Subscribe to Inc. magazine
STRATEGY

Network: January 1993

Network questions and answers: reader-to-reader advice on miscellaneous topics.
Advertisement

Discount Suits
My small manufacturing business has a big problem. PIE Nationwide, our freight carrier, earned our business after offering us great discounts. Now PIE has filed for bankruptcy protection, and the trustees have filed a complaint for the amount of the discounts, totaling several thousand dollars. We can't pay a lawyer, and we can't pay the fees. What can we do?

JoAnne Forman

Executive Vice-President

Tearstrip Systems

Boyertown, Pa.

* * *

The PIE case has prompted reams of news copy, legislative action in Congress, and legal action that has reached the U.S. Supreme Court. Briefly, this is what happened: Carriers file tariffs with the Interstate Commerce Commission (ICC), stating their shipping fees. In the early 1980s, carriers (like PIE) and shippers (like your company) began agreeing to discounts. Occasionally, the carriers failed to file the discounted rate with the ICC. When those carriers began to file for bankruptcy protection, auditors noted the discrepancy and questioned the legality of those discounts. Trustees then began to sue shippers for the difference, or undercharges.

That was the first phase of these lawsuits, according to lawyer Dan Sweeney, a partner with the Washington, D.C., firm of McCarthy, Sweeney & Harkaway. The second phase began when auditors questioned contracts that did not comply with ICC regulations, for various reasons, and trustees went after those undercharges, too. The third phase began in December 1991, when a Los Angeles court ruled that trustees for Trans-con, another bankrupt carrier related to PIE, also could sue for undercharges.

Shippers are going to the ICC to challenge the reasonableness of the higher charges. One question that's still being resolved is this: do shippers who are being sued have to pay the undercharges before filing challenges, or can they place the amount of undercharges in escrow -- or not do anything -- while they wait for an ICC ruling on "reasonableness"? That question is now before the U.S. Supreme Court.

According to Ken Siegal of the American Trucking Association (ATA), trustees of PIE and Transcon are seeking almost $1 billion in undercharges from hundreds of shippers -- including the ATA itself, which used PIE to ship its products.

Your options: Siegal hears that PIE is settling some cases out of court for about 50¢ on the dollar. Or you could join one of the defense committees sharing lawyers' fees among defendants in the PIE case, in a limited reverse-class-action suit. The ATA, which PIE is suing for $3,700, has joined one committee headed by Sweeney. He has filed answers to the complaint against the ATA and to all interrogatories, and has motioned to combine the several claims whose defendants he represents and dismiss them. All that has cost the ATA less than $260 so far. You could join this defense, for $200, after becoming a member of the National Small Shipments Traffic Conference. (Membership fees start at $240 for companies with revenues of $3 million or less; contact Bill Moran, 407-778-7782.) Your share of legal costs may run 5% to 10% of your undercharge claim. The Transportation Claims and Prevention Council also has formed a defense group representing about 600 defendants, headed by Northport, N.Y., lawyer Bill Augello.

Educate yourself about the entire affair. Conduct a Nexis search at a local library, and call 60 Minutes (800-848-3256) for a videotape ($33.45) of the segment "You're Kidding," which dealt with PIE and aired October 4, 1992. Or call 800-777-8398 for a transcript ($5).

* * *

Written in Inc.
I'm working on a great business idea, but it will be at least two years before it generates revenues, so I need to keep my full-time job. When is the best time to incorporate? I've already incurred travel expenses (for site selection) and training expenses (for my M.B.A.), and soon I will have equipment expenses (for a word processor) and professional-association dues. The prospective business is not related to my present job.

Name Withheld

* * *

You don't have to incorporate at all. A sole proprietorship is cheaper and easier -- you register at your town clerk's office for about $13 -- and it keeps taxes simple, since you pay as an individual (and deduct your business expenses on Schedule C of your personal tax form). The arguments for incorporation are that you limit your personal liability and you deduct business losses from your taxable income. So if you choose to incorporate, the sooner the better.

And the cheaper, too. The actual filing with the IRS will cost about $500, but you'll also pay legal and accounting fees. Since you're still at an early stage, those should total less than $100, but they'll rise if advisers have to organize your business's messy prehistory.

Neatness counts with prospective investors, too, says Tony Mendoza, a lawyer with the Los Angeles firm of Riordan & McKenzie. "It's best to have in place, from the beginning, a structure investors are used to, a clean history of the company."

You may form a C corporation and pay both corporate taxes and personal taxes on salary and dividends; or an S corporation, and pay only personal tax, as a sole proprietor would. In either case, you may deduct rent and salary, but you must keep business operations separate from personal financials. The Small Business Legal Advisor, by William A. Hancock (McGraw-Hill, 1992, $29.95; 800-233-1128), details the various legal forms a business can take.

