Great article to read as you start on your tax returns.

IRS Audit Red Flags: The Dirty Dozen Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.

http://finance.yahoo.com/news/irs-audit-red-flags--the-dirty-dozen.html

Under the First Sale doctrine, codified in 17 U.S.C. § 109(a), once a copyright owner consents to the sale of a copy of his work, he may not thereafter exercise the distribution rights with respect to those copies.  Section § 109(a) provides in pertinent part:

Notwithstanding  the provisions of section 106(3), the owner of a particular  copy . . . lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . . .

At issue in Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. Cal. 2008), was whether the First Sale doctrine applies where the works are made outside the United States and sold here.  The Ninth Circuit held that the First Sale doctrine does not apply.  On appeal, the U.S. Supreme Court issued a decision without analysis affirming the judgment in a 4-4 Split Decision.   Costco Wholesale Corp. v. Omega, S.A., 2010 U.S. LEXIS 9597 (U.S. Dec. 13, 2010) (affirmed by an equally divided Court).

In Omega S.A., defendant Costco Wholesale Corporation (“Costco”) purchased watches bearing Omega, S.A.’s (“Omega”) copyrighted designs on the “gray market” in the following manner:  Omega manufactured the watches in Switzerland and sold them to authorized distributors overseas.  Other third parties then purchased these watches and sold them to a New York distributor, which then sold the watches to Costco, who then sold the watches in the U.S.  Omega filed a lawsuit alleging that Costco’s sales of its watches constituted copyright infringement because it violated Omega’s exclusive right to distribute copies under 17 U.S.C. § 602(a) and 106(3).  These sections provide in pertinent part:

17 U.S.C. § 602(a):

Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies . . . under section 106, actionable under section 501.

17 U.S.C. § 106(3):

Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights . . . to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.

In reaching its decision, the Ninth Circuit applied its prior precedent, including the presumption against extraterritoriality, which states that a U.S. statute "applies only to conduct occurring within, or having effect  within, the territory of the United States, unless the contrary is clearly indicated by the statute."  Omega S.A. at 987-88 (“the [Copyright] Act presumptively does not apply to conduct that occurs abroad even when that conduct produces harmful effects within the United States”).  Therefore, Section 109(a) applied only to copies lawfully made and sold in the U.S., and not to copies made overseas.  Since the Omega watches sold by Costco were not made in the U.S., Section 109(a) was not available as a defense to copyright infringement. 

As a result of Omega S.A., retailers in the Ninth Circuit that resell goods manufactured from abroad, and purchased and imported into the U.S. by third parties, must obtain consent from the copyright owners prior to reselling the goods.  Similarly, importers of such goods must obtain consent from the relevant copyright owners prior to resale.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

(This is a follow-up article to “What is the state of the law concerning keyword advertising?” accessible at http://www.allenmlee.com/blogengine.net/post/2010/01/22/What-is-the-state-of-the-law-concerning-keyword-advertising.aspx).

In Network Automation, Inc. v. Advanced Systems Concepts, Inc., 638 F.3d 1137, 2011 U.S. App. LEXIS 4488 (2011), the Ninth Circuit issued a significant decision that clarifies the test for trademark infringement in Ninth Circuit cases involving the purchase of keywords in search engine advertising. 

At issue in this case was Network Automation’s purchase of the keyword ACTIVEBATCH in various search engines like Google and Microsoft Bing.  ACTIVEBATCH is the registered trademark of Advanced Systems Concepts, a direct competitor.  When search engine users keyed in ACTIVEBACTCH, a results page showing www.NetworkAutomation.com was displayed as a sponsored link. 

The district court granted an injunction after applying the eight-factor Sleekcraft test, AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979), for likelihood of confusion, emphasizing the three factors outlined in Brookfield Commc'ns, Inc. v. West Coast Entm't Corp., 174 F.3d 1036, 1054 (9th Cir. 1999) – now often referred to as the “Internet trinity” or “Internet troika” – as being determinative.  On appeal, the Court of Appeals reversed and remanded.

First, the Court held that the use of a trademark as a search engine keyword that triggers the display of a competitor’s advertisement does indeed constitute “use in commerce” under the Lanham Act.  Network Automation, Inc. at *10.  This is important because “use in commerce” is a required element for bringing a trademark action.

The Court then rejected a rigid application of the “Internet troika” analysis to internet cases, stating that "[w]e must be acutely aware of excessive rigidity when applying the law in the Internet context; emerging technologies require a flexible approach."  Id. at *1.  The Court identified the key issue as follows:  “The potential infringement in this context arises from the risk that while using [Advanced Systems Concepts, Inc.] mark to search for information about its product, a consumer might be confused by a results page that shows a competitor's advertisement on the same screen, when that advertisement does not clearly identify the source or its product.” 

