Corporate Law Monitor : Corporate Lawyer & Attorney : Cole, Schotz, Meisel, Forman & Leonard Law Firm : NJ, Mid-Atlantic Business Transactions & Finance Law

On June 13, 2011, the United States Supreme Court rendered a decision in the Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525.  In a 5-4 decision, the Court held that a mutual fund’s investment adviser cannot be held liable for securities fraud under Rule 10b-5 over false statements in a mutual fund’s prospectuses.  In sum, the Court found that Rule 10b-5 provides a private right of action only against the person or company with “ultimate control” over the statements in the prospectuses (i.e. the mutual fund itself), not the mutual fund investment adviser who was “significantly involved” in the preparation of the prospectuses.

Rule 10b-5 of the Securities Exchange Act of 1934 (the “Act”) provides that it is unlawful for “any person, directly or indirectly,…[t]o make any untrue statement of material fact” (emphasis added) in connection with the sale or purchase of securities.  The Court in Janus Capital therefore had to determine who may be held liable in a private right of action for having “made” untrue statements of material fact in the mutual fund prospectuses.

Janus Capital Group (“Janus Capital”), a public company, created a group of mutual funds called The Janus Investment Fund (“Janus Investment”).  Janus Investment hired Janus Capital Management LLC (“Janus Management”), a wholly-owned subsidiary of Janus Capital, to act as its investment adviser and administrator.  Janus Investment is a separate legal entity from Janus Capital and Janus Management and owned by mutual fund investors.  Janus Management provides investment advice and administration to Janus Investment. 

Pursuant to securities laws, Janus Investment issued prospectuses to its investors describing investment strategies and operations of its mutual funds.  First Derivative Traders, a company owning stock in Janus Capital, sued Janus Capital and Janus Management for securities fraud, alleging that Janus Investment’s prospectuses falsely provided that Janus Management would implement policies to restrain trading strategies based on market timing and delays and that those statements led to a fall in Janus Capital’s stock value.  First Derivative Traders claimed that Janus Capital should be held liable for Janus Management’s acts as a “controlling person” under Section 20(a) of the Act.

The Court provided that Janus Management did not “make” untrue statements of material fact, which is required to pursue a 10b-5 action, stating that the Court must interpret Rule 10b-5 with “narrow dimensions.”  Accordingly, the Court held that the “maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it” and that “one who prepares or published a statement on behalf of another is not its maker.”  The Court likened the relationship between investment adviser and mutual fund to a speechwriter and the speaker, stating “[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”  In this case, it is Janus Investment, not Janus Management or Janus Capital, that is statutorily obligated to file the prospectuses with the SEC   Thus, Janus Management, because it did not have ultimate control over the statement, did not “make” the statement for purposes of 10b-5. 

The Court came to this conclusion despite recognizing that there exists a very close relationship between mutual funds and their investment advisers and that investment advisers exert significant influence over mutual funds.  Notwithstanding the foregoing, the Court found that “corporate formalities were observed,” Janus Investment had an independent board of trustees different from the board of trustees of Janus Management, and that Janus Capital and Janus Management “remain separate legal entities.”  Finally, the Court stated that redistributing liability in securities cases based on the close relationship between investment advisors and the mutual funds they advise is not the responsibility of the courts, but rather Congress.

Justice Thomas wrote for the majority, in which Chief Justice Roberts and Justices Kennedy, Scalia and Alito joined.  Justice Breyer wrote for the dissent, in which Justices Sotomayor, Ginsburg and Kagan joined.

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On March 1, 2011, New Jersey became the third state to enact legislation authorizing the creation of “benefit corporations”.  A benefit corporation is a corporation designed to generate profits while promoting public benefits.  The legislation is designed to promote performance, accountability and transparency with respect to achieving public benefits, while providing legal protection to directors and officers for considering the interests of its employees and customers, the communities in which the company operates and the environment, as well as the interests of its shareholders, in making corporate decisions.  Maryland, Vermont and Virginia have enacted similar legislation, and a number of states are considering similar bills.

A benefit corporation is formed in the same manner as any other for-profit corporation, except that the certificate of incorporation of a benefit corporation must include a statement that the corporation is a benefit corporation.  N.J.S.A. 14A:18-2.  An existing corporation can become a benefit corporation by amending its certificate of incorporation to include such a statement.  N.J.S.A. 14A:18-3.

