The Debt Ceiling–what happens if the debt ceiling is not raised?

I previously wrote about the debt ceiling.  In my first post about the debt ceiling I explained what the debt ceiling is and briefly touched upon the direct effects of not raising it.   I concluded with the only two clear conclusions that can be drawn:

“(1) we are not facing a total shutdown/Armageddon and (2) some people will be affected.”

In my second post, I gave the analogy of a credit card to explain that the Federal government “WILL still spend money, but only equal to the amount they bring in.”

In this post, I will step out on a limb and read the tea leaves to try to predict more direct effects from hitting the debt ceiling.  It is easy to say “we won’t have a total government shutdown” or “some people will be affected,” but it is much harder to say what the actual effects will be or who will be affected.  As with everything we post – this is not legal or financial advice, it is just a very brief, very rudimentary analysis.

The first thing to do is to start with what we “know” (I put “know” in quotes because I am getting this from the Wikipedia page on the U.S. Deficit, which is probably accurate, but I have not cross-checked this information with the official public reports):

(1) the Total debt is roughly $14.46 TRILLION, which is almost equal to the entire U.S. GDP in 2010.  GDP is not revenue (taxes are revenue).  Basically, GDP is the value of all goods and services produced in the entire country in one year.  It is important to note that U.S. GDP is calculated by adding together Consumption, Investment, Government spending, and net exports (which in turn is calculated by subtracting imports from exports).  There are different models of calculating GDP, but this is the one that is used to report U.S. GDP. 

(2) The 2010 deficit is approximately $1.6 TRILLION.  In other words, the government spent $1.6 TRILLION more than they brought in.  They had to borrow at least that much money.

(3) If the debt limit is reached, the deficit automatically becomes zero (because no further borrowing is possible).  The budget instantly becomes balanced.

From the above, we know that slightly more than 10% of GDP will be immediately taken out of the GDP calculation.  That’s a very large amount.  Directly affected will be government contractors – the government will no longer be able to pay those contractors, and that will have a trickle down effect.  Also, this will move the GDP number into recession territory.  Beyond that, it is hard to know who will be affected.

Since government spending is such a huge part of GDP, it becomes clear that the private sector is hurting and the government spending is masking some of that pain.  But that pain still exists in reality, it is just not reflected in the numbers.

So, from the above, we would expect the economic numbers to reflect a significant decline.  The people directly affected will be government contractors, and people in that chain.  It may also affect interest rates and the stock market, which then has ripple effects.

Contract Pitfalls–the “merger” or “integration” clause

Contracts often have “boilerplate.”  People assume that boilerplate clauses are standard, necessary, and risk-free (this seems especially true in the entertainment industry where everything is claimed to be “standard”).  But there are huge pitfalls to signing a contract without carefully thinking through the effects of each clause.  One of the most common “boilerplate” clauses is the merger clause (a.k.a. an integration clause).  Like all “boilerplate,” this clause can be worded several different ways (which already says something about how “standard” any language is).  To spot this clause, look for a heading titled “entire agreement,” or “merger,” or “integration,” or something to that effect.  The language itself will state, in substance, that “this Agreement is the entire and final Agreement between the parties on this matter…”

The effect of this clause is to make the current contract the final, binding agreement between the parties.  This is very important in case there were oral communications, emails, etc. that might otherwise be considered part of the contract (but keep in mind that just because a merger clause is in a contract, that doesn’t mean evidence of discussions or emails can’t come in to help interpret the contract).  In short, it keeps things simpler and cleaner in case of a dispute.

But, sometimes the unintended consequence of this clause is to supersede another contract, which should not be superseded, and can lead to confusion.  For instance, if you contract to buy 100 widgets a month, and then want to buy another 200 a month (so the total would be 300), and the contract for another 200 a month has a merger clause, are you supposed to buy a total of 200 or 300 a month?  If the new contract contains a merger clause, then there is a strong argument that you are only buying 200 a month, not 300.  This can be a huge problem is you need 300 a month and you have now contracted yourself into a shortage!  Once this problem is recognized, you have many options on how to proceed, depending on the specific circumstances.  In this example, for instance, the new contract could just be an addendum to the older one, or you could have it be an amendment for the full 300.  Either way, to avoid confusion it should reference the old contract and clearly explain how to treat the old contract.