Accordingly, in order to determine whether this infringement was actionable, “[t]he sine qua non of trademark infringement is consumer confusion,” Id. at *2-3, and  “the eight factors established more than three decades ago in Sleekcraft are the nonexhaustive list of factors relevant to determining the likelihood of consumer confusion.”  Id. at 3.

Of interest, in applying the Sleekcraft factors to keyword advertising, the Court found the following:

1. Proximity of the Goods.  As a general rule, the more related the goods, the greater the likelihood of confusion.  The District Court had found that this factor favored Advanced Systems Concepts, Inc. since the parties were direct competitors.  On appeal, the Court of Appeals found this was reversible error since the lower court weighed this factor in isolation by failing to consider whether the parties’ status as direct competitors would actually lead to a likelihood of confusion.  Instead, this factor must be considered in conjunction with the labeling and appearance of the advertisements and the degree of care exercised by the consumers of Network Automation’s software.  Id. at *27.  [Win for advertisers]
2. Similarity of the Marks.  The Court determined that a proper analysis of this factor was not possible in this case since consumers do not actually confront two distinct marks. Rather, upon entering one company’s mark as a search term, a competitor’s sponsored link is displayed which shows neither company’s trademarks.   Thus, the lower court erred in treating the search term ACTIVEBATCH as conceptually separate from the mark ACTIVEBATCH and then comparing the same.  Id. at *28-29.  [Win for advertisers]
3. Marketing Channels.  The Court determined that this factor merited little weight.  As a general rule, convergent marketing channels increase the likelihood of confusion.  However, the Court found that it is rare for a retailer today not to advertise online, and thus the use of a ubiquitous marketing channel like the internet sheds little light on the issue of likelihood of confusion.  Id. at *32.  [Win for advertisers]
4. Type of Goods and Consumer Care.  The District Court found that Internet users on the whole exercise a low degree of care based on the Court’s decision in Brookfield and other early internet cases.  The Court determined that this was reversible error since this was no longer a reasonable assumption.  The factors that must be analyzed include the nature and cost of the goods, the whether the products are being marketed primarily to expert buyers.  Id. at *32.  [Win for advertisers]
5. Defendant’s Intent.  Normally, when an alleged infringer knowingly adopts a mark similar to another’s, courts may presume that the public will be deceived.  However, in the context of search engine advertising, this factor must be determined in the context of whether a party intended to compare its products to that of the trademark proprietor as opposed to deceiving consumers.  [Win for advertisers]
6. Other relevant factors.  In the keyword advertising context the "likelihood of confusion will ultimately turn on what the consumer saw on the screen and reasonably believed, given the context.” Id. at *36 (citing Hearts on Fire Co. v. Blue Nile, Inc., 603 F. Supp. 2d 274, 289 (D. Mass. 2009).  The Court found that the labeling and appearance of the advertisements and their surrounding context were important factors to consider.  Of note, while the advertisement at issue did not clearly identify their source, the sponsored links are clearly labeled as such and segregated from the objective search results.  [Win for advertisers] 

In summary, the Network Automation, Inc. decision provides additional guidelines for advertisers to follow in minimizing their liability when structuring their keyword campaigns. 

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

In many states, and still so today, contractual restraints on the practice of a profession, business or trade were generally considered valid so long as they were reasonably imposed.  This was true in California until 1872, when the California legislature rejected the so-called rule of reasonableness by enacting legislation that made covenants not to compete void, subject to some exceptions.  Today, this statute is codified in Cal. Bus. & Prof. Code § 16600-16602.5, which states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Excluded from the scope of this prohibition are noncompetition agreements in the sale or dissolution of corporations (Cal. Civ. Code § 16601), partnerships (Id.; § 16602), and limited liability corporations (Id.,§ 16602.5). 

In the years since its enactment, California courts have generally condemned noncompetition agreements.  See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 123, fn. 12 (Cal. 2000) (stating that such restraints on trade are “largely illegal”).  In this regard, California courts have consistently affirmed that Section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.  Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946 (Cal. 2008).  This law protects Californians and ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.”  Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 859 (Cal. Ct. App. 1994).  It protects “the important legal right of persons to engage in businesses and occupations of their choosing.”  Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1520 (Cal. Ct. App. 1997). 

