary, criticism, scholarship, and research.

In order to determine whether the Fair Use doctrine applies, courts look at the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use on the potential market for or value of the copyrighted work

Patents

A patent gives its holder the exclusive right to produce, sell, and use the object of the patent for 20 years. A patent can be a product, a process, an invention, a machine, or a plant that is produced by an asexual reproduction.

how to obtain a patent?

One must apply to the PTO.

The object of the patent must be novel or new (no one else must have made or published the plans for the object)

The object must be useful and provide some utility to society (unless it is a patent for a specific design or style)

The object must be non-obvious (not a wedge, or a bar for breaking up rocks)

Patterns are usually licensed out to other producers for the exchange of royalties. 

are CORPORATIONS legal persons?

Corporations are legal persons.

U.S. corporations are citizens of the United States and of the state where they are incorporated.

• Under the law, a corporation is a legal person with rights and responsibilities.

• The Constitution's protections extend in many areas to corporate citizens.

-have perpetual existence

A corporation is protected under…

4th and 5th Amendments.

• A corporation must be accorded Due Process.

• A corporation is protected from unreasonable searches and seizures.

Recently, the Supreme Court has held that corporations have rights under the 1st Amendment.

The law provides a process for the formation of a corporation.

corporation requirements for incorporation

The Articles must contain the name of the corporation the address of its registered office the name of its registered agent

• the names and addresses of the incorporators

Some states require identification of the purpose of the business ("any lawful purpose").

Then the Secretary of State will issue a certificate of incorporation

what can corporations do?

Corporations issue shares to their shareholders in exchange for the shareholder's investments.

This allows the corporation to raise money.

Shareholders can typically sell their shares (privately or on exchanges, depending on the circumstances)

Corporations can also issue bonds (loans) which are debt securities.

what does it mean that corporations have perpetual existence?

Even if the humans involved with it withdraw, the corporation continues to exist, shareholders are typically not liable for actions of the corporation they have invested in.

So, usually shareholders are never at risk of losing anything more than the amount they invested in the company.

main advantage of a corporation…

it provides limited liability to its investors.This allows a corporation to raise capital.

characteristics of corporations

derive capital from their investors or shareholders. This gives them access to vast amounts of capital needed to build factories or to engage in research and development.

The capital raised by investment tends to increase stock prices. This further benefits the shareholders when they decide to sell their shares.

Can be public.

Public corporations include the Federal Deposit Insurance Corporation (FDIC) or companies chartered under state law, such as Virginia Public Media (VPN).

most corporations are…

• private and do not directly serve government purposes.

• for-Profit Corporations

Most corporations are for-profit.

Their objective is to create profits.

Shareholders purchase stocks in for-profit corporations hoping that they will be able to share in the profits.

what is a dividend?

% of a profit paid to a shareholder as a share of the profits

Double Taxation

A corporation has to pay taxes on its profits, and after that the shareholders have to pay taxes on the dividends that they receive.

when do shareholders pay taxes on their earnings?

Shareholders do not pay taxes on the appreciation (increase in value) of their shares until the increase is realized (that is, when they sell the shares). 

Nonprofit (or not-for-profit) corporations may be profitable, but …

they do not distribute profits to shareholders.

Their objective is not to earn a profit, it is to serve a particular purpose. Many charitable organizations are nonprofits. They typically reinvest most of their profits in the business.

A closely-held corporation, or privately-held corporation, is often a family business.

The shares of closely-held corporations are sometimes restricted from transfer.

corporate management

The shareholders do not participate in corporate management except by electing a board of directors.

The board of directors, in turn, selects the officers who manage the corporation.

Shareholders are not typically responsible or held liable

the responsible person doctrine

Directors and officers of corporations can be held liable for torts and crimes of their employees under the responsible person doctrine.

