Want to avoid the 7 biggest legal mistakes that physical product and eCommerce companies make? Attorney Brittany Ratelle walks through the most common mistakes that land modern product companies in legal hot water and how you can avoid these headaches as a small business owner.
Here are the top 7 mistakes:
1. No operating agreement or business “prenup”
Operating agreements, also known as founder or partnership agreements, define the roles and responsibilities of a business and are a private binding contract that outlines equity, exit planning, intellectual property ownership, non-compete obligations, manager roles and how decision-making will be handled in a business partnership. These agreements are sometimes dubbed as business “prenups” or prenuptial agreements because, without them, many businesses can end with ugly business divorces with multiple parties claiming they had a different understanding of the rights and responsibilities of the business, whether they are fighting over assets or liabilities. *Highly recommend when you start a business with friends or family!*
2. Failure to protect intellectual property
There are 4 main types of intellectual property with different tools to protect them: patents, trademarks, copyrights, and trade secrets. Intellectual property protection and boundaries can increase the value of a company and its brand, its products, and the way in which it solves problems for consumers. If you don’t protect your own intellectual property, you can get ripped off by other companies and if you don’t pay attention to your own practices, you can be at risk of infringing on someone else’s property by using intellectual property that doesn’t belong to you. If you have protected your own IP (intellectual property), you may be able to license it out and make additional revenue streams and grow your company into an empire. For physical product companies, the IP protection you want is:
Trademark: overall brand name, logo, slogan, and product name
Copyright: any surface pattern design, important product photos/audio/video
Patent: design or utility patents or both on the actual new and novel product
Trade secret: formulas, recipes, processes, methods, market research, vendor information, pricing/markup, customer data/email list
Sign up a for a consult with Brittany if you are ready to get your intellectual property protected
3. The website isn’t legally compliant
All websites need these documents to be legally compliant: privacy policy, website terms, copyright statement, and necessary disclosures/disclaimers. Get all of these in the website legal bundle. Also, make sure that your website is ADA-friendly with the current WCAG standards.
4. The product has safety/labeling/testing issues and liability
Physical products come into contact with real human beings and their environments, so by their very nature, they have bigger legal exposure. Make you are complying with any relevant CPSC, testing, and labeling standards, especially if you sell baby & children’s goods, toys, health and wellness products/supplements, and dangerous products.
5. No written contracts with vendors and/or manufacturers
Get your agreements in writing! A fairly drafted contract is nothing for either side to fear and can help outline expectations, resolve ambiguities, and set up a clear working relationship for both parties in a deal. Make sure to use written (and solid) contracts for your affiliate program, for wholesale, and for pop-up shops (whether you are the or the guest). You also might want a model release or event waiver if you do your own product photography with models or host events.
6. False advertising issues
Don’t lie. The Federal Trade Commission is in charge of protecting consumers and a big part of that is in policing the actions and the marketing of companies, especially around claims they make about their products. Be careful about statements regarding “Made in the USA”, any claims that your product cures any illness or disease. Remember that if you can’t back up or “substantiate” the claims you are making – don’t say them (and don’t let your affiliates, direct sales people or other individuals say them either as a “workaround.”)
7. Employee misclassification - your “contractors” should really be “employees”
If it looks like an employee and smells like an employee - that person is an employee (whether you call them that or the individual even wants to be classified as such). Make sure you are properly classifying your team members as either contractors (1099ers) or employees (W2) as there are significant state and federal penalties for misclassification and for failing to provide HR compliance such as payroll taxes, employee handbooks, unemployment insurance, workers compensation, HR posters, and other compliance when you have accidental employees.
Resources:
Employee classification test (https://www.dol.gov/agencies/whd/flsa/misclassification) (https://www.irs.gov/pub/irs-pdf/p1779.pdf)
Other episodes:
Episode 10 copyright vs. trademark
Episode 24: 6 ways a trademark can protect a brand
Contract Templates mentioned in this episode:
- Operating Agreement
- NDA
- Website BUNDLE
- Wholesale
- Pop-up shop
- Affiliates Agreement
- Independent Contractor Agreement
Brand Protection:
Interested in securing and protecting your own brand name? Chat with Brittany about whether you are ready for a federal trademark registration to protect your brand assets.
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*Not legal advice. For informational purposes only. No attorney-client relationship.*