More recently, in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, the California Supreme Court again reaffirmed that noncompete agreements are automatically void as a matter of law under Section 16600.  At issue in Edwards were two non-compete clauses.  The first prohibited the plaintiff accountant employee from performing professional services of the type he had provided while at his former firm for any client he had worked on in the 18 months prior to his separation from the firm.  The second clause prohibited the accountant, for a year after termination, from ‘soliciting,’ defined under the noncompete agreement as providing professional services to any client of the former employer’s Los Angeles office.  The Court held these provisions to be invalid because it restrained the employee’s ability to practice his profession.

Notably, in Edwards the Supreme Court rejected the limited or “narrow-restraint” exception to section 16600 followed by some federal courts, which excepted application of Section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession.”  Under some interpretations of the narrow-restraint exception, only noncompetition agreements that completely restrained the employee from practicing his profession, trade, or business were void.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

Q.  I am receiving restricted stock in a company and was given the option of making an I.R.C § 83(b) election.  What does this mean, and should I make the election?

When given restricted stock, an employee normally recognizes as ordinary income the excess of the fair market value of the stock received over the amount (if any) paid for the stock, at the time the employee’s beneficial interest in the stock is transferable or is no longer subject to a substantial risk of forfeiture, whichever occurs earlier.  This would be reported on a Form W-2 for employees or Form 1099 for independent contractors.  Gains that occur thereafter will qualify for capital gains treatment.

I.R.C. § 83(b) permits an employee who has received stock as compensation to report its value as income in the year of receipt even though the stock is subject to a substantial risk of forfeiture. If the election is made, the employee recognizes as ordinary income the excess of the fair market value of the stock received over the amount (if any) paid for the stock.  The employee's tax basis in the stock becomes the fair market value at the time of receipt. If the stock is later sold for a greater amount, the employee will realize a capital gain equal to the difference.

In essence, an 83(b) election changes the timing for the inclusion of income of the stock, from the time when the risk of forfeiture ceases to exist to the time of its receipt.  Making an I.R.C. § 83(b) election can be advantageous if an employee expects stock received as compensation to appreciate substantially in value, particularly if its value is small at the time it is received, since the employee will qualify for capital gains treatment on the appreciation.  The risk of making the I.R.C. § 83(b) election is that the employee will receive no deduction for the value of the stock that was reported as income if the stock is later forfeited, thus paying taxes on a stock that he or she does not have. 

An I.R.C. § 83(b) election should be made whenever an employee purchases his or her employer's stock for its fair market value. The election will not result in income to the employee because the value of the stock does not exceed its purchase price, and any future appreciation of the stock will qualify as capital gains.

An I.R.C. § 83(b) election must be made within 30 days after the employee receives the stock.  I.R.C. § 83(b)(2).  An I.R.C. § 83(b) election can be revoked on or before its due date. Thereafter, the election is revocable with the consent of the IRS if made under a mistake of fact, but not a mistake of law.  Rev. Proc. 2006-31, 2006-27 I.R.B. 32.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

Q:  Can copyright protection attach to book titles, short phrases or slogans?

A:  Probably not, but this may change depending on how much protectable content there is.  The general rule is that “a combination of unprotectable elements is eligible for copyright protection only if those elements are numerous enough and their selection and arrangement original enough that their combination constitutes an original work of authorship.”  Satava v. Lowry, 323 F.3d 805, 811 (9th Cir. Cal. 2003).  The majority of courts have held that titles and short phrases do not meet this minimum requirement. 

See, e.g., Narell v. Freeman, 872 F.2d 907, 911 (9th Cir. Cal. 1989) (“Ordinary phrases are not entitled to copyright protection. . . Phrases and expressions conveying an idea typically expressed in a limited number of stereotyped fashions are not subject to copyright protection.”); Yu Zhang v. Heineken N.V., 2010 U.S. Dist. LEXIS 121084 (C.D. Cal. May 12, 2010) (“Words and short phrases such as names, titles, and slogans; familiar symbols or designs; mere variations of typographic ornamentation, letter or coloring are not subject to copyright.”); Alberto-Culver Co. v. Andrea Dumon, Inc., 466 F.2d 705, 710 (7th Cir. Ill. 1972) (“ 'Brand names, trade names, slogans, and other short phrases or expressions cannot be copyrighted, even if they are distinctively arranged or printed.”); CMM Cable Rep v. Ocean Coast Props., 97 F.3d 1504, 1520 (1st Cir. Me. 1996) (“copyright protection simply does not extend to “words and short phrases, such as names, titles, and slogans”).

Further, the U.S. Copyright Office's regulations specifically exclude from copyright protection “words and short phrases such as names, titles, and slogans . . . .” 37 C.F.R. § 202.1(a). The Second Circuit has endorsed this principle as a “fair summary of the law.”  Kitchens of Sara Lee, Inc. v. Nifty Foods Corp., 266 F.2d 541, 544 (2d Cir. 1959). 

It should be also noted that copyright protection protects only against copying of the actual expression of an idea, and does not protect the idea itself.  Kay Berry, Inc. v. Taylor Gifts, Inc., 421 F.3d 199, 208 (3d Cir. Pa. 2005) (“It is a fundamental premise of copyright law that an author can protect only the expression of an idea, but not the idea itself”).

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

In drafting license agreements, licensors sometimes seek to prevent their licensees from engaging in certain competitive behavior such as creating works which compete with the copyrighted work, or from using other competitors’ works.

Courts have held that such restrictive licensing terms can constitute “copyright misuse.”  The doctrine of misuse “prevents copyright holders from leveraging their limited monopoly to allow them control of areas outside the monopoly.”  Assessment Technologies of WI, LLC v. Wiredata, 350 F.3d 640, 647 (7th Cir. 2003).  While this doctrine has been applied to practices seen as violating the antitrust laws, such as certain tying arrangements, “[t]he question is not whether the copyright is being used in a manner violative of antitrust law (such as whether the licensing agreement is “reasonable”), but whether the copyright is being used in a manner violative of the public policy embodied in the grant of a copyright.”  Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 978 (4th Cir. 1990). In other words, copyright misuse “forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office.”  Id. at 977-79; accord Practice Management Info. v. Am. Med. Ass’n, 133 F.3d 1140 (9th Cir. 1997).

As such, licensees should be wary whenever their license agreements (i) attempt to control competition outside the scope of their copyright, and (ii) uses copyright to achieve that result.  Copyright misuse does not invalidate the copyright, but merely precludes its enforcement during the period of the misuse.  This defense is normally raised as a defense to a copyright infringement claim and can be asserted by any defendant, even if the defendant was not a party to the original “overreaching” contract. 

 Examples of copyright misuse:

•         Requiring licensees and their employees to agree not to create their own works which compete with the copyrighted work.  Lasercomb America, Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990).

•         Requiring licensees to use the copyrighted work to the exclusion of other competitors’ works. Practice Management Info. v. Am. Med. Ass’n, 133 F.3d 1140 (9th Cir. 1997).

•         Prohibiting the use of copyrighted software on any other equipment but the licensor’s, when that restriction effectively prevents the development of new works.  DSC Communications Corp. v. DGI Technologies, Inc., 81 F.3d 597 (5th Cir. 1996).

•          Threatening litigation in an effort to extract a licensing fee or other profit when there is no reasonable basis for determining that the copyright proprietor’s copyright has been infringed.

•         Requiring licensees to purchase the copyrighted work in conjunction with other products.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

On September 10, 2010, the Ninth Circuit announced in Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir. Sept. 10, 2010), a rule for determining when a software user is the owner or a mere licensee in a software program.  This distinction is important, because under copyright law, owners are free to resell their copies of their software program under the first sale doctrine, whereas licensees are not unless otherwise permitted under their respective license agreements.

Under the first sale doctrine, codified in 17 U.S. C. § 109, “the owner of a particular copy . . .  is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . .”  However, Congress specifically excluded owners of software from renting, leasing or lending copies of software programs for direct or indirect commercial advantage.  See 17 U.S.C. § 107(b)(1)(A).

The Court held that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. 

In Vernor, the software program at issue was Autodesk’s AutoCAD Release 14, which is sold pursuant to a software license agreement (“SLA”).  The SLA stated that Autodesk retains title to all copies of the program, and that customers could not rent, lease or transfer the software.  Further, the SLA imposed significant use restrictions, including prohibitions on modification or disassembly of the software, removal of any proprietary notices or marks, use outside the western hemisphere, and use for commercial purposes if the software was labeled for educational use only. Applying these facts, the Court determined Autodesk only granted users a license and not ownership in the program.  As a consequence, the first sale doctrine was not applicable to any subsequent resales of the software, thereby making such resales potentially infringing.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Email: info@allenmlee.com, Internet: www.allenmlee.com.

On June 28, 2010, the U.S. Supreme Court finally ruled in Bilski v. Kappos, 08-964, on the long contentious issues of whether business methods are patentable subject matter under the patent laws, and whether the Federal Circuit’s machine-or-transformation test was the exclusive test in making this determination.       

To provide some context, the patent laws provide that there are four independent categories of inventions or discoveries that are patentable: (1) processes, (2) machines, (3) manufactures, and (4) compositions of matter.  The Supreme Court has held that there are three specific exceptions to these categories that do not constitute patentable matter: (i) laws of nature, (ii) physical phenomena, and (iii) abstract ideas.   