A benefit corporation must have as its purpose the creation of a general public benefit, which purpose may be in addition to any other purpose or specific public benefit set forth in its certificate of incorporation.  N.J.S.A. 14A:18-5.  A “general public benefit” is defined as “a material positive impact on society and the environment by the operations of a benefit corporation through activities that promote some combination of specific public benefits.”  N.J.S.A. 14A:18-1.  “Specific public benefits” include “(1) providing low-income individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment.”  Id.

By statute, the achievement of general and specific public benefits are deemed to be in the best interest of a benefit corporation and directors of a benefit corporation are required to consider the effects of any action on various stakeholders when considering the best interests of a benefit corporation.  N.J.S.A. 14A:18-5; 14A:18-6.  Specifically, directors of a benefit corporation are required to consider the effects of a corporate action upon its shareholders, as well as upon the employees of the benefit corporation, its subsidiaries and suppliers; its customers, as beneficiaries of the public benefit purpose of the corporation; the community, including communities in which the benefit corporation or its suppliers are located; the environment; and the short-term and long-term interests of the benefit corporation, including benefits that may accrue from the company’s short term and long-term plans.  Moreover, directors are not required to give priority to the interests of any one group of stakeholders, including shareholders.  N.J.S.A. 14A:18-6.  Officers of benefit corporations are also required to consider these factors in connection with any action within the officer’s discretion that reasonably appears to potentially have a material effect on the creation of a general or specific public benefit or the above-referenced factors.  N.J.S.A. 14A:18-8.

In addition, a benefit corporation is required to elect an independent director, designated as the “benefit director”, who shall prepare an annual statement as to whether, in the opinion of the benefit director, the benefit corporation acted, in all material respects, in accordance with its stated general and specific public benefit purposes and whether the directors and officers of the corporation complied with their obligations to consider the impact of corporate actions upon its various stakeholders, including its shareholders.  N.J.S.A. 14A:18-7.  A benefit corporation may designate a “benefit officer”, whose management duties shall relate to the creation of general or specific public benefits.  N.J.S.A. 14A:18-9.

The public benefit purpose of a benefit corporation and the duties of directors and officers of a benefit corporation are enforceable in a “benefit enforcement proceeding”, in which a claim is brought against an officer or director for failing to pursue the general or specific public benefit purpose of the company or for violating a duty or standard of conduct of an officer or director of a benefit corporation.  N.J.S.A. 14A:18-1; 14A:18-10.  Benefit enforcement proceedings may be commenced directly by the benefit corporation or derivatively by a shareholder, director, the holders of ten percent or more of the equity of the benefit corporation’s parent entity or any other person specified in the company’s certificate of incorporation.  N.J.S.A. 14A:18-10.  Benefit directors are protected from personal liability for their actions or omissions in that capacity, unless a benefit director engaged in self-dealing or his actions or omissions constituted willful misconduct or a knowing violation of law.  N.J.S.A. 14A:18-7.  In addition, officers or directors of benefit corporations are not personally liable for money damages if a benefit corporation fails to create general or specific public benefits.  N.J.S.A. 14A:18-6; 14A:18-8.

Finally, a benefit corporation is required to deliver an annual benefit report to its shareholders containing a narrative describing the ways in which the benefit corporation pursued general or specific public benefits, the extent to which such public benefits were created, and any circumstances hindering the creation of such public benefits.  In addition, the annual benefit report is to contain an “assessment of the social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard . . . .”, as well as the statement of the benefit director as to whether the company acted in accordance with its general and specific public benefit purposes.  N.J.S.A. 14A:18-11.  A “third-party standard” is defined as a “recognized standard for defining, reporting and assessing corporate social and environmental performance” which is prepared by an independent person and is “transparent” because the factors considered in applying the standard, the weighting of those factors and the identity of the person who developed and controls any changes made to the standard is publically available.  N.J.S.A. 14A:18-1.  Finally, a benefit corporation is required to list in its annual benefit report the names and contact address for the company’s benefit director and benefit officer (if any), the compensation paid to each of its directors and the names of each person owning, beneficially or of record, five percent or more of the outstanding shares of the benefit corporation.  N.J.S.A. 14A:18-11.  The annual benefit report must be posted on the company’s website and be filed with the Department of Treasury, provided that the benefit corporation may omit references to compensation of its directors, as well as financial and proprietary information, from the publically posted and filed version of the annual benefit report.  Id.