How to Choose a Strong Trademark, Part II

If you choose a weak trademark, or one that is ineligible for trademark protection, your competitors may be able to use similar marks, making it more difficult for your customers to identify your business, product, or service. Having a strong trademark makes it less likely that you will be forced into costly litigation over trademark rights later on, and more likely that any dispute that arises will be resolved in your favor. In my last post I explained that, in order to achieve maximum trademark protection, your trademark should a highly distinctive, strong trademark without any descriptive, surname or geographic connotations. The following types of trademarks are eligible for protection:

1.) The Suggestive Mark: A suggestive mark suggests, but does not describe the product or service. The customer must go through a mental process in order to associate the mark with the type of product or service it represents. An example of a suggestive mark would be “Greyhound” for fast busses, “Razr” for a thin cell phone, or Frootloops for fruit flavored cereal.

2.) The Arbitrary Mark: An arbitrary mark is one that has an ordinary meaning that is unrelated to your goods or service. This type of mark is protected even more broadly than the suggestive mark. Some examples of arbitrary trademarks are “Apple” for computers and “Amazon” for an online store.

3.) The Fanciful Mark: Fanciful marks, like arbitrary marks, enjoy the broadest protection under trademark law. This type of mark isn’t a dictionary word. Instead, a fanciful mark is a letter or number combination that has no function other than its use as your mark. Some examples of fanciful marks include KODAK, EXXON, and GOOGLE.

Attempting to register your trademark is a good idea. If your trademark is denied registration, you will have the opportunity to choose a stronger trademark before investing time and money in the development of the weaker one. Whether or not you choose to register your trademark right away, it is important to make sure that your mark is not confusingly similar to someone else’s registered mark, as the use of such a mark could subject you to liability. To do a free trademark search on your own, go to www.USPTO.gov.

How To Choose A Strong Trademark, Part I

If you choose a weak trademark, or one that is ineligible for trademark protection, your competitors may be able to use similar marks, making it more difficult for your customers to identify your business, product, or service. Having a strong trademark makes it less likely that you will be forced into costly litigation over trademark rights later on, and more likely that any dispute that arises will be resolved in your favor. Therefore, it is important for you to understand a few very basic things about trademark law.

Maximum protection for your trademark will be achieved if you select a highly distinctive, strong trademark without any descriptive, surname or geographic connotations. Such a trademark will be registered in the Patent and Trademark Office and in foreign countries with little difficulty, and will have maximum protection under trademark law.

Some words cannot be protected by trademark law because they are not distinctive: Some types of words are excluded from trademark protection because they are not distinctive. Some examples include generic names. A generic name may be a common dictionary term (if you make computers and you plan to call your product “Computer,” you would be using a generic name to describe your product), or it may be a former trademark that has become a common name for a product. These terms are viewed by the public as descriptors of the product itself, not of the source of the product, so you cannot reserve exclusive use of these words.

Sometimes, a non-distinctive mark may acquire distinctiveness through secondary meaning: Sometimes, a nondistinctive word such as a descriptive term, a geographic term, or a name may become eligible for protection where it becomes distinctive through long time use. This type of distinctiveness arises where your use of the mark creates a secondary meaning in the minds of consumers, who associate the mark with your product or service despite its basic weakness as a mark. Secondary meaning may take substantial time and money to develop, and may be difficult and expensive to prove in court. Therefore, you should choose a mark that is distinctive on its own, not one that requires secondary meaning.

The strongest marks are those that are inherently distinctive. Some marks are inherently distinctive, so that you don’t have to prove secondary meaning in order to achieve protection. These marks are the strongest, and they fall into three categories: Suggestive terms, Arbitrary terms, and Fanciful terms. To achieve maximum trademark protection, your mark should be suggestive, arbitrary, or fanciful. In my next post, we will look at these three types of trademarks in more detail.

The Importance of Foundation

Whether you are dealing with a lawsuit or business negotiations or political debate, it is essential to understand the concept of foundation.  Far too often, people jump to a conclusion without the proper support or evidence (in other words, the “foundation” for that conclusion).

For instance, maybe one person rear ends another.  The person who got rear ended might assume that the other person was sending a text message and not paying attention.  But why would they assume that?  This is absolutely a vital question.  Perhaps they saw the person with a cell phone in hand, perhaps not.  Even with a cell phone in hand, you can’t conclude that the person was sending a text message.  Maybe the person was distracted for other reasons.

Another example would be if you suddenly found your competition using the name of your product on theirs.  You might assume that they are doing so on purpose.  But without some support, that is just an assumption.  Perhaps they are doing it accidentally.  Perhaps not.  But you should always start with what you know for sure and build from there, making note of where you are making assumptions.

What does “foreclosure” mean in California?

“Foreclosure” is not new in California.  But there is one important detail that people miss when discussing the topic – there are TWO types of “foreclosures” in California.  In both cases, a debt is owed to someone.  We’ll call this person the “Lender” even though it might not be the person who made the loan.  In both cases, the loan is secured by real property (“real property” simply means real estate as opposed to “personal property” which is other property).

The first is the most common: “non-judicial.”  In non-judicial, the lender auctions off the property through a “trustee sale.”  This auction, and the procedure surrounding it, has to comply with certain laws.  But nothing has to be filed in court.

The second is less common, but has its own benefits and risks for both parties: “Judicial.”  In a judicial foreclosure, the lender files a lawsuit in court so that the auction actually goes through the court system.

It is important to know which you are discussing because there are vastly different legal ramifications between the two.

The U.S. Debt Ceiling–a simple analogy

In a past post, I gave an overview of the debt ceiling issues.  I recently explained this to a very confused colleague using a simple analogy:

Let’s say you have a monthly income of $1,000.  Your basic living expenses are $700 a month, leaving you with a “surplus” of $300 a month.  Due to elements out of your control, you cannot change your monthly income (despite repeatedly asking your boss) and you cannot decrease your living expenses.  That is, the bare-minimum necessary for you to survive every month is $700 and the most money you can possibly earn every month is $1,000.

You have options on what to do with that $300 though.  You can save it or spend it.  In this example lets pretend that the only way to save it is by putting the surplus in a jar in your closet. If you save it, you can spend it in a later month.  For instance, if you save $300 one month, you now can spend $1,300 the next month (your $1,000 income check plus the $300 that you saved).  Or you can spend $1,150 next month and $1,150 the month after.  Or you can continue to save $300 a month, or whatever you want to do.  But you can never spend more than your monthly income PLUS whatever you have saved up in the past; that is you can never spend more than what your boss pays you that month PLUS the amount in your jar.

Given the above scenario, everything is fine and simple.   Life goes on, sometimes you save a portion of your $300 surplus, sometimes you spend a portion of your savings, etc.  One day, you get a credit card.  Your credit card has a cap of $5,000.  The credit card allows you to borrow any amount of money at one time, up to $5,000, or you can borrow in increments.  The credit card acts almost exactly the same as your jar – you can take money from it, or put money back into it.  The big difference is that you can never take more than $5000 out and you will HAVE TO put the amount of money that you took out back into it at some point.  So if you take $100 out, you will eventually have to put $100 back in.  The other big difference is that you have to pay interest on what you take out, so if you took out $100, you might eventually have to pay back a total of $150 over time.

There are only two hard and fast rules attached to this particular credit card: (1) you can never take out more than $5000 at a time, including accrued interest and (2) as long as you pay your minimum payment every month, you are not in “default.”

You decide that since you now have this credit card, you can spend more than $1000 a month, so you do.  You buy all kinds of fun stuff, so your monthly expenses end up $1,200, month after month. You spend every dollar in your jar as well since you had some saved up.  But every month you continue to pay your minimum payment.  Pretty quickly though, you reach your cap and can no longer spend extra.  Due to the large balance, your minimum payment every month is $300.  So now your income of $1,000 a month exactly meets your bare necessities PLUS your minimum required payment to avoid default.  You can no longer buy anything excessive since you have spent your savings and maxed out your credit card.

The important thing is that you are NOT in default.  You just have to cut back on the $200 excessive spending a month that you have grown accustomed to.  You also won’t be able to save any money or have the benefit of occasional splurges that you enjoyed in the past.

This is the situation the U.S. Federal government faces – they have maxed out their credit card, so they need to cut back.  They WILL still spend money, but only equal to the amount they bring in.  Right now, and for the foreseeable future, the amount they bring in is enough to cover their minimum “monthly payments” on the credit card as well as their “crucial living expenses.”

The Importance of having a FANTASTIC Logo

Recently I was speaking with an entrepreneur who was bragging about hiring a very expensive graphic designer to design a logo.  The entrepreneur was spending a huge portion of his startup budget on just the logo.  This is a very common and costly mistake!

A logo is your trademark.  As a general guideline, it should be recognizable and unique.  Anything else depends on your industry and target demographic.  For instance, sometimes you will want your logo to obviously indicate the product or service you offer.  Other times, you want it to be more subtle or just be something memorable.  But your logo will never be the key driver of your business.  Having a great logo or a catchy slogan will mean nothing if you provide a bad product or service.  Similarly, having a decent logo will be good enough if you provide a great product or service.

In the case of a startup with very little seed capital, wasting money on an expensive logo is a bad investment.  If you have a large amount of seed capital, then it does not affect you as much.

The Basic Legal Issues Involved in Marketing Your Product or Service

When you create a website, video, document, or other material for the purpose of advertising your business, your main goal is to convince potential customers to buy from you. However, you also need to make sure that your advertising materials comply with the law. Some of the things you need to think about are:

What Claims Do You Make In Your Advertisement?

There are two types of claims you need to analyze in order to ensure compliance: Express claims, which are claims you make directly, such as “Our product promotes weight loss,” and implied claims, which are implied by the ad without being stated expressly.  Both types of claims are treated the same – you can’t imply a claim that you could not make directly, and all claims must be truthful, not misleading, and have adequate substantiation.  You must assess the net impression of your advertisement, which includes the text, product names, and depictions of the product or other images in the advertisement.

Do You Omit Important Information?

If your advertisement fails to reveal information which is material in light of your advertisement, it might be misleading. Any qualifying information must be disclosed prominently, and not hidden in fine print, and it must be simply and clearly stated.

Can You Provide Evidence?

You must have a reasonable basis for the claims you make. The amount of evidence you need depends a lot on what you are selling. If your product or service is something that consumers will have a hard time evaluating on their own, you need a high level of substantiation for your claims.  How much substantiation is required depends on many factors, including what level of substantiation is considered reasonable by experts in
your field.  

Testimonials, Endorsements, Books, and Articles

You cannot make claims either through consumer or expert endorsements that would be deceptive or could not be adequately substantiated if made directly, and it is irrelevant that a testimonial represents the honest opinion of the endorser. If you use an expert endorser, it is your responsibility to make sure he/she has appropriate qualifications, make sure he/she has conducted a proper examination of the product, and disclose any connection  between the endorser and the product which might affect credibility. You also can’t use other literature in a way that would be misleading.  If you quote another publication, you may be required to substantiate the claims in that publication if it does not include adequate substantiation.

Need More Information?

More information about the laws related to advertising may be found at: http://business.ftc.gov/advertising-and-marketing. There, you will find helpful information, policy statements, and legal guides regarding advertising in general, as well as rules and information about advertising in specific industries.  Remember that certain regulated industries may have additional advertising rules.

The Debt Ceiling–an unbiased primer

The U.S. Federal government will soon hit its debt ceiling.  This information has been in the news for some time, often with predictions of “doomsday” if the ceiling is not lifted.  Most of the news on the ceiling does not explain, in any sort of detail, explain what the debt ceiling is, why it is a perceived problem if we “hit” it, and why raising it is a solution to anything (other than to “hitting” the ceiling).  Here is a brief, unbiased explanation of what the debt ceiling is and its effect so that you can decide if it is a problem.

It is easy to explain “what” the debt ceiling is: the Federal government has a cap on the amount of money it can borrow.  If the Federal government reaches this limit, the Federal government can no longer borrow any more money.

What the debt ceiling is not: in the above, notice the emphasis on the word “borrow.”  The debt ceiling is NOT a limit on how much money the Federal government can bring in or spend.  For instance, in 2008, the Federal government brought in $2.66 TRILLION from taxes.  That money is unaffected by the debt ceiling, the Federal government will still collect a similar amount each year no matter what happens with the debt ceiling.  If the Federal government were a business, this would be its “Revenues.”

That same year, the Federal government spent $2.9 TRILLION.  If the Federal government were a business, this would be its “Expenses.”  Obviously, the Expenses were more than the Revenues, which leaves a “deficit” instead of a “surplus.”  The only way to spend more than you make from the ordinary course of business, is to borrow the difference.  That difference gets added to the negative balance that has accrued from past years, which is the total debt amount.

As you can see, if the Expenses are less than or equal to the Revenues, there is no deficit and no additional debt.  In other words, if Expenses are the same as Revenues, the Federal government does not move closer to the debt ceiling and the debt ceiling has absolutely no effect on anything.  Similarly, if Expenses are less than Revenues, the Federal government actually moves away from the debt ceiling, and again, the debt ceiling has absolutely no effect on anything (other than to leave more “room” for borrowing in the future).

So why might it be a problem to reach the debt ceiling? If the Federal government cannot borrow any more money, then the most it can spend is the amount it brings in.  Any spending beyond its revenues is impossible (more accurately, any spending beyond its revenues is unconstitutional).  In other words, it can “only” spend $2.66 TRILLION a year (if we use 2008 numbers), and will be forced to cut discretionary spending.  In 2008, mandatory spending was $1.788 TRILLION, the rest was spending.  So the Federal government will still be able to cover all of it’s “mandatory” spending, which includes: Social Security, Medicare, Medicaid, and Federal debt interest.

Notice that Federal debt interest is a “mandatory” expense.  This prevents a default.  But the Federal government will be forced to cut “discretionary” expenses.  It will do this by laying off some Federal government employees and cutting back on some benefit programs.  These programs can grow in the future as revenues grow, or the Federal government can leave them at a smaller size and have a surplus in its budget.

Will these cutbacks affect you? That is for you to decide.  Two things are clear though: (1) we are not facing a total shutdown/Armageddon and (2) some people will be affected.