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The Morton Memo - FEBRUARY 2011


Although most business owners I know reported that 2010 was a very difficult year, 2011 has begun with optimism everywhere I look.  I see high hopes for continued economic recovery and business people are putting together interesting new plans and projects.  I hope that you will have a very prosperous 2011.

In this issue of The Morton Memo, I explore two ways that Congressional leaders have started to pay attention to small businesses.  First, Congress decided that the hardball tactics of large companies who bully small businesses was worthy of study.  Second,  Congress decided to extend tax credits for small business "C" corporations.

The Morton Memo is for you, so kindly email me those topics of interest to you.

>> Trademark Bullying Study 

>> Tax Exclusion Extended



There is hope for small businesses.  Last year, Congress enacted Trademark Technical and Conforming Amendment Act of 2010.  Among other things, the law provides for a study of trademark litigation tactics.  Specifically, the study will examine how large companies often "bully" small businesses using Federal trademark dilution laws.  Click here for the link to the study.

 The U.S. Trademark Dilution Act is one of my favorite laws to hate.  In 1995, in an apparent reaction to the rise of the Internet, Congress enacted the Trademark Dilution Act which amended the U.S. trademark laws. The law was backed by large established companies.

Under then existing trademark law, the owner of a trademark could enforce its rights against persons using the same or a similar trademark if the owner could prove infringement.  Infringement is (very generally) when one trademark is confusingly similar to another, older trademark. The infringing trademark must be used in the same class of goods or services, or close to the same class of goods or services, and must be so similar as to create the likelihood of consumer confusion. 

The dilution laws allow the owner of a trademark to stop someone from using a similar trademark even when it does not create a likelihood of confusion. In other words, a small business might be sued even if the trademark usage does not legally infringe on another.

The trademark owner can stop the use of a similar trademark if 1) the plaintiff's trademark is famous, and 2) the defendant's trademark will tarnish or exploit the famous trademark's goodwill.  The language of the statue is rather vague as to what is a "famous" mark.

The most famous case regarding dilution was the Victoria's Secret case. Victoria's Secret (VS) sued the owners of a small lingerie shop in Kentucky for dilution. The name of the shop was Victor's Little Secret. Eventually, the U.S. Supreme Court heard the case and decided that the Victor's Little Secret trademark did indeed dilute the VS trademark but VS had no case since it hadn't been damaged.

The U.S. Congress immediately amended the dilution laws to provide that the owner of the famous mark did not need to prove damages. Congress has since further strengthened the law to give a greater edge to the owners of famous marks.

I strongly dislike dilution law. I represent entrepreneurs and small business owners - the people who own companies like Victor's Little Secret. Last year, Facebook sued a company called Teachbook under these laws.  Here is the L.A. Times article on this suit.    I have had small business owners see me about cease and desist letters from major law firms that represent large corporations. I have told my clients that the other side has a weak case, even for dilution, but the other side can sue and take the case to trial. The problem is that my clients can rarely afford to litigate a trademark case in Federal court when they are up against the resources of a large corporation and its law firm.

Therefore, the dilution law is designed to allow the owner of a "famous" trademark to force the small business into court and stay there. This has resulted in a considerable amount of trademark bullying.  Large companies threaten litigation to force smaller companies to change their names. 

I am glad to see that Congress has recognized this problem and commissioned a study to hear from small business owners about this unfair law. 

For more information about the study, please follow the link above.

If you have any questions about trademark law, please contact us at or (760) 722-6582.

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                                                                                                     TAX EXCLUSION EXTENDED 

LaptopOn a happy note, last year Congress passed the Small Business Jobs Act of 2010.  The law amends Internal Revenue Code Section 1202 which allows for the exclusion of capital gains on the sale of “qualified small business stock.” The amendment provides that a taxpayer other than a corporation, i.e. an individual, will be able to exclude from gross income 100% of any gain from the sale of “qualified small business stock” that has been held for more than 5 years.

Under prior law, if certain requirements were met, up to 75% of the capital gain from the sale of “qualified small business stock” could be excluded from capital gain tax. The Small Business Jobs Act of 2010 increases the gain excludable to 100%. Among the requirements that must be satisfied are the following: (1) the entity issuing the “qualified small business stock” must be a C Corp.; (2) the taxpayer/investor must be the original purchaser of the stock; (3) the stock must be issued and purchased prior to January 1, 2011; (4) the stock must be held for a minimum of 5 years; and (5) the business of the C Corp must satisfy the “active business” requirements.

To be eligible for the exclusion, the taxpayer must acquire the stock for money, for property other than stock, or as compensation for services. When the stock is issued, the aggregate gross assets of the issuing C Corp may not exceed $50 million. In addition the C Corp also must use at least 80% of the value of its assets in the active conduct of a “qualified trade or business.” A “qualified trade or business” means any trade or business except those specifically listed. Those excluded include, for example, any trade or business involving the performance of services in the fields of health, engineering, accounting, financial services, banking or investing. Importantly, the stock can be purchased and held not only by individuals but also by “pass-through” entities such as partnerships, S Corps, regulated investment companies and common trust funds. Finally, the amount of gain eligible for the 100% exclusion by the taxpayer with respect to any C Corp is capped at the greater of (1) 10 times the taxpayer’s basis in the stock or (2) $10 million. 

If you would like more information about this subject, please contact me at or (760) 722-6582. Tax attorney Bradford Dewan contributed to this article.  He may be reached at or (619) 239-7777.

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