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The Frank-Dodd Wall Street Reform and Consumer Protection Act (the “Act”) amended the definition of “accredited investor” under the Securities Act of 1933, as amended, by requiring that any natural person who is intending, with or without that person’s spouse, to be deemed an “accredited investor” based on the $1 million dollar net worth test, exclude the value of the primary residence of the natural person in the calculation. The Act authorizes the Securities and Exchange Commission to review the definition of “accredited investor” as such term applies to natural persons, to determine whether other requirements of the definition should be modified for the protection of investors, in the public interest and in light of the economy and, thereafter, make such adjustments as the SEC deems appropriate. While the SEC has not issued amendments to its rules to reflect this change, this amendment to the calculation of net worth in the definition of accredited investor was effective upon adoption of the Act on July 21, 2010.

Offering documents and purchase/subscription agreements (and, in some cases, operating or governing agreements) currently being used or in the process of being prepared should be revised to reflect these amendments to the definition of “accredited investor”.

The Act contains numerous other changes in or proposed changes to current laws which are not summarized herein. A copy of the Act is available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.

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In the recent decision Cain v. Merck & Co., Inc., the New Jersey Appellate Division held that shareholders of New Jersey corporations are entitled to inspect board of directors and executive committees minutes, in addition to minutes of shareholder meetings. The Appellate Division made clear, however, that shareholders must demonstrate a “proper purpose” in exercising this right and that the scope of board of directors and executive committee minutes required to be made available for shareholder review are limited to only those minutes pertinent to that proper purpose.

In Cain, the plaintiffs made a written demand, pursuant to N.J.S.A. 14A:5-28(4), for the inspection of certain books, minutes and records of the company in connection with the plaintiffs’ claim that the company had engaged in wrongful conduct and mismanagement in failing to disclose the results of a clinical drug trial for a period of twenty-one (21) months. The trial court ruled that the plaintiffs were entitled to inspect all of the board of director and executive committee minutes for that period.

Section 14A:5-28 provides that: (1) a corporation is required to “keep the books and records of account and minutes of the proceedings of its shareholders, board and executive committee”; (2) upon request, a corporation shall provide certain financial statements to a shareholder; (3) a shareholder holding at least five (5%) percent of the outstanding stock of a corporation, or who has owned his stock for at least six (6) months, has the right to inspect “for any proper purpose” a corporation’s “minutes of the proceedings of its shareholders and records of shareholders”; and (4) a court may, “upon proof by a shareholder of proper purpose . . . compel production . . . of the books and records of account, minutes, and record of shareholders” of the corporation. In construing the statute, the Appellate Division acknowledged that shareholders have a qualified common law right, not limited to simply stock transfer records, to examine corporate books and records, provided that the inspection request was made in good faith and for a proper purpose. The Appellate Division further noted that unlike the language of subsection (3) of the statute, the language of subsection (4) was not specifically limited to minutes of shareholder meetings. Accordingly, the Appellate Division held that under N.J.S.A. 14A:5-28(4), a shareholder is entitled to inspect the minutes of the board of directors and executive committees of a corporation.

Recognizing that an unfettered right to inspect board of directors and executive committee minutes could be detrimental to the best interests of the corporation and its shareholders, the Appellate Division made clear that this inspection right is not unqualified. A shareholder has the burden of proving a “proper purpose” for its inspection demand, based upon “specific and supported, credible allegations of mismanagement.” “Fishing expeditions” by shareholders based upon general or unsubstantiated claims of mismanagement are not permitted. Additionally, a court has the power to specifically circumscribe the scope of the inspection, limiting the inspection to only those documents relevant to the shareholder’s demonstrated proper purpose. In Cain, therefore, the Appellate Division limited the scope of the minutes available for plaintiffs’ inspection to only those portions of board of directors and executive committee minutes dealing with the clinical drug trial during the period the plaintiffs alleged the company wrongfully withheld the results of the trial. The plaintiffs were not entitled to inspect all corporate minutes for that period, as previously allowed by the trial court.

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On August 13, 2010, New York State laws were amended to clarify that powers of attorney executed by individuals in New York primarily for a business or commercial purpose need not comply with the onerous requirements that went into effect on September 1, 2009. Following the 2009 amendments, the New York General Obligations Laws technically required all powers of attorney executed by individuals within the State of New York (including those used in corporate transactions and securities filings) to comply with mandatory notice, acknowledgement and notarization provisions and certain other technical matters.

