7 Biggest Legal Mistakes Physical Product Companies Make

09/15/22 • 38 min

Want to avoid the 7 biggest legal mistakes that physical product and eCommerce companies make? Attorney Brittany Ratelle walks through the most common mistakes that land modern product companies in legal hot water and how you can avoid these headaches as a small business owner.

Here are the top 7 mistakes:

1. No operating agreement or business “prenup”

Operating agreements, also known as founder or partnership agreements, define the roles and responsibilities of a business and are a private binding contract that outlines equity, exit planning, intellectual property ownership, non-compete obligations, manager roles and how decision-making will be handled in a business partnership. These agreements are sometimes dubbed as business “prenups” or prenuptial agreements because, without them, many businesses can end with ugly business divorces with multiple parties claiming they had a different understanding of the rights and responsibilities of the business, whether they are fighting over assets or liabilities. *Highly recommend when you start a business with friends or family!*

2. Failure to protect intellectual property

There are 4 main types of intellectual property with different tools to protect them: patents, trademarks, copyrights, and trade secrets. Intellectual property protection and boundaries can increase the value of a company and its brand, its products, and the way in which it solves problems for consumers. If you don’t protect your own intellectual property, you can get ripped off by other companies and if you don’t pay attention to your own practices, you can be at risk of infringing on someone else’s property by using intellectual property that doesn’t belong to you. If you have protected your own IP (intellectual property), you may be able to license it out and make additional revenue streams and grow your company into an empire. For physical product companies, the IP protection you want is:

Trademark: overall brand name, logo, slogan, and product name

Patent: design or utility patents or both on the actual new and novel product

Trade secret: formulas, recipes, processes, methods, market research, vendor information, pricing/markup, customer data/email list

3. The website isn’t legally compliant

All websites need these documents to be legally compliant: privacy policy, website terms, copyright statement, and necessary disclosures/disclaimers. Get all of these in the website legal bundle. Also, make sure that your website is ADA-friendly with the current WCAG standards.

4. The product has safety/labeling/testing issues and liability

Physical products come into contact with real human beings and their environments, so by their very nature, they have bigger legal exposure. Make you are complying with any relevant CPSC, testing, and labeling standards, especially if you sell baby & children’s goods, toys, health and wellness products/supplements, and dangerous products.

5. No written contracts with vendors and/or manufacturers

Get your agreements in writing! A fairly drafted contract is nothing for either side to fear and can help outline expectations, resolve ambiguities, and set up a clear working relationship for both parties in a deal. Make sure to use written (and solid) contracts for your affiliate program, for wholesale, and for pop-up shops (whether you are the or the guest). You also might want a model release or event waiver if you do your own product photography with models or host events.

6. False advertising issues

Don’t lie. The Federal Trade Commission is in charge of protecting consumers and a big part of that is in policing the actions and the marketing of companies, especially around claims they make about their products. Be careful about statements regarding “Made in the USA”, any claims that your product cures any illness or disease. Remember that if you can’t back up or “substantiate” the claims you are making – don’t say them (and don’t let your affiliates, direct sales people or other individuals say them either as a “workaround.”)

7. Employee misclassification - your “contractors” should really be “employees”

If it looks like an employee and smells like an employee - that person is an employee (whether you call them that or the individual even wants to be classified as such). Make sure you are properly classifying your team members as either contractors (1099ers) or employees (W2) as there are significant state and federal penalties for misclassification and for failing to provide HR compliance such as payroll taxes, employee handbooks, unemployment insurance, workers compens...

Here are the top 7 mistakes:

1. No operating agreement or business “prenup”

2. Failure to protect intellectual property

Trademark: overall brand name, logo, slogan, and product name

Patent: design or utility patents or both on the actual new and novel product

Trade secret: formulas, recipes, processes, methods, market research, vendor information, pricing/markup, customer data/email list

3. The website isn’t legally compliant

4. The product has safety/labeling/testing issues and liability

5. No written contracts with vendors and/or manufacturers

6. False advertising issues

7. Employee misclassification - your “contractors” should really be “employees”

Previous Episode

Create a Positive Company Culture with Founder of Thirst and Dottie's Kolaches, Sierra McCleve

Serial entrepreneur Sierra McCleve, founder of two successful Utah-based food businesses, Thirst and Dottie's Kolaches shares on the Creative Counsel Podcast how created a positive team culture in the challenging food industry. She shares her wisdom as a baker, manager, owner, mom, wife, garage gym fitness enthusiast and now an investor in other projects. Sierra talks about how radical ownership can transform your role as a founder and CEO and help create a positive customer experience – even in a business with lots of moving parts and people.

