Accused of Selling Knockoffs: What If I Do Nothing?

Dear Rich: I buy handbags from an importer and resell them online. I advertise them as knockoffs at various sites, including eBay. I never claim they're originals ... I always tell people they're copies. Recently, I got a letter from a lawyer saying I had to stop selling them or I would get sued.  Would I be better off running my business as a corporation so that I won't be personally liable? What will happen if I don't respond to the letter? Sorry, but the Dear Rich Staff has lost its ability to predict the future. (We think it happened when Google implemented Panda One and switched its search algorithm.) In any case, any of the following scenarios are possible after receiving a cease and desist letter:

• you keep selling the knockoffs, the lawyer files a lawsuit, gets a default judgment and enforces it against you personally (assuming you're not an LLC or incorporated) or against your business
• you stop selling the knockoffs, the lawyer drops the whole thing
• you stop selling, the lawyer sends a second letter, gets no response and files a lawsuit and gets a default judgment. 
• you blow off the letter, keep selling the knockoffs, and the lawyer is impressed with your moxie, and decides to hire you as an investigator of trademark counterfeiting. You do really well in that position, give up your handbag business and eventually write a book about the knockoff industry. 

Actually, the last choice --the Catch Me If You Can approach -- isn't very probable at all. If you continue to sell without either fighting the letter or otherwise responding, the lawyers will most likely pursue you because, as the young people say, that's how they roll.

Does forming an LCC or corporation shield you from these lawsuits? Converting your business to an LLC or corporation can establish limited liability and will shield you from personal liability in some instances -- the lawyers can only go after your business assets. But your liability is likely to be tied to your status at the time of the infringement. So if you're a sole proprietor when you got the letter, then you're probably going to be treated that way (personally liable) in court, as well, even if you later convert to an LLC or corporation. In addition, keep in mind that the LLC/corporate shield also won't protect you from the following:

• You personally guarantee a loan or lease.
• You owe federal or state taxes. 
• You act negligently (people are injured by your handbags).
• You fail to abide by corporate rules. 

That Said Dept. That said, perhaps you should reconsider your business model (as well as your business entity). First, you need to determine whether the lawyers are right -- that is, are your bags infringing? If yes, you should abandon the infringing items. If you're not infringing, you should consider whether you want to fight or move on. If you fight, you may be able to have some luck fighting takedown notices (we'll talk about them more this week) but keep in mind that if you're dragged into court, you'll be hit hard in your bankroll and the only guaranteed winners will be the lawyers.

How Do I Deduct Crafts Inventory on My Taxes?

Dear Rich: Last year we started selling handmade jewelry at places like Etsy. We had a good year but we ran into few problems at tax time and filed for an extension. We got your book but we're confused about how to calculate inventory. It's not that bad doing the calculations if you use a tax software program (we've used TurboTax Home and Business). But even if you use software, you'll still need to know your cost of goods (COGS) for the year. The IRS explains how to figure it out on its website by walking you through lines 35 through 42 of Schedule C. Here's a summary:

• Line 35: Beginning of year inventory. If this is your first year of operations, beginning inventory would be zero. If it's not your first year, this amount should be identical to the prior year's closing inventory. (If it isn't, you must explain why to the IRS.) Include the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the crafts, but only those that were part of inventory at the beginning of the year. The IRS provides an explanation on valuing inventories (scroll down to "Inventories"). 
• Line 36: What did you purchase this year? Here you provide the cost of all merchandise you purchased during the year. Include the costs of all materials you purchased in the year that were necessary to manufacture your crafts. Subtract the cost of any items withdrawn for personal use.
• Line 37: Labor costs. Calculate labor costs — the amounts paid to employees for making your crafts. Do not include any amounts paid to yourself. (If you have employees that are not involved in manufacturing items for sale, their labor costs will be deducted elsewhere on the tax return and are not included in the cost of goods sold.)
• Line 38: Other manufacturing supplies. If you need glues, chemicals or other crafts supplies to manufacture your goods for sale, list the amount paid for these supplies.
• Line 39: Packaging costs. If you manufacture goods for sale, you can list additional costs such as containers and packages that are part of the manufactured product, costs of freight to bring in supplies, and overhead expenses — for example, rent, heat, light, power, insurance, depreciation, taxes, and maintenance — that are direct and necessary manufacturing expenses.
• Line 40: Total lines 35 through 39. This represents the total cost of inventory that your business held in the year.
• Line 41: End of year inventory. On Line 41, you enter the value of the inventory unsold at the end of the year. Keep in mind that the value of the remaining inventory is not the price you plan to sell it for; it is the amount you paid for it. This amount will become your beginning inventory for the next year — that is the number you will use on Line 35 of the following year's tax return. Note that most businesses do a "physical" inventory at the end of the year; that is, actually count and record the type and number of each remaining inventory item. The results of this work will provide the basis for the year-end inventory calculation. Physical inventories also allow you to inspect and discard inventory if it is damaged or of no value, thereby "writing it off" of year-end inventory and increasing the costs of your 'goods sold' deduction. A physical count also will alert you to items missing from your inventory.
• Line 42: COGS deduction. On Line 42, you subtract the amount listed on line 41 (ending inventory) from line 40 (all inventory costs). The result is the amount you claim as your COGS deduction.

For more information on inventories, see the Cost of Goods Sold section in Chapter 7 of IRS Publication 334, Tax Guide for Small Businesses, and IRS Publication 538, Accounting Periods and Methods.
By the way ... Some cities also have a tax on business inventory. This is another reason why some retail businesses have inventory sales -- to reduce their stock before the tax date.

How to Make an Electronic Agreement

Should I Make Disclaimer When I File TM Application?

Dear Rich: I am applying for a trademark and I had a question. I want to use my trademark for a website for people who own daycare businesses. (I already have the domain name.) The trademark has the word "DayCare" in it and I know that I can't trademark that part of the name. Should I make a statement giving up rights to "Daycare" under the "additional statement" section. What do you think? You're correct that nobody who runs a daycare business can claim trademark rights to the word "daycare" -- it is a generic term for  businesses that care for kids. So most people who include it in their trademarks will have to disclaim it. As a general rule, most trademark attorneys would probably take the position that it's best not to disclaim anything unless asked to do so by a trademark examiner. The reasons for this blanket rule: (1) you can't always predict what the examiner will ask you to disclaim -- for example, though it's highly likely you'll be asked to disclaim the term, there's always the possibility that the examiner may not ask for it because you are providing online services (and not daycare services), (2) adding a disclaimer later won't derail your application (though it will slow the process), and (3) by taking the initiative yourself, you may mistakenly disclaim an essential element of your mark.
That Said Dept. That said, if you're certain that an examiner will ask you to make the disclaimer -- for example, your competitors have been asked to make similar statements in their applications (you can review all existing applications and registrations online) -- and you're in a hurry to get your registration, then make the disclaimer at the time you file the application. (The intake box is shown below).

Does drawing a trademark prevent getting sued for infringement?

Dear Rich: In response to your recent question about a children's book ... I have done a book for children that features some of their toys, but instead of using photographs of these, I have drawn them, so they resemble the toys. I believe there is no issue with trademark infringment. Can you please clarify this for me? For those readers who don't have time to wade through a few paragraphs, the short answer to our blog's question for today is "Not necessarily."
Please Don't Sue Dept. By way of example, today's thumbnail image, Ed Ruscha's "Large Trademark with Eight Spotlights," (a painting of the 20th Century Fox logo), does not infringe under trademark law because Ruscha is not using the mark to sell anything (other than the art work itself). It's referred to as an informational (or "editorial") use. It's generally fine to use most trademarks for such artistic or news purposes without worrying about trademark infringement but if the trademark has substantial decorative features, it is also protected by copyright (we explain the diff here).  Any reproductions might be considered infringing derivative works (unless declared a fair use).
Walking a Thin Line Dept. Where Ed Ruscha could run into problems would be if he licensed the use of his painting for t-shirts, merchandise, or for use in connection with films or TV shows. In that case, the use shifts from informational (artistic or news) to commercial and 20th Century Fox might argue that consumers are likely to confuse its products with those offered by Ruscha.
"That Said"Dept. In summary, the fact that you drew the marks may not shield you from a cease and desist letter. In addition, some users of trademark images lose the "editorial shield" when they modify the appearance of a trademark. That said, you should also factor in the bigger question of whether the trademark owner will notice your use (or care if they do notice). If the answers are "no" and "no" then you're good to go.

Art and Text Combinations: Copyright or Trademark?

Dear Rich: I have come up with several different art works and slogans that go along with the art work. This art work and slogans are directed towards a certain group of people that enjoy participating in a certain type of sport. After doing some reading, it appears to me that both the art work and slogan would be protected under a trademark. I know art work can be protected under a copyright but I don’t think that includes a slogan that goes along with the art work. So my questions are as follows: (1) Does a trademark protect both art work and slogans? (2) Can I submit 2 or 3 different art works and slogans under one trademark if they are all directed towards the same clientele and sport? (3) And if my applications are denied, do I get my money back? We're in a backwards kind of mood so we'll answer your questions in reverse order.
(3) No, you don't get your money back. The USPTO will not refund your $300+ application fee if your trademark application is rejected. That's why the Dear Rich Staff urges applicants to make sure that their trademarks avoid the three most common reasons for rejection: the mark is descriptive and lacks secondary meaning; the mark is the generic term for the goods and services; or the mark (or something substantially similar) is already being used in commerce by a 'senior user' for those goods and services. (We explain all three standards here.)
(2) No, you can't include more than one mark per application. The application and fee are "per mark," so you can't compile a bunch of marks and register them in one application.
(1) Yes, trademark will protect artwork combined with a slogan (and so will copyright). Let's start by talking about copyright. The art world, as well as the publishing, and advertising industries have long relied on copyright protection for art and text combinations. However, because copyright does not protect short phrases, the copyright for an art+text work usually doesn't extend to the text, by itself. So if someone were to copy just the slogan from the works, you couldn't stop that person (with some rare exceptions). Registering the combination as a trademark will only work if you plan to use the art+text as a trademark -- that is, as a signifier for specific goods and services. This can pose some tricky issues. For example, if you use your art+text combo on a t-shirt, the USPTO might reject your application because the mark is being used in a decorative manner. That is, people are buying and appreciating the t-shirt for the art+text. Even if you can claim it as a trademark for apparel, for example, you would still need to register it in each class of goods for which you seek protection ... an expensive proposition. May we recommend that you rely on copyright until one of your works enjoys exceptional success, then you can consider trademark registration.

Can I Republish an RSS Feed?

Dear Rich: I'm interested in linking to a RSS feed which I subscribe to in an online website I'm developing. I can't seem to find any guidelines about how to use this content. Do I need to get permission to use the content if its from a company's RSS feed? What about a federal government website? As you may be aware, an RSS feed is a method of delivering news or any other form of digital content that is published regularly (for example, blogs, podcasts or video) -- hence the name, Real Simple Syndication. Originally RSS was simply for text but supposedly ex-MTV DJ Adam Curry encouraged RSS feed inventor Dave Winer to add "enclosures" into RSS feeds so that these feeds would recognize MP3 files. That's how podcasting and video casting were born. Want to see what a feed looks like? This is our RSS feed. Who knew?
Right, you had a question. Unless an RSS feed is created by federal government employees within the course of their duties (here are some examples), you should presume that the material provided in the feed is protected under copyright law. RSS is simply a method of delivery and just like other delivery systems --  television signals, radio transmissions, and newspaper deliveries -- the medium doesn't affect the copyright status of the message. If all you're pulling from the feed is the headline or blog entry title, that's probably not an issue (for example, we pull blog headers from other blogs in the right column on this page). In addition, many news outlets modify the feeds and provide a paragraph from each item along with a link back to the source (and whether that qualifies as a fair use has not been fully resolved, yet).