The 2010 amendments expressly provide that the requirements for powers of attorney set forth in the 2009 amendments will not apply to:

1. a power of attorney given primarily for a business or commercial purpose, including without limitation:
   1. a power to the extent it is coupled with an interest in the subject of the power;
   2. a power given to or for the benefit of a creditor in connection with a loan or other credit transaction;
   3. a power given to facilitate the transfer or disposition of one or more specific stocks, bonds or other assets, whether real, personal, tangible or intangible;
2. a proxy or other delegation to exercise voting rights or management rights with respect to an entity;
3. a power created on a form prescribed by a government or governmental subdivision, agency or instrumentality for a governmental purpose;
4. a power authorizing a third party to prepare, execute, deliver, submit and/or file a document or instrument with a government or governmental subdivision, agency or instrumentality or other third party;
5. a power authorizing a financial institution or employee of a financial institution to take action relating to an account in which the financial institution holds cash, securities, commodities or other financial assets on behalf of the person giving the power;
6. a power given by an individual who is or is seeking to become a director, officer, shareholder, employee, partner, limited partner, member, unit owner or manager of a corporation, partnership, limited liability company, condominium or other legal or commercial entity in his or her capacity as such;
7. a power contained in a partnership agreement, limited liability company operating agreement, declaration of trust, declaration of condominium, condominium bylaws, condominium offering plan or other agreement or instrument governing the internal affairs of an entity authorizing a director, officer, shareholder, employee, partner, limited partner, member, unit owner, manager or other person to take lawful action relating to such entity;
8. a power given to a condominium managing agent to take action in connection with the use, management and operation of a condominium unit;
9. a power given to a licensed real estate broker to take action in connection with a listing of real property, mortgage loan, lease or management agreement;
10. a power authorizing acceptance of service of process on behalf of the principal; and
11. a power created pursuant to authorization provided by a federal or state statute, other than this title, that specifically contemplates creation of the power, including without limitation a power to make health care decisions or decisions involving the disposition of remains.
    The 2010 amendments are effective on September 12, 2010, and will apply retroactively to September 1, 2009.

The 2010 amendments contain other modifications to the New York power of attorney laws which are not all summarized herein.  A copy of the 2010 amendments is available at http://assembly.state.ny.us/leg/?default_fld=&bn=A08392%09%09&Summary=Y&Text=Y.
 

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With the limited liability company (“LLC”) being the entity of choice for many new businesses, LLC members and managers need to understand their legal obligations with respect to the LLC and its members. While directors of a corporation have fiduciary duties to its shareholders, similar duties are not automatically in effect for an LLC.

Fiduciary Duties of Corporate Directors

Directors owe a corporation’s shareholders fiduciary duties of care and loyalty. A duty of care is a director’s obligation to act in good faith, in a reasonably prudent way, and with a degree of care which another in a similar situation would use. A duty of loyalty is a director’s obligation to act with the best intentions of the corporation in mind. It is meant to prohibit a director from acting out of self-interest or self-dealing. As a result of this duty, a director cannot, for example, divert a corporate opportunity to himself without fairly presenting that opportunity to the Board for consideration.

LLC Duties

The New Jersey Limited Liability Company Act, 42:2B et.seq. (the “NJ Act”) sets forth default provisions which identify the rights and obligations of members and managers of an LLC. However, the NJ Act is deferential in nearly every respect to the ability of members to establish rights and obligations pursuant to a written operating agreement. Courts have “consistently held that New Jersey’s statute governing LLCs … controls only in the absence of an operating agreement.” Brick Professional, L.L.C. v. Napolean, 2009 WL 2176699, p. 3 (N.J. Super. A.D.) (additional citations omitted). As to fiduciary duties, 42:2B-66(a) indicates that the NJ Act “is to be liberally construed to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.” Thus, if the members of an LLC agree in writing to terms which govern their actions, those terms will be honored, even if they contradict the default terms set forth in the NJ Act.

Subsection (b) also contains critical language with respect to assessing a member or manager’s conduct:

“To the extent that…a member or manager has duties (including fiduciary duties) and the liabilities relating to [an LLC] or to another member or manager: (1) any member or manager acting under an operating agreement shall not be liable to the [LLC] or to any other member or manager of the [LLC] for the member’s or manager’s good faith reliance on the provisions of the operating agreement; and (2) the member’s or manager’s duties and liabilities may be expanded or restricted by provisions in an operating agreement.”