In Bilski, the Supreme Court held that “process” does not categorically exclude business methods.  Rather, a business method is simply one kind of “method” that is, at least in some circumstances, patent-eligible. 

The Court also held that the Federal Circuit’s machine-or-transformation test, while useful, is not the sole or exclusive test for deciding whether an invention is patent-eligible.  Under the machine-or-transformation test, an invention is a “process” only if (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.     

In deciding Bilski, the Court declined to determine whether petitioners’ underlying patent application for hedging against the risk of price fluctuations in the commodities and energy market constituted patentable “processes,” or to define further what constitutes a patentable “process” beyond the definitions provided in Section 100(b) of the Patent Act or the Court’s guideposts in Gottschalk v. Benson, 409 U. S. 63 (1972), Parker v. Flook, 437 U. S. 584 (1978) and Diamond v. Diehr, 450 U. S. 175 (1981).  Instead, the Court held that the petitioners’ patent application was not patentable simply because it claimed an abstract idea. 

Allen M. Lee.  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  He counsels clients on business formation, general corporate matters, trademark, copyright, trade secret, patent, licensing, internet and domain name issues, among other things.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Fax: (408) 260-8263, Email: info@allenmlee.com, Internet: www.allenmlee.com.

A key question many people ask when deciding to incorporate their business is which state should they incorporate in.  As a general rule, a corporation is generally subject to the laws of the state it was incorporated in.  Accordingly, it is not uncommon for people to shop around for a state with the most favorable laws.  However, for companies based in California, California’s pseudo-foreign corporation law, Cal. Corporation Code § 2115, may vitiate the benefits of filing elsewhere.

Under Section 2115, foreign corporations doing business in California that are characterized as “pseudo foreign corporations” may be treated as if they had incorporated in California, with California law superseding the law of the jurisdiction in which the corporation was incorporated in many important respects.  These include:

•    Annual election of directors (Corp Code §301);
•    Removal of and filling of director vacancies (Corp Code §§303-305);
•    Directors' standard of care (Corp Code §309);
•    Liability of directors for unlawful distributions (Corp Code §316);
•    Indemnification of directors, officers, and others (Corp Code §317);
•    Limitations on corporate distributions in cash or property (Corp Code §§500-505);
•    Liability of shareholders for unlawful distributions (Corp Code §506);
•    Shareholder meetings (Corp Code §600);
•    Shareholders' right to cumulate votes at any election of directors (Corp Code §708(a)-(c));
•    Supermajority vote requirement (Corp Code §710);
•    Limitations on sales of assets, mergers, conversions, and reorganizations (Corp Code §§1101, 1151-1152, 1200-1203);
•    Dissenters' rights (Corp Code §§1300-1312);
•    Records and reports (Corp Code §§1500-1501);
•    Action by the attorney general (Corp Code §1508); and
•    Rights of inspection (Corp Code §§1600-1604).

To determine whether a foreign corporation will be treated as a “psudo foreign corporation,” two tests must be met:

1)    the average of the property factor, the payroll factor, and the sales factor (as defined in Sections 25129, 25132, and 25134 of the Revenue and Taxation Code) in California compared to the company’s total property, payroll, and sales is more than 50 percent during its latest full income year; and

2)    more than one-half of its outstanding voting securities are held of record by persons having addresses in California on the record date for the latest meeting of shareholders held during its latest full income year or, if no meeting was held during that year, on the last day of the latest full income year.  Cal. Corp. Code § 2115(a)(1),(2).

Corporations which are listed on the New York Stock Exchange or the American Stock Exchange or quoted on the NASDAQ National Market System are exempt from Section 2115.

While California courts have upheld Corp. Code Section 2115, see, e.g., Wilson v Louisiana-Pacific Resources, Inc. (1982) 138 CA3d 216, courts in other states may decide to apply the law of their own state.  For example, courts in Delaware have refused to apply Section 2115 to Delaware corporations doing business in California.  See VantagePoint Venture Partners 1996 v. Examen, Inc.,  871 A.2d 1108 (Del. 2005).  For businesses located in California but incorporated elsewhere, this may mean that they may still be subject to the California Corporations Code in the event they are sued in California.

Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  He counsels clients on business formation, general corporate matters, trademark, copyright, trade secret, patent, licensing, internet and domain name issues, among other things.  For more information contact: Allen M. Lee, a Professional Law Corporation, Tel: (408) 249-2735, Fax: (408) 260-8263, Email: info@allenmlee.com, Internet: www.allenmlee.com.