Even if an officer knew nothing about the criminal activity, they can be held liable if a "responsible person" would have known about it and prevented the illegal activity.

the business judgement rule

Directors and officers are required to make decisions in the best interest of the corporation.

However, directors and officers aren't liable for decisions that harm the corporation if they were acting in good faith at the time of the decision.

This is a common law rule, not a statute.

important because it allows directors and officers to take risks without being constantly afraid of personal liability. (aka shareholders suing them for loss)

Shareholder Derivative Suits

If an action by the officers and directors of a corporation has harmed the corporation, shareholders can file a derivative lawsuit, on behalf of the corporation, against those officers and directors.

Any damages recovered go to the corporation, not to the individual shareholder

sole proprietorships

These are the most popular forms of business organization.

• You have started making money by providing services or products.

• You are entitled to keep all the profits, to make all of the decisions, and there is no board of directors overseeing you.

• You are also responsible for running everything and hiring and supervising everyone who works for your business.

A __________ is personally liable if the company loses money.

• Thus, a major disadvantage to this is that it can discourage risk-taking and expansion.

  • A ___________ terminates when the person gets out of the business.

partnership

exists when parties do business together and agree to share profits, even if they do not have an express agreement.

Uniform Partnership Act (UPA)

applies to partnerships in most states, even if the members do not formally form a partnership.

General Partnership

the parties often divide profits and management responsibilities equally.

They also share unlimited personal liability for their debts.

If a ____ partner withdraws, then the _____ is dissolved.

In a ______ partnership all of the partners are personally liable for all of the debts of the partnership.

Partners owe fiduciary duties to one another means that…

• They have to work for the benefit of the partnership

• They cannot undermine the partnership

• They cannot take advantage of business opportunities for themselves that would have benefited the partnership

  • They must not do any action to harm the partnership

Formal Partnership Agreements Include:

• The partners' names

• How long the partnership should last (or its duration). You can specify a particular date for the partnership to expire or you can state the partnership is indefinite.

• Division of labor or management within the partnership

• Duties of each partner

• How much capital or financial contribution each partner is making

• Most importantly, how profits and losses should be shared

If one partner leaves, the partnership is dissolved.

limited partnerships

• has at least one partner who is a "limited" partner.

• partners do not assume any liability for the partnership other than the capital that they invest in the business.

• They also do not participate in the management of the company.

• If a limited partner dies or withdraws, a limited partnership is usually unaffected

  • But one of the general partners withdraws, then the limited partnership is dissolved.

limited liability companies

is taxed like a partnership.

The members pay personal income taxes, but the company still has limited liability.

There is no personal liability for shareholders. As in a corporation, liabilities are limited to the amount of shareholders' investment in the ____ itself.

Because the ____ has shareholders, it is easier for the company to take loans and raise capital.

It is the most popular form of business organization for new small businesses.

how to register an llc:

In Virginia:

• Select a name. It must be distinguishable and include "LLC"

• Appoint a registered agent

• File articles of organization: name of LLC, name & address of registered agent, qualifications of agent, address of LLC's principal office

• OPTIONAL: Prepare an operating agreement

  • Get an EIN (employer identification number) for tax and regulatory purposes

s corporations

An S type corporation is named after the tax code provision that provides for them.

An S Corporation is a closely held corporation but is taxed as if it were a partnership which means there is no double taxation.

franchises

is a contract or cooperative business agreement between a corporation that owns a trademark and a person who wants to use that trademark to sell goods or services. The trademark owner typically assists the person in establishing the business.

The agreement will contain requirements that the type of business must meet in order to remain in the agreement.

Hart-Scott-Rodino (HSR) Act

parties to certain large mergers and acquisitions must file premerger notification and wait for government review.

The parties may not close their deal until the waiting period outlined in the

HSR Act has passed, or the government has granted early termination of the waiting period. The FTC administers the premerger notification program, and its staff members answer questions and maintain a website with helpful information about how and when to file. The FTC also provides daily updates of deals that receive early termination