The first premise is that IF someone has fiduciary duties, that person will satisfy those duties if he or she relies on the operating agreement. The second premise is that the operating agreement can expand or restrict one’s duties. Thus, there is no automatic or implied fiduciary duty thrust upon a member or manager; however, an written operating agreement can create such duties and adjust them as needed. If the operating agreement creates a duty, the member or manager can fulfill his or her responsibilities by complying with the terms contained in such agreement.

Given that the NJ Act is to be liberally construed, creating a fiduciary duty can be achieved by having the operating agreement state that members and/or managers shall have fiduciary responsibilities as if they were directors in a corporation.

Serious Implications to a Member’s Actions

Even if a member’s poor actions do not constitute a breach of a fiduciary duty (either because there are no fiduciary duties in the operating agreement or the actions are simply not bad enough to rise to the level of a breach), they could have other serious consequences for such member. Section 24(b) of the NJ Act identifies reasons that a member may be dissociated, or forced out, from an LLC by judicial determination, including if: “the member engaged in wrongful conduct that adversely and materially affected the [LLC’s] business”; “the member willfully or persistently committed a material breach of the operating agreement”; and “the member engaged in conduct relating to the [LLC] business which makes it not reasonably practicable to carry on the business with the member as a member of the [LLC].” Therefore, while a member’s actions might not enable another member to bring an action against the bad actor for a breach of duty, they could lead to such member’s dissociation.

In summary, one should not assume that being a member or manager of an LLC means that fiduciary duties exist. If, however, the LLC and its members wish to ensure that members and managers have fiduciary responsibilities as if they were directors of a corporation, it is possible to create such obligations.
 

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NASDAQ Requires 10-Minute Notification Prior to Release of Material Information

Effective December 7, 2009, The Nasdaq Stock Market LLC (“Nasdaq”) requires Nasdaq-listed companies to provide Nasdaq’s Market Watch Department with at least 10 minutes prior notification when releasing material information. See Nasdaq Listing Rule 5250(b)(1). Previously, Nasdaq merely recommended such advance notice. Notification is required to be made through the Nasdaq electronic submission system available at www.nasdaq.net, except in emergency situations. This notice requirement is intended to provide Nasdaq with information to assess whether a trading halt is appropriate to permit full dissemination of the news to the public and to maintain an orderly trading market. The New York Stock Exchange contains similar notification requirements. See NYSE Listed Company Manual Section 202.06(B). Nasdaq also clarified that, consistent with the Securities and Exchange Commission (“SEC”) guidance, the posting of information on a company website by itself, would not satisfy the public disclosure requirements of Regulation FD. The final SEC Release No. 34-61008 (November 16, 2009) containing the amendments to the Nasdaq Listing Rules is available here.

SEC Proposes Amendments to Rules Regarding Internet Availability of Proxy Materials

In an effort to improve notice of and access to proxy materials and increase participation by shareholders in proxy voting, the SEC proposed amendments to the proxy rules under the Securities Exchange Act of 1934 (the “Exchange Act”). The proposed amendments would provide issuers and other soliciting persons with additional flexibility in formatting and drafting the Notice of Internet Availability of Proxy Materials (the “Notice”). If adopted, the Notice: (1) would be required to address specified topics, in lieu of the mandatory boiler-plate legend currently required in the Notice; (2) would not be required to mirror the proxy card so long as the Notice identified each matter being considered at the meeting; and (3) would be permitted to be accompanied by an explanation of the process of receiving or reviewing the proxy materials and voting. The proposed amendments would also modify the filing deadlines for a non-issuer soliciting person utilizing the notice-only option for delivery of proxy materials. Comments to the proposed amendments were due by November 20, 2009. If adopted, the final rules could be effective for the upcoming proxy season.

The proposing SEC Release No. 34-60825 (October 14, 2009) is available here. The final SEC adopting release with respect to the notice and access proxy rules is SEC Release 34-55146 (January 22, 2007) and is available here.

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On September 15, 2008, the New Jersey Assembly and Economic Development Committee released a package of seven bills aimed at improving New Jersey’s corporate governance statutes. Since that date, all of the bills have been passed by the entire Assembly, and four of the proposed bills have been signed into law. The remaining bills, have been reported on favorably by the Senate Commerce Committee, but have not yet signed into law.

The bills are modeled on Delaware General Corporation Law, a historically corporation-friendly statute. Supporters of the bills believe that if and when these bills are passed into law, that New Jersey will become a more attractive state to incorporate in and do business. Among other things, the bills will make it easier for corporations to act quickly by using email and other progressive tools to conduct corporate business.

The new bills that have been signed into law:

• Allow corporate directors to provide the corporation with notice of resignation that would only be effective upon the occurrence of a particular event. This creates greater flexibility by allowing directors to submit resignations prior to the conclusion of an event. This bill was approved and signed by the Governor on January 27, 2009 and can be found at N.J.S. 14A:6-3.
• Permit a corporation to eliminate plurality voting for the election of directors in the bylaws of the corporation. Prior New Jersey law provided that a corporation may only eliminate plurality voting in its certificate of incorporation. The new bill gives corporations more freedom to adopt different voting methods for the election of directors after its incorporation. This bill was approved and signed by the Governor on January 27, 2009 and can be found at N.J.S. 14A:5-24.
• Update the definition of “foreign corporation” to mirror similar definitions used in the New Jersey Limited Liability Company Act and the Uniform Limited Partnership Law. The bill provides New Jersey corporations the option to merge with and acquire or consolidate with unincorporated entities, in addition to the limited liability companies and partnership previously permitted. In addition, the bill allows domestic corporations to create partnerships with foreign businesses. This bill was approved and signed by the Governor on November 20, 2009 and can be found at N.J.S. 14A:1-2.1.
• Provide that corporations may grant different types of equities from those traditionally used by corporations, thus recognizing the trend of granting more restricted stock grants in lieu of stock options. This bill was approved and signed by the Governor on November 20, 2009 and can be found at N.J.S. 14A:8-1.

The new bills that have not yet been signed into law but have been passed by the State Senate:

• Permit any corporate notice required under the New Jersey Business Corporations Act to be filed electronically. Electronic filing not only saves corporations time and money, but also grants more direct access to the corporation’s shareholders and directors. This bill was unanimously passed in the Senate on December 10, 2009.
• Improve the speed at which corporate transactions can take place by providing one- and two-hour services for expedited over the counter corporate service requests. Currently, the fastest filing service takes up to 8.5 hours from when the request is received. This bill was unanimously passed in the Senate on December 10, 2009.
• The passage of the proposed bills is the first step towards what Assemblyman Joseph Vas, a sponsor of these bills, desires “…a stimulation of economy, a boost in the private sector job growth, and help reverse the state’s reputation as being business unfriendly.”

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Many business owners believe their company’s name is “cleared” for trademark purposes once it is registered as a business name. That is a dangerous misconception. The system for registering business names is separate from the system for clearing and registering trademarks. To minimize the risk of expensive infringement litigation and maximize protection for a company’s trademark, a business owner should have a complete trademark search conducted and should generally register their trademarks, not just their business names, with the federal or state governments.

Business names – technically, “trade names” – are registered by the county clerk (for sole proprietorships and general partnerships) and the State (for corporations, limited liability companies and limited partnerships). Trade names are legally distinct from trademarks and service marks. While a “trade name” identifies the company itself, a “trademark” distinguishes the company’s goods from another’s goods and identifies those goods as originating from a particular source. A “service mark” serves the same function for services.

The difference may seem technical, but failing to recognize it can lead to trouble. County or State registrations for trade names and alternate names neither reserve a trademark nor ensure a trade name will not infringe another business’s trademark, service mark or trade name. The state/county trade name registration system does not prohibit the registration of alternate names that infringe other trade names, much less trademarks and service marks, and the system does not cross-check between state and county records. The trade name registration/reservation process also does not check for registrations outside New Jersey or for unregistered uses of trademarks and service marks, which can have common law protection.

A comprehensive search of federal, state and public records is needed, therefore, to clear trademarks, service marks and trade names. That search should be done before a company invests time and money developing goodwill in the mark.

Once a mark is cleared, it should usually be registered with the federal Patent and Trademark Office or the State. Although registration is not mandatory, it enhances the scope of protection, deters infringements and affords registrants important advantages when trademark disputes end up in court.
 

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