B Law Exam 3

Ch.35 1-27, Ch. 12 28-48, Ch. 48 49-65, Ch.49 66-99, Ch. 50 100-136, Ch. 7 137-168, Ch. 2/7 169-188

Major forms of business organizations

• Sole proprietorship

• General partnership (GP)

• Limited partnership (LP)

• Limited liability partnership (LLP)

• Corporation (C-corp and S corp)

• Limited liability company (LLC)

• Joint venture (JV)

• Franchise (chain-style, distributorship, and manufacturing arrangement)

Sole proprietorship

Unincorporated business owned by one person. Owner has total control and unlimited personal liability. Profits taxed directly as income to sole proprietor

Sole proprietorship- advantages

Ease of creation, owner has total managerial control, owner retains all profits.

Sole proprietorship- disadvantages

Personal liability for all businesses debts/obligations. Funding limited to personal contributions and loans.

Sole proprietor doesn’t have a legal shield to protect themselves, as the owner of a corporation/member of a LLC does

General partnership

Unincorporated business owned and operated by 2 or more people who carry on the business for profit.

Each partner has equal control of the business and unlimited personal liability for business debts/obligations. Business is not a separate legal entity so profits taxed as income to partners

General partnership- advantages

Ease of creation, no written partnership agreement or incorporation required. Partnership income is partner income. Business losses qualify for individuals’ tax deduction

General partnership- disadvantages

Individual joint and several liability for all business debts/obligations, including those created by partners on behalf of partnership.

Limited partnership (LP)

Incorporated business with at least one general partner and one limited partner. Requires filings with the relevant state to form (incorporate). Has no managerial/operational control over the business.

General partner in limited partnership (LP)

Has managerial/operational control over business and unlimited personal liability

Limited partner’s liability

Liability limited to extent of their capital contributions

Limited liability proprietorship (LLP)

No general partners- all limited partners assume liability for the business and for each other. But only to the extent of the partnership’s assets.

Liability for negligence is limited only to personal negligence and negligent supervision. Requires a filing with the state to form (incorporation).

Not a separate legal entity; each partner pays taxes on their share of the business’ income.

Corporation- C-corp.

State sanctioned business with legal identity separate and apart from its owners (shareholders) that can sue or be sued on its own.

C. Corp- owners’ (shareholders’)

Liability limited to amount of personal investment in corporation.

C-corp- advantages

• Separation of “ownership” and “control” as defining hallmark corporation

• Limited liability for shareholders and officers

• Ease of raising capital by issuing (selling) additional stock

• Generally unlimited transferability of ownership

C-corp- disadvantages

• Double taxation

• Significant formalities required in establishing and maintaining corporate form

• Limited control over transferability of ownership

S corporation

Business organization formed under federal tax law; considered corporation yet taxed like a partnership- avoids double taxation!

S corporation- requirements

• Cannot have more than 100 shareholders

• Must have only one class of stock

• Shareholders must be domestic individuals (no partnerships, corporations, or non-residents

• Shareholders must report income on their personal income tax forms

Limited liability company (LLC)

Hybrid business organization with limited liability of a corporation yet taxed like partnership. Formed under state law by filing articles of incorporation

Owners (members) pay personal income taxes on shares they receive and report. No limitation on number of owners permitted. Individual liability limited to members’ capital contributions.

Specialized forms of business organizations- joint venture

relationship between 2 or more persons or corporations created for a specific business undertaking. Often subject to antitrust scrutiny when competitors agree to collaborate for specific projects or goals

Specialized forms of business organizations- franchise

Agreement between franchisor (owner of trade name/trademark) and franchisee (person who, by specific terms of agreement, sells goods/services under trade trade name/trademark). Hallmark creation is the franchise agreement document which is a contact that creates/defines the franchising relationship

Franchise to franchisee- advantages

• Franchisee receives significant assistance from franchisor in starting franchise

• Immediate trade name/trademark recognition and strength of brand

• Franchisor direct company-wide advertising campaigns

Franchise to franchisee- disadvantages

• Must meet contractual requirements or possibly lose franchise

• Little/no creative control over business strategy; franchisor retains significant control over business operations

• Regulations: many states have special franchise laws that differ from state to state and can make widespread growth more difficult

Franchise to franchisor- advantages

• Low risk in starting a franchise because franchisees bear significant risk

• Increased income from franchises through passive management and oversight

Franchise to franchisor- disadvantages

• Must meet contractual requirements or possibly lose franchise

• Little/no creative control over business strategy; franchisor retains significant control over business operations

• Regulations: many states have special franchise laws that make widespread expansion more cumbersome

Types of franchises- chain-style business operation

Franchise operates under franchisor’s business name and is required to follow franchisor’s standards and methods of business operation

Types of franchises- Distributorship

Franchisor manufactures product and licenses with a dealer to sell in an exclusive geographic territory

Types of franchises- manufacturing arrangement

Franchisor provides franchisee with technical knowledge and license to manufacture franchisor’s product

Intellectual Property (IP)

Property that results of one's intellectual mind and creative efforts, rather than physical efforts.

Protection comes from trademarks, trade secret protection, patents, copyrights

Trademark

A distinctive mark, word, design, picture, or arrangement used by a producer in conjunction with a product that tends to cause a consumer to identify the product with the producer

Must be registered with the USPTO to be protected

Remedies for trademark infringement

Money damages and injunction

Trade dress

Overall appearance and image of a product. Entitled to same protection as a trademark

To succeed on a claim of trade-dress infringement, a party must prove three elements

• Trade dress is primarily nonfunctional;

• Trade dress is inherently distinctive or has acquired a (recognized) secondary meaning; and

• Alleged infringement creates a likelihood of customer confusion

Trademark dilution laws

Prohibits use of “distinctive” or “famous” trademarks even without a showing of consumer confusion

Differences between trademark dilution and trademark infringement

• Dilution additionally requires the mark be famous

• Dilution does not require a showing consumer confusion, as required by infringement

Copyright

Protects fixed form of the expression of an original, creative idea. No registration required

Examples of copyrighted materials: books periodicals, musical compositions, plays, motion pictures, sound recordings, lectures

Remedies for copyright infringement

Money damages and injunction

Fair-use doctrine

Most common defense against copyright infringement. Provides that a portion of copyright work may be reproduced for purposed of criticism, comment, news reporting, teaching, scholarship, research.

When determining fair-use doctrine as valid defense to claim of copyright infringement, court must weigh these factors:

1. Purpose of character use, including whether use is of a commercial nature or for nonprofit educational purposes

2. Nature of the copyrighted work

3. Amount and sustainability of portion used in relation to the copyrighted work as a whole

4. Effect of use on potential marker for or value of copyrighted work

No electronic theft act, 1997

Illegal for a person to infringe a copyright for commercial purposes or financial gain but also to reproduce or distribute, for no financial gain, copyrighted work of another

Digital millennium copyright act (DMCA), 1998

Illegal to circumvent encryption and other anti-piracy technology that protects commercial software and outlaws manufacture, sale, distribution of encryption-breaking devices that can be used to illegally copy software.

Patent

Protects a product, process, invention, machine, or plant produced my asexual reproduction. Object must be novel, useful, nonobvious

Remedies for patent infringement

Money damages and injunction

Patent restrictions

Patent holder may license use of idea in exchange for royalties, provided holder doesn’t enter into tying arrangement (antitrust) or engage in cross licensing

Injunction

Legal order to stop doing something

Anatomy of patent litigation

• Patent holder file patent infringement contentions that explain in detail how defendant infringes the patent

• Defendant file invalidity contentions that explain why ideas in patent already exist

• Court considers proposed definitions and decides how terms are defined for purpose of litigation

America Invents act (2011)

• First person to file a patent application in the US for an invention will be deemed to have rights to the invention.

• Act expands types of prior art that may be considered by USPTO when determining to grant a patent or not

• Makes changes to reexamination process, making it more like litigation

• Prohibits a plaintiff from filing one suit against many unrelated defendants

• Makes it easier/more affordable for small business and sole entrepreneurs to apply for patent

Trade secrets

Proprietary process, product, method of operation, or compliance of data/info that gives a businessperson competitive advantage

No registration required to get IP rights. Protected under many state laws

Remedies for trade secret infringement

Money damages and injunction

Real Property

Land and anything permanently attached to land (fixtures)

Personal Property

Property not attached to land, or moveable property

• Tangible: physical objects

• Intangible: property that not physical (stocks, bank account, nft)

Voluntary transfer: Sale and Purchase

Buyer gives consideration (sometime of value) to seller in exchange for title to property

Voluntary transfer: Gift

No consideration given to transferor (donor) by transferee (donee) for title to property

Involuntary transfer: Abandoned property

Property that original owner has intentionally discarded

Involuntary transfer: Lost property

Property that original owner has unknowingly/accidentally dropped/left somewhere

Involuntary transfer: Mislaid property

Property that original owner has intentionally placed somewhere but has forgotten its location

Involuntary transfer: General finders rules

• The finder of lost or mislaid property acquires title to the property against all except the true owner

• the finder of abandoned property gets title to it

Involuntary transfer: Exception

Some states’ laws require the finder to place an ad in a
newspaper to give true owner reasonable notice lost/mislaid property
has been found/left with local police before the finder can
acquire title to the property

Elements necessary for a valid gift

1. Delivery of property from donor to donee

   • physical presentation of gift or delivery of item that gives access to gift (car keys)

2. Donative intent

3. Acceptance of property by donee

Inter Vivos Gift

“between the living;” gift made by donor during his or her lifetime

Gift Cause Mortis

Gift made in contemplation of donor’s imminent and impending death

• To be effective, all the required elements of delivery, donative intent, and acceptance, must occur before the donor’s death

• Donor can revoke at any time before their death and gift is automatically revoked if the donor recovers

Bailment

Special relationship where one party transfers possession of property to another party, to be used if held by bailee in an agreed-upon manner, for an agreed-upon time period

Bailor has right to expect bailee to:

• Take reasonable care of bailed property

• Use bailed property only as stipulated in bailment agreement

• Not alter bailed property in any unauthorized manner

• Return bailed property in good condition at end of bailment

Duties of bailor:

• Must provide bailee with any agreed-upon compensation for bailment

• Must reimburse bailee for any necessary costs incurred by bailee during bailment

Rights of bailee:

• To possess bailed property during term of the bailment

• To use property in a manner consistent with terms and purpose of the bailment

• to receive compensation for bailment unless bailment is gratuitous

• To retain bailed property until payment is received

Duties of the bailee:

• Must take reasonable care of bailed property

• Must use bailed property only as stipulated in bailment agreement

• Must not alter bailed property in any unauthorized manner

• Must return bailed property in good condition at the end of the bailment

Extent of ownership

Airspace above the land, water rights, mineral rights

Water rights

Legal ability to use water flowing across or underneath the property (subject to state law); not allowed to affect downstream flow via diversions of natural passageways

Mineral rights

Ownership of subsurface rights includes the right to enter on to the property to remove the underground materials

Interests in real property

Fee simple absolute, conditional estate, life estate, waste, future interest, leasehold estate

Interests in real property: Fee simple absolute

Right to own/possess for life and devise (via a will) to heirs upon death; complete ownership interest in all facets of real property

Interests in real property: Conditional estate

Interest comparable to fee simple absolute, except interest will terminate of occurrence/nonoccurrence of a specified condition

Interests in real property: Life estate

Granted for lifetime of an individual ("life tenant"); right to own/possess property terminates upon life estate holder's death, and property passes to party designated by original grantor ("future holder")

Interests in real property: Waste

When the holder of a life estate uses property in way that reduces its value to future holder for no possibly beneficial purpose. It's unlawful, and the future holder can take legal action immediately even though the life estate has not expired

Interests in real property: Future interest

Person's right to property ownership and possession in the future

Interests in real property: Leasehold estate

Exclusive right for tenant to possess property for a stipulated period of time generally in exchange for regular rent payments; no ownership rights associated here because it is a lease; landlord has limited rights to property during leasehold period

Nonpossessory estates

Real property rights that don’t deal with possession interest in realty

Easement

Irrevocable right to use some part of another’s land for a specific purpose without taking anything from the land; generally used to travel through land or retain open access

Easement by prescription

Most states, if someone openly uses portion of another’s property for a statutory period (~25 years), an easement arises by law… a species of “adverse possession”

Easement of necessity

Created if no other way to access property

Nonpossessory estates: Profit

Right to enter another’s land and take part of the land or take away a product. Ex: right to harvest time from another’s land

Nonpossessory estates: License

Temporary, revocable right to use another’s property. Ex: theater ticker, software services

Tenancy in common

Equal/unequal shares may be held; creditors can claim any owner’s proportional interest; deceased owner’s share is transferred to their heirs

Joint tenancy

Equal shares of ownership (50/50; 25/25/25/25). Creditors can claim any owner’s individual interest; deceased owner’s share reapportioned equally among surviving joint tenants (“right of survivorship”)

Deed

Written instrument used to show/convey interest in real property

Voluntary transfer of real property by an owner requires:

1. Execution- preparation of signing the deed

2. Delivery: transfer of deed to grantee (buyer), with intent of transferring ownership; often done by third party title company or realtor

3. Acceptance: grantee’s expression of intent to possess and own the property

Recording

Filing deed with appropriate county office to protect interests of grantee (buyer) - not technically “required” but always good to protect ownership interest by creating a public record

Deed requirements

1. Identification of grantor (seller) and grantee (buyer)

2. Expression of grantor’s intent to convey the property

3. Legally sufficient description of the property (including physical boundaries and any easements)

4. Any warranties/promises made my grantor with the conveyance that are intended to convey along with the land

General warranty deed contains the following promises/representations:

• Grantor owns interest in what they are conveying

• Grantor has right to convey the property

• No mortgages/liens against the property that are not stated in the deed

• Grantee will not be disturbed by anyone who has better claim to property title, with promise to defend grantee’s title against such claims or reimburse grantee for any money spent in defense and/or settlement of claims

• Grantor will provide grantee with any additional documents that grantee needs to perfect or his or her to property

Special warranty deed

No representation of guarantees contained in general warranty deed; grantor is promising they haven’t done anything to lessen value of property transferred

Quitclaim deed

No warranties, grantor simply conveys whatever interest they hold in the property

Sales Contract

Negotiation is often facilitated with broker/realtor. Often includes “earnest money” designed as liquidated damages if buyer backs out for invalid reason. uses “escrow account” to ease transfer of funds

Disclose

Seller’s duty to disclose material defects through disclosure documents. Extent of duty governed by applicable law. Buyer allowed to conduct own inspections to discover.examine material defects

Title examination

Third party searches public records to ensure seller has appropriate title rights and is allowed to transfer the property. Title insurance common to protect against undiscovered title defects.

Financing

If not all-cash transaction, mortgage financing quite common. Can blow up a deal if buyer is unable to obtain financing

Closing

Mutual exchange of consideration- keys/deed/ownership in exchange for money

Adverse possession “legal stealing”

When person openly treats real property as their own, without protest/permission from real owner, for statutorily established period of time, ownership is automatically vested in that person. Rare to successfully happen, purpose is to encourage upkeep of land and avoid uncertain ownership disputes. Cannot adversely possess against the government

Condemnation

Government acquires ownership of private property and pays just compensation in exchange for public use of the property; over protests of the property owner

Restrictive covenants “covenants, conditions and restrictions - CCRs”

Promises to use/not to use land in particular ways. Often put in place in development of subdivisions/neighborhoods to protect value by outlawing negative impairment of property. Generally allowed and transfer along with deed as long as rights relate to the land itself and are reasonable and not unfairly discriminatory

Zoning

Restriction of use property put in place by local government to allow for orderly growth and development of community and to protect health, safety, and welfare of its citizens by controlling usage of land in designated areas

Landlord (lessor)

Property owner