What's in a Name?
We've been in business a year now, selling fax machines nationwide by mail order. Another Harvard Fax is doing business in New York State. That company wants us to change our name or do business under a different name in New York. What does the law require of us?

Jeff Patterson

General Partner

Harvard Fax

Los Angeles

* * *

The real problem is not your corporate name but your use of the name as a trademark. A corporate name identifies the legal entity that is the company. That name must be registered with the secretary of state in the state where the company was incorporated and in every state where the company is conducting business. But once you begin advertising under that name, or in other ways associating it with your goods or ser-vices, it becomes a trademark.

A trademark is any name, word, symbol, or device used to indicate the source of a product or service and distinguish it from others. A trademark exists upon its first association with goods in trade, says lawyer Pam Walter of Gardner, Carton & Douglas, in Chicago, even if a company has not registered it. Registering a corporate name does not protect or reserve a trademark -- it only ensures that another company will not incorporate or do business in the same state with a "deceptively similar" name.

If it was there first, your New York competitor has at least common-law trademark protection against other "confusingly similar" trademarks within its product and geographic markets. It may also have registered a trademark at the state and federal levels.

If you insist on fighting this battle, find out what kind of trademark the New York company has -- common law, state, or federal. If it has not registered at the federal level, you could obtain state trademarks yourself in states where your competitor does no business. You could get common-law protection in those states just by selling something there, or you could file with the states' patent and trademark offices. You could even file for a federal trademark if the New York company hasn't. But Walter advises against that; there's a five-year waiting period, and the other company would likely find out about the application and block it.

As a national company, you probably want to do business in New York. If you decide not to register your current trademark, the other option is to change your name. If New York is the only state where your competitor does business, you could operate under a different name there, with different catalogs and invoices. Perhaps you could persuade the other Harvard Fax to buy the name from you or to pay costs you incur by changing your name, which it's likely to consider only if it wants to enter states where you hold the trademark.

Above all, Walter says, "always do a trademark search and registration." Law firms can conduct a crude search through an on-line database (cost: $20 to $30 for a basic search that turns up few marks, up to $150 for a more detailed search). Trademark-searching firms offer a much more thorough search, and, for less than $300, will even check out common-law or unregistered uses of a mark.

Call the Patent and Trademark Office (703-557-4636) for more information. Walter also suggests Intellectual Property -- Patents, Trademarks and Copyrights -- in a Nutshell (West Publishing, 1990, $15.95; 800-328-9352). And call the United States Trademark Association (212-986-5880) for its $5 Guide to Proper Trademark Use.

* * *

Intramural Entrepreneurs
In our privately held company of 105 employees, we have a couple of high-energy people who want to work on special revenue-generating projects after-hours and on weekends. That presents two problems: compensating them for their efforts without making others jealous, and ensuring that the outside projects don't compete for time with their regular workload. Any suggestions?

Howard M. Collett

President

WordPerfect Publishing

Orem, Utah

* * *

A gain-sharing program would be simplest, says Tony Mathews, a benefits consultant at BSI, in Los Angeles. Gain sharing rewards employees with a share of the increased revenues they help produce. Since you can't pay them forever, however, and since gain sharing should encourage employees to generate projects continually, set the percentage on each project to diminish over time. Mathews suggests setting a baseline for productivity in employees' regular work, so it isn't neglected. Also use separate accounting for the projects. The National Center for Employee Ownership publishes Gainsharing and Employee Ownership ($25 for nonmembers; 510-272-9461), an introduction to various companywide programs.

Mathews wonders, though, why you don't make these projects part of your employees' jobs. If a project is worthwhile, why make employees work on it after-hours?

Jack Stack, CEO of Springfield Remanufacturing (see "The Great Game of Business," June 1992), in Springfield, Mo., sets aside about $250,000 a year in risk capital for projects developed by employees. Because projects are conducted on company time, employees who undertake them must justify the expense of the hours spent away from their usual work. You, too, could use employees' hourly rates to convert hours worked to a cash figure and count that as their financial contribution to the project. Incorporate that figure and the corporate capital contribution into a cash-flow statement. Then pay employees a return based on their personal investment. Control cash, Stack says, and time will take care of itself. "I tell them, 'When you're out of cash, you're out of a project.' Then people have a tendency to get things done." n

-- Reported by Michael P. Cronin, Christopher Caggiano, Vera B. Gibbons, and Rachel S. Tsutsumi.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: