Today, we’re doing something different. In this episode, I will be sharing with you an excerpt from an interview that I had with Ben Fewtrell on his show the Business Brain Food podcast.
Ben and I talk about why it’s important for businesses to get themselves sorted from a legal perspective then we delve deeper into four general areas of legal risk that business owners should be thinking about covering off first. I call these areas legal landmines, which can blow up in your face at any time if you don’t get them sorted right away.
Episode Highlights:
- Importance of getting sorted from a legal perspective
- Risks relating to IP and brand protection
- Types of intellectual property protection
- Protecting a business process
- Landmines in registering a trademark
- Risks relating to clients
- Tick-a-box agreements
- New legislation relating to unfair terms
- Risks relating to employees
- Enforceability of employee restraints
- Risks relating to business partners
- Don’t wait for these landmines to blow up in your face!
- Let’s wrap things up
Importance of getting sorted from a legal perspective
There’s a size that businesses get to where they suddenly realise that they need to get themselves sorted from a legal perspective. Now some businesses, and these are the exception rather than the rule, some businesses will start out by understanding that they need to go and lay the foundations properly and get all of their ducks in line and get themselves sorted out properly and usually those businesses are actually comprised in part, some of the equity partners or business partners that are involved having been in business before.
But for the vast majority of other businesses that start up, they’ll either have something in place that is begged, borrowed or stolen from someone else in terms of their terms of conditions and their employment agreements and all of those sorts of things, or they’ll have, in the worst case scenario, they have nothing at all.
But they’ll get to a particular size when either number one they suddenly understand the risk that’s involved or number two they’re hit with an issue that causes them a lot of pain and a lot of cost, time and money in dealing with the issue.
So they’ll hit that critical point where they understand either because something’s gone wrong or because they’ve gotten overwhelmed or they’ve gotten more educated, where they realize that they need to get their legal foundations in place.
But the biggest risk I think is businesses who are on a really strong growth path who haven’t understood the point of or the need for getting their legal foundations in place before they start that strong growth path because that’s when a business is most exposed.
Most exposed often because it has lower cash flow so if something goes wrong they’re less flexible and able to deal with issues that are confronting them. Quite often, they also are carrying a large overhead at that point.
I think before hitting a strong period of growth, for advisors to business, it’s critical for them to make sure businesses have thought about getting the legal foundations protected before they hit that strong period of growth.
Risks relating to IP and brand protection
It’s one of the easiest to understand and it’s also one of the easiest for an organization to protect. From a brand protection perspective, when organisations have a brand that isn’t protected by a registered trademark, effectively they are exposed. Exposed either number one to other organisations attacking them on the basis that they’re using a name that’s too similar to their own registered mark or number two exposed because they are less able to stop competitors from using a similar mark as theirs.
In this sense, the answer is so simple. I mean trademark registration is actually an extremely cheap process and it’s the sort of thing that once you get a registration, a registration in Australia lasts for 10 years. Once you get it, all you do is at the end of the 10 years is pay a small fee which at the moment is $300 per mark and you get another 10 years protection.
As far as business insurance is concerned, I feel it’s one of the cheapest that you can have. We do a lot of work in this intellectual property space so we have a lot of clients referred to us when they are already in trouble.
One that we just managed to close off last week had been around for 14 years. They had been using their name for 14 years. After using the name for 14 years, another firm that they were aware about at the time, had been using a similar name. Neither of them was sure who really started first. But someone bought the other business and got really aggressive on the intellectual property and brand name.
They ran off to the trademarks office, got a trademark registration and then started pursuing our client so our client after 14 years of using the name effectively had to come up to this decision as to whether or not they spend a lot of money from a legal perspective fighting to keep their name or whether they just abandoned this name that they built all of this brand, goodwill under for 14 years and rebrand.
But this sort of thing, had they have come to us earlier, they could have kept their brand and it would have cost them maybe a grand, maybe one and a half grand and then that’s it protection forever more with their brand name.
Types of intellectual property protection
Intellectual property can be trademarks, as we talked about, and trademarks can either be words or logos. But they can also be smells and they can also be sounds like the Del chime is an example of a sound that is protected by trademark registration.
We also have copyright and copyright is a body of work that’s longer than a name, which is protected by trademarks. If you, for example, have a blog page, then you’ve got copyright protection in relation to that page. There’s a number of ways that you protect yourself against people copying something that you have copyright protection to and there’s a number of other intellectual property protections. But they’re really the two main ones.
There is also obviously patents, which is protection for a novel process or method of doing something. But they are essentially the main core types of intellectual property that you can protect.
One of the things that I find quite interesting is I’m very often approached by people that say “I’ve got this idea. How can I protect it?” And the reality is with intellectual property, the only thing that you can protect is the expression of the idea, not the idea itself. That’s why we have copyright protection that covers all of the words on a page, but not the idea that someone comes up with.
If you come up with an idea, we need to think of other ways to try and protect that idea from other people dealing with and usually we’ll do that contractually with say for example a confidentiality agreement.
Protecting a business process
A process is something that can be protected by patent. But a business process is extraordinarily difficult to get a business patent for and patents aren’t cheap.
In reality, most people that feel that you have a novel way of doing their business model will find that it’s very difficult for them to protect it through intellectual property protection means or registrations. What they need to do is then think of other approaches they would take to protect their business IP. That would be basically contractual means and keeping elements of it secret to the extent that they can.
We look at commercial ways, and quite often that might be with any employees or staff that we engage with, we build certain things into the contract to ensure that they can’t talk about it, they can’t engage in businesses that are in competition after they’ve ceased employment with us. Those sorts of things.
We’ll build up these elements of contractual rights that will protect us and them from a commercial perspective. We’ll also look at the arrangement and are there elements that we can keep behind closed doors rather than making everything, all of our staff aware of each of the elements of it or without making it public to all of our clients.
But if you’re not able to do any of that or you’re able to do all of that but you feel that that’s not sufficient, then really it’s about being the predominant name in the market. It’s about building a brand and obviously protecting your brand before you build it so that no one else can trade under something too similar.
Landmines in registering a trademark
If you apply for a mark and the trademarks office deems that it’s too similar to other marks that are around at the moment, I’d recommend that you come via a lawyer that’s quite expert in the area. There’s a lot of ways that we can deal with and effectively what you’re talking about here is called a citation.
Firstly, before you even start down the trademark registration path you need to know exactly what’s on the register so you know in advance what the trademark office might say in response to your application. Because if you know for sure that you’re going to get knocked back then that will impact your strategy for application because there’s lots of ways that you can apply for a trademark.
The interesting thing is trademark registration on the face of it looks quite simple. I’ve been in trademarks for 15 to 20 years and I’m still learning things about trademarks as we go. It’s an extraordinarily complicated area in comparison to how simple it looks.
As you’re putting the trademark application, there’s a lot of things that you need to think about. Do I apply for a word mark? Do I apply for a logo mark? Do I apply for the two together? Which class do I apply for? What wording do I use in my specification to make sure I’m protected enough? And of course what structure should the owner of this be? Because in an organisation sometimes it’s not the structure that you think it should be. There may be a better way for a better ownership structure for the mark.
Once you’ve worked through all of these areas and you’ve done a good search to know what’s on the register at the moment, you’ll effectively have a strategy in place that will allow you to get a trademark registration in some way shape or form. It might be a strong registration, if no one else is around on the register first or it might be a weaker application, if you’ve got real issues from other people on the register.
But if someone has got a direct conflict in a trademark, so they use the same name as you. They’ve got it registered before you in the same kinds of services that you provide or the same kinds of goods that you provide. So say for example you’re a widget maker and and you know a phone maker and someone else has got the same name for making phones then you’ve got yourself a problem, a really serious problem and you need to understand whether or not you’re infringing at that point. And even if you were the first to use it, you’ve still got a potential issue for your business.
Risks relating to clients
Organisations need to have a strong client engagement agreement with their clients because if they don’t they will find, as they get bigger and bigger and they deal with larger and larger projects or more and more projects, that there will come a point where there is a difference between what they think they have agreed to provide and what the customer believes has been agreed to have been provided.
Your terms and conditions help you protect against this as well as against things like broad liability in relation to the goods or services that you’re providing. The answer for businesses is to have a proper client services agreement or standard terms and conditions that they then use with their customers to ensure that they’re setting up their relationship right from the start so that it’s clear what they’re providing, by what date. It’s clear what the payment will be and when payment will be expected and what will happen if payment isn’t made on time because as I said before one of the greatest issues facing businesses is their growth period.
Quite often they are most exposed during the growth period. Quite often this relates to when customers stop paying or start paying slower and that can really cripple a business if you’ve got slow payers or late payers. Your client terms and conditions should really clearly deal with the issue of any extra fees that you might apply for non-payment or late payment. Indeed, businesses need to make sure that they’ve got processes set in place so that they can ensure that they’re not in the situation where slow payers or non payers are building up over time. You really need to be on top of this.
