FAQs on Corporate Liability for Employee’s Unauthorized Actions

Posted by on Aug 22, 2012 in Direct Investment from China, Employment and Labor |

By: Kun Zhao, Esq.

In the course of conducting business, companies rely on their employees to carry out their duties.  The relationship between company and employee is a principal-agent relationship. When employee is acting on behalf of the company within the scope of his authority, the company is bound to the employee’s decisions and activities dealing with third parties on behalf of the company. Disputes arise when employees act outside their scope of authority and third parties have no knowledge or notice that the employees were acting in such a manner.

Situations involving employees acting outside their scope of authority generally fall into three categories. Under the first scenario, an employee has no authority to perform certain actions on behalf of the company. For example, a salesman cannot dispose of his company’s real property. Where one deals with an agent who is apparently without authority to act, he must inquire into the agent’s authority to represent the company. If a third party fails to make such an inquiry, the company has no liability and the third party can only seek remedy against the employee agent.

Under the second scenario, an employee’s act is within the scope of his authority but his conduct is in fact unauthorized by the company and there is no surrounding circumstance that alerts the third person. For example, a salesman may have the authority to collect non-cash payments for transactions, but he has no authority to receive cash payments. In this situation, the company is accountable for the conduct of its agent acting within the scope of his authority even though the conduct is unauthorized and the company receives no benefit from it. The rationale underlying this doctrine is that even though the employee agent may have deceived the principal company, as well as the third person victim, it is more equitable to hold the company accountable rather than the innocent third party because the company placed its employee in a position to perpetuate the act.

The third scenario is identical to the second scenario except that there are circumstances that cause the third party to suspect something is amiss. For example, past payments may have been made by wire transfer, but the salesman suddenly demands substantial cash payment. Such circumstances serve to put the third party on notice and to charge him with the duty of making an inquiry. If the third party fails to make an inquiry and confirm the employee’s authority with the company, the risk shifts to him.

Multi-party relationships in the business world are normally inevitable. Thus, companies should be careful about giving authority to employees to properly notify employees about the scope of their authority. Companies should also firmly enforce their policies and procedures in dealing with third parties. Third parties should adhere to their customary dealings with company employees and make alert inquires if there are any deviations from past practices.

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When a Trademark is Abandoned, Can Market Competitors Register and Use that Mark?

Posted by on Jul 26, 2012 in Intellectual Property |

By: Kun Zhao, Esq.

Trademark rights are acquired and maintained through continuous use in commerce. Once a trademark owner suspends or stops using the mark in commerce, he is risking losing his right in the mark.

The trademark law, section 45 of Lanham Act, states that “a mark shall be deemed to be “abandoned” when its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for three consecutive years shall be prima facie abandonment.” If the trademark is deemed abandoned, the owner cannot enforce his rights in the mark. The mark will then fall into the public domain and may be appropriated for use by others in the marketplace in accordance with the basic rules of trademark priority. In other words, if the mark is deemed abandoned, the person who registers the mark first or uses the mark first after the abandonment has the priority of using that mark in the marketplace.

There are two criteria for determining whether abandonment has occurred: (1) non-use and (2) intent not to resume use. Three years of non-use creates a rebuttable presumption of abandonment. “Intent not to resume” does not mean “intent never to use” but means “intent not to resume use within the reasonably foreseeable future.” If the owner suspended or stopped using the mark for more than three consecutive years, the owner will have to offer evidence of grounds for the temporary suspension and plans to resume use in the reasonably foreseeable future when the conditions requiring suspension abate to rebut a challenge of abandonment. The evidence of intent to resume use must be within the three year period of non-use. A bare assertion of possible future use is not enough.

The above rules also remind business owners that if the company intends to suspend using the mark for certain reasons, it should properly document the grounds for the suspension and the condition and time frame when the use will be resumed to rebut future challenges from others when asserting the right in the mark to protect company’s hard earned goodwill and mark recognition in the public.

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Withholding or Deducting from Wages: FAQs for Employers

Posted by on Jul 19, 2012 in Direct Investment from China, Employment and Labor |

By: Kun Zhao, Esq.

During the employment relationship, employer and employee may encounter wage payment issues, especially when employer is a small business. Under what circumstances an employer can deduct from employee’s wages and how wage dispute should be dealt with properly are often at issue. Employers are often confronted with the issue of whether employees must be reimbursed for certain expenses or for economic loss or damage purportedly sustained by employees.

New Jersey law is very strict as to what may be deducted from employee wages. Other than very limited situations where the employer is allowed to deduct monies for the benefit of the employee, such as employee-authorized contributions to employee welfare, insurance, pension, retirement plans, etc., an employer may not withhold, deduct, or divert any portion of an employee’s wages.

Employers may not deduct wages for the purchase of necessary items for employment, such as tools, uniforms or clothing.  However, with employee consent, employers may deduct wages for the rental or cleaning of required uniforms or clothing. Employers are not allowed to withhold or deduct employee wages even when employees damage employer property or when employees steal employer funds. If an employer suffers losses due to employee misconduct and cannot resolve the matter with the employee, it should seek judicial relief rather than engaging in self-help measures that may be illegal.

Additionally, in the event of disputes over the amount of wages between an employer and employee, the employer is required by law to timely pay, without condition, all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies to which he might otherwise be entitled as to any balance claimed. The acceptance by an employee of a payment of the conceded amount does not constitute a release as to the balance of any claim. Any release required by an employer as a condition to payment is null and void.

Therefore, when dealing with wage issues with employees, employers should be very careful to comply with state and federal laws to avoid unnecessary state investigations and penalties due to violations.

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Crowd Funding-Another Finance Option for Startups and Small Businesses

Posted by on Jul 6, 2012 in Direct Investment from China |

By: Kun Zhao, Esq.

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The law provides many exemptions and lifts many restrictions under securities laws which allow small businesses and startups to access capital market more easily. The law provides an easy option called “Crowdfunding” for startups and small businesses to raise capital publicly by issuing securities online without registration with the Security Exchange Commission (SEC).

It exempts small offers or the sale of securities by an issuer (a startup or small business) from registration with the SEC, provided that:

(1)   The aggregate amount of securities sold during the 12-month period does not exceed $1,000,000.

(2)   Any investor that makes under $100,000 per year or whose net worth is less than $100,000 can only invest the greater of 2,000 or 5% of the annual income or net worth; 10% of the annual income or net worth if the investor’s annual income or net worth is $100,000 or more.

(3)   The sale or offer must be through a broker or funding portal (website) that is registered with the SEC.

(4)   The securities acquired generally may not be transferred within one year from the date of purchase.

To be exempted under this law, the small business or startup is required to provide to the SEC, investors and the relevant broker of the funding portal, information that is necessary for the investors to decide whether they want to acquire a piece of the company, including the capital structure, financial information, a business plan, and the offering itself. The small business or startup can not advertise the offering except for notices that direct investors to the funding portal or broker.

The broker and funding portal are required by law to make sure the investors are protected by conducting a background check of the securities, enforcement and regulatory history of each person on the management team and the major shareholders, verifying and disclosing information provided by the issuer, affirming that the investors understand the risk of the investment.

The SEC is going to have about 270 days from the enactment date to set forth specific rules and regulations to implement the law. The legislation is expected to be fully implemented by early 2013.

While small businesses and startups will gain a new avenue for raising capital, investor relations will pose a significant new challenge to management. Overnight, management will have to answer to and will owe a fiduciary duty to hundreds of shareholders who will have the right to access corporate information and have a say on how to run the business.

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FAQs for Starting A Business in the U.S. as A Foreign National

Posted by on Jul 2, 2012 in Direct Investment from China |

By: Kun Zhao, Esq.

As more and more Chinese individuals and companies invest in the U.S. and break into the U.S. market, they recognize that the first hurdle to setting up shop is their status as foreign nationals or entities. Since U.S. citizenship and residency are not required, however, foreign nationals are able to start and expand their businesses much in the same way that domestic individuals and companies would.

Although details vary slightly from state to state, the following steps are generally required for foreign nationals to establish businesses or operations in the U.S.:

  1. Incorporate or form a LLC in the chosen state.
  2. Obtain a federal Employment Identification Number.
  3. Open a business bank account.
  4. Register the business with state government.
  5. Obtain a business license from local and state government if required by law.

Incorporate or Form a LLC

Foreign business entities are incorporated as corporations or formed as limited liability companies (“LLCs”) at the state level in the U.S. If one operates the business offshore and has no physical presence here, Delaware, Wyoming and Nevada are most popular states for purposes of registration; otherwise, choosing the home state where most of the business is to be transacted is optimal. The process varies from state-to-state, but usually it is quite simple and straightforward. For example, to incorporate in New Jersey, an authorization certification needs to be filed and the basic information required for the filing is as follows:

  1. Corporate name.
  2. Business purpose.
  3. Total number of stock shares.
  4. Registered agent information.
  5. As least one director information.
  6. At least one incorporator information.

Usually, one needs to have several corporate names as candidates, just in case that the most preferred corporate name has already been used by another business. The business purpose could be just stated as “general,” which permits the business entity to engage in any legal business. A registered agent can be an individual or a corporation, but must have a physical address in the U.S.  The director and incorporator can be the same person. This filing process can be done entirely online.

Obtain a federal Employment Identification Number (“EIN”)

Each new entity needs a federal Employer Identification Number (“EIN”) to open a bank account and have employees in the U.S. To obtain an EIN, the Internal Revenue Service typically requires the corporation to provide the social security number (SSN) of a “principal officer”. The principal officer must be someone who “controls, manages, or directs the applicant entity and the disposition of its funds and assets”. For those foreign “principal officers” who do not have a SSN, the IRS does not reject the EIN application if a SSN is not included. In such a situation, one must contact the IRS to obtain an EIN by telephone and follow the specific procedures and requirements.

Open a Business Bank Account

A foreign owned corporation or LLC may open a business bank account at a U.S. bank. The requirements for opening a business account vary from bank to bank. Most Banks require (1) incorporation documents of your U.S. Business (corporation or LLC); (2) EIN Number of the U.S. Corporation or U.S. LLC; (3) A copy of a photo ID (passport) of all signers of the account. The representative of the corporation or LLC should be present in person to open the bank account with original documents.

Register Your Business with State Government

For state tax and employer purposes, most states require all businesses to file registration with the state tax department. For example, in New Jersey, all businesses must register for state tax purposes by completing the form NJ-REG to report their business information and profile. This process can be completed online in New Jersey.

Obtain a Business License from Local and State Government If Required by Law

Special state and local licenses may be required in some industries which are regulated under state laws and local rules, such as childcare, construction, telemarketing and environmental mitigation. Therefore, all businesses should check with local and state government agencies to ascertain the regulatory requirements.

Obviously, registering a business as a legal entity is merely the first step towards establishing a successful business in the U.S. In order to flourish, a new corporation or LLC will have to also consider organizational and structuring issues, employment issues, immigration issues regarding employees sent from Chinese parent companies to work at U.S. affiliates, etc. It certainly requires a strategic plan, an experienced executive team, and a group of experienced, sophisticated and efficient legal, accounting, and business consulting professionals here in the U.S.

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