Tick-a-box agreements
Clicking accept to terms and conditions is effectively acceptance. In law, to have a contract in place you need offer and acceptance and so that effectively is acceptance. So yes, clicking a box does work in terms of ensuring that you have bound the other party. But a business can’t contract out of some things and some of those things are set out in what used to be called our Trade Practices Act but is now called the Competition and Consumer Act, which is a bit more of a mouthful. Things like minimum standards that a customer can expect from goods or services that they purchase from you can’t be contracted out of.
But one of the issues that often occurs and we see a lot in disputes is that businesses might have this process of terms and conditions flying between them. Think of an example where if you’re a business that has accepted an estimate from someone and they provided their terms and conditions on the back and then you send your terms and conditions, your terms of service to them and they send you back an invoice with their terms and conditions. We call this the battle of the forms.
This creates a bit of a minefield for organisations. But I think the most important thing for businesses who are providing goods or services is to think about whether or not they are trying to just have a gotcha if something goes wrong or are they trying to prevent issues from occurring in the first place.
If you’re taking it from the position of preventing issues from occurring in the first place, then you’ll want to ensure that your customers understand what they are signing and you want to have something that’s more than just a click because a tick box with a link attached to it is something that we can almost always guarantee no one will read. I barely even read them.
If you’re after the tick-a-box thing, then you’re saying “I’m creating these terms just in case I need them in the future so we can call them along to our lawyers so they can battle it out.” But if what you want is to avoid issues, then you need to think of a sensible way to communicate these terms in in a way that is far more likely to be read than the tick-a-box and the link.
New legislation relating to unfair terms
A new legislation came out and effectively it said when you’re in the situation of one business to another, where one business is a small business, then if you have a standard form contract and within that standard form contract you have an unfair term, then the small business can argue that that unfair term is void even if they’ve ticked the box. This legislation has been around for a bit longer in business than consumer land.
So when you’re talking about the gym you’re talking here about a business to a consumer. And once again that legislation has been around for a little bit longer than the business to business legislation and it says the same thing where there is a standard form contract. An example of that is the preprinted contracts but it can actually be ones that may even have been slightly negotiated between the parties.
But wherever there is a standard form contract and there’s an unfair term within it, then the consumer for the consumer legislation, or the small business for the small business legislation, can argue that that term is void.
We certainly use that as a tactic for our small business clients to help get them out of really tricky contracts sometimes if we’re able to argue that it’s a standard form contract with a small business that has an unfair contract term.
For people who are listening to this who have their own business, the other thing for them to be aware of is if they have standard form contracts with their customers whether they’re consumers or small businesses, they are going to be subject to the same risks that one of their clients comes to them and says this term that you’re asking for is unfair therefore it should be void and if it’s void, you don’t get the opportunity to write the clause down into a way that is more palatable to both of you. It’s just void. It’s struck out.
If it’s an important clause and it’s there to protect your organization against liability, then you need to now make sure that it’s a reasonable clause, because if it’s not if you’ve borrowed these terms and conditions from someone else or you’ve gone and got them drafted from a lawyer who doesn’t quite understand the implications of what they’re drafting, you might be in the situation where something happens that triggers some sort of liability to your organization.
Risks relating to employees
The biggest one in staff is the risk of unfair dismissal action. As you employ people, you really need to make sure you have a strong employment agreement in place and the strong employment agreement needs to protect organisations against the areas of confidentiality that we were talking about before, and also intellectual property. You want to make sure that your staff members are assigning all of the intellectual property that they’re creating to you clearly in the agreement and that they’re not able to deal with that intellectual property after they’ve terminated the agreement with you.
I would recommend having restraints in that agreement as well to ensure that if they go on finish working with you, they don’t end up taking the client base or all of the rest of the staff. All of those things are the sorts of things that should be thought about and do come up from time to time.
But by far, the biggest issues we see are with this element of an argument of unfair dismissal because whenever you terminate an employee you’re entering into a really dangerous area. You just need to make sure you don’t terminate an employee without getting some sort of legal advice. I think that’s probably the easiest way to say it because the more information we provide in terms of the sorts of things that you’re doing the more businesses forget one key element.
If you’re thinking about terminating a staff member, you really need to just make sure you’ve had a chat with someone who understands the area first to make sure you’re doing it in the right way. Otherwise you’re exposing your organisation to an unfair dismissal action and it’s very cheap for employees or ex employees to file a claim with the Fair Work Ombudsman. You need to make sure you know what you’re doing before you’re exposing yourself to any sort of issues in the area of termination.
Firstly, it’s about making sure you have the right record keeping within an organization. If you’ve got a staff member who has performance issues, you need to make sure that you’re documenting those issues and documenting those discussions. But before you take any sort of action to terminate them, you just need to make sure you understand the process that you need to go through.
Enforceability of employee restraints
There is certainly a myth that goes around that restraints with staff are just unenforceable, which is actually not at all correct. But it’s very true to say there’s a lot of risk sitting in trying to restrain a staff member post termination. But it’s not completely unenforceable.
You have to be very careful in what you’re asking, to ensure that it’s reasonable in the circumstances. What’s an example of that?
If you’ve got a senior staff member who has access to information in relation to your organization that provides your organization with a competitive advantage then you can certainly add clauses that would restrain them from working with the competitor or using that information with a competitor. Certainly it’s easier to prove just a blanket restraint as long as it’s reasonable in the circumstances, as long as it doesn’t create a situation where they’re not able to get employment out outside of that restraint.
Let’s say you work in a particular niche industry and you have a staff member who has access to information that relates to competitive advantage your organization has in that niche industry. Well you might say well look they didn’t work in that niche industry before they came to work from us. Therefore, a restraint wouldn’t be unreasonable, that prevents them from acting within that industry for a reasonable period of time after we terminate.
That’s an example of the way that you can play with these restraints so that they are enforceable so you can play with the type of industry that they relate to. You can play with how long the restraint lasts for after the end of termination. You can play with what the restraint actually relates to.
Where a restraint relates to things like not taking clients, not dealing with clients, not taking staff, not dealing with staff. Those sorts of things are generally highly enforceable for a period of time. You can’t have them being ongoing forever and five years will probably be too long a period of time.
But if you come up with what looks like a reasonable period of time, then those two areas are certainly something that you could include in those clauses and then in relation to competition i.e. stopping them from working with a competitor of yours once again sometimes that might be seen as something that would be defensible as being reasonable, depending on how it’s drafted and sometimes it wouldn’t.
This is why, as you can see, just borrowing an agreement that someone else has used and just whipping it in place for any old staff member of yours that has these sorts of clauses may be your undoing if those clauses aren’t properly reflecting what is reasonable in your business situation.
It’s very difficult to stop an organisation and another organisation external to yourself benefiting out of your client base and it’s hard to stop an employee leaving you and taking a client base and dealing with your clients and dealing with your staff if you don’t have something that’s set out contractually. So that’s the first thing. The first thing is about having the right contracts in place for your organization.
Another thing is also the commercial reality which is having the right relationships in place as well. Contract is one thing but the relationship is also an element on top of that. When I say that, I’m of the belief that you never want a contract to sit there in and of itself. You want people to understand what the contract contains. You want them to understand what’s right from your perspective. You want them to understand what’s wrong from your perspective and you need them to understand why that’s in place.
I’m all for ensuring that people who are signing these agreements, in this sense we’re talking about employees, ensuring that they understand what they’ve signed as well and that’s also another reason why these agreements need to be clear and not too complex so easy for them to understand.
But if an employee has signed a contract like this where they have a strong restraint, a strong and appropriate restraint, and they still leave and they engage with another organisation, that’s the sort of instance when we would suggest to our client to go very hard on ensuring that the new employer completely understands that they’re dealing with someone who is now in breach of a contract, understand that they might be in our target zone as well.
One of the things that we might argue against this new employer is that they are participating in inducing a breach of contract. As long as you’ve got these contractual means in place, we have a lot to work from from a legal perspective including stopping people. But you need to have it in place first.
Risks relating to business partners
Firstly, I just want to be clear I think there is nothing wrong with having business partners in business. I hear a lot of people talk about never go into business with anyone else. I don’t subscribe to that.
But I do subscribe to the theory that the likelihood is that the majority of business partnerships, so when I say partnership, I mean and in the broader sense because there is a concept of a legal partnership. But when I say partnerships, I mean two, three, four, five people who are all participating in a business together, being shareholders in a company or whatever.
Whatever the partnership looks like, in most business arrangements where they involve other people who are part of the equity, there will be a point where one or all of them will disband at some point. That’s reality and I think if you’re clear about that and you start with the end in mind then you’re aware that you need to understand what the exit looks like, exit options look like for all of you.
I think the saddest thing is often people who start in business being really close, having alignment right in the beginning but getting to this point where someone wants to leave and now they suddenly don’t agree on how that will happen and one person thinks that the proposed approach is unfair and then it just winds up and winds up and can lead to really ugly long term and expensive battles.
The way you avoid that is by having the discussion right at the beginning. What are we going to do if one person leaves? And how are we going to deal with this? Then from a legal perspective, one of the important elements is making sure you have if it’s a company a shareholders agreement, if it’s a partnership a partnership agreement, that you have some agreement in place that steps out the way the business will be run together and how exit can happen in an orderly way if one or everyone wants to exit the business.
I think it’s super important that businesses start with that element no matter how hard it is at the beginning. I promise you it would be harder if you don’t do it at the beginning and you leave it to the end when you’re not agreeing. This is where you need to make sure that you’re clear about the other business owners not being able to run off with the staff for example. This is also where you have restraints.
Don’t wait for these landmines to blow up in your face!
Our legal practice has a litigation and dispute resolution division and as I said to you before I don’t deal with a lot of litigation myself because I prefer more proactive approaches to business than litigation.
But for years and years, I ran the practice in that way and one day I realized when issues were occurring people did need litigation help and all I was doing was sending them off to people who didn’t care as much as I did about them and their business. In the end, I decides we’ve got to put this litigation and dispute resolution arm on because then I can make sure we’re at least caring for them in the right way in this process.
I think by far the best thing is if you tackle it from the beginning. I can promise you as much as I don’t want our clients to end up in litigation, if they end up there that will be far more expensive than if they warded off that issue right in the beginning so I’m all about proactiveness.
If you think it’s time consuming to deal with in advance, you’ve got no idea how time consuming it will be if you don’t deal with it and you leave it to blow up in the future because if you’re dealing with a growing business something will blow up at some stage. There is no question about it. There is no client I’ve dealt with that has not had a growing business that has not something blow up if they have not put the right foundations in place from the beginning.
It’s about trust with a legal firm as well. I think some organizations just don’t know where to start so they try to put together bits and pieces themselves without really knowing what they’re doing. I think it’s about finding a legal firm that you’re comfortable with and that you trust and allowing them to provide you with the outline of what your business needs in whatever phase it is at the moment.
Let’s wrap things up
That’s it for today’s episode of Talking Law. As a quick review, we talked about four top legal landmines that businesses are exposed to and how you can avoid them.
Number one, make sure you have trademark protection for your brand. And before you even start down the trademark registration path, I highly recommend that you seek professional help from someone who is an expert in the area because although the trademark process is fairly quite simple, there’s a lot that can go wrong if you’re not familiar with the landmines that are sitting in this space.
Number two, have strong client agreements in place to ensure that you are setting up the relationship correctly right from the start.
Number three, you really need to make sure you have a strong employment agreement in place to protect your business against the areas of confidentiality and intellectual property. We busted the myth relating to how restraints are unenforceable – they are as long as it’s reasonable within the circumstances. I also talked about the biggest issue in this area being the risk of an unfair dismissal claim. So if you’re thinking about terminating a staff member, run things through your lawyer first to make sure you’re doing it in the right way because as I said, it’s very easy and very cheap for a disgruntled ex employee to file a claim for unfair dismissal.
And finally, number four, make sure you have clear agreements in place between business partners or shareholders. Start with the end in mind and make sure everyone is aligned in their understanding of how the business will be run together and what the exit looks like for all of you.
If you want to hear the full episode of my podcast interview with Ben on his show, you can visit his website at businessbrainfood.com.au and look for episode 165. You can also look up his podcast – Business Brain Food – on iTunes or your favorite podcast player.
If you’re interested in learning more about how you can get your business sorted from a legal perspective and ensure the right protections are set in place to avoid these legal landmines, we have a FREE eBook called “7 Key Legal Risks in a Business and How to Avoid Them!” which is available for download on our website at aspectlegal.com.au.
There you will also find details on how to book a free 15-minute consultation with one of our legal eagles here at Aspect Legal if you need help with any of the areas that we covered today.
Thanks again for listening in! This has been Joanna Oakey on Talking Law, a podcast brought to you by our commercial legal practice – Aspect Legal.
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date. Liability limited by a scheme approved under Professional Standards Legislation.