In this episode we discuss:

How to decide if a business model is viable
When to pay attention to competition and when to ignore it
The secret to good customer experiences
The real role of an owner/manager
What to do when stuff goes wrong in your business
How to create a positive company culture
Why owning everything in your business is actually liberating
How to forecast in the food business
How to make your team feel valued
How to make your check-ins and meetings more effective
Creating and nurturing superfans
Sierra’s top 2 business book recommendations

Quotes

“Create value and just find that thing that people need, that people want – and then try to figure out how to solve that need.”

“One of our mottos is employee satisfaction is number one. And we believe that it will translate to the customer experience, customer satisfaction, and even quality of products.”

One thing that I've learned that’s very painful, but also very liberating – everything is your fault.

“When you have ownership, you have control over it, whereas if it's someone else's fault, I have no control over that person.”

“I tell my team – as an owner, I work for every single one of you. And my job is to get you the tools and the education you need to do your job super well. So, let's not get it confused with the traditional business management pyramid. I think that gives managers and employees the ability to more quickly come to you with problems and issues that are going to be solved much quicker as opposed to keeping them quiet because they're worried they’ll get in trouble.”

“Over-communicate on appreciation.”

“If you can't step away from your business for a day or for an afternoon, you need to work on your systems so you can trust that your people are going to get it done.”

“On Conflict and risk management: Be a good human, be honest, take ownership of your mistakes and treat your people well.”

“You have to get buy-in from every single person at every level of your company. So, I would say be deliberate about it. Consider nicknames and retreats and just stuff like that – make people feel valued. Be really liberal with your praise and, limit your criticism, but deliver it in a way that's going to be uplifting

“Do not be audacious enough to think that everyone is there to serve you.”

Sierra’s Favorite Tools for connecting with team members:

Snapchat

Slack

Books:

E-Myth

Jocko, Willink, Extreme Ownership.

Other episodes:

Creative Counsel episode 54: HOW TO BUILD A BUSINESS FOR THE LIFE YOU WANT WITH EMYTH VP TRICIA HUEBNER - how to find your “primary aim”

Brand Protection:

Interested in securing and protecting your own brand name? Chat with Brittany about whether you are ready for a federal trademark registration to protect your brand assets.

Team Protection:

If you are trying to build a positive team culture, make sure you have clear expectations for your contractors and employees! Independent contractors or 1099ers need to have a solid independent contractor agreement and employees should have an employee agreement, an employee handbook, and other HR-compliant systems like payroll, Unemployment insurance, and worker’s compensations.

Connect with Sierra

Her Instagram

Her Podcast: Make a Dent

FREE RESOURCES

Want a free LEGAL workbook to get your creative business legally legit? Download HERE and get access to my newsletter with tips and tricks for YOUR growing creative business.

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Next Episode

How to sell wholesale from Thimblepress founder and business coach Kristen Ley

Kristen Ley, founder of Thimblepress® shares her wholesale secrets from being in the stationery businesses for more than a decade. Thimblepress is an international lifestyle company that encourages kindness and inspires fun, through her artisan cards, Push-Pop Confetti, and viral hits like the "Your butt looks great in those jeans!" card. In their interview with attorney for creators Brittany Ratelle, Kristen dives into her creative process, how she launched Thimblepress and grew it to an internationally successful company as a passionate creative, businesswoman, coach, and woman of faith. Kristen has grown Thimblepress as a reflection of her life, love of her family, and reflecting back on one of her favorite places in the world; one of them being her home in Jackson, Mississippi.

In this episode:

How Kristen got started with an antique letterpress
The journey from side hustle to “burning the ships behind her” when she left a safe corporate job
Pros and cons of trade shows (and how Kristen did her first few all on her own!)
How she decides what she wants to offer for wholesale - and how she coaches other people through these decisions
Pricing for wholesale profitability
What sparks her creativity for new art products
Why Kristen shares about her faith alongside her business
How Kristen teaches her coaching clients who want to get into licensing or wholesale
Kristen’s advice for overcoming “noise” on social media
How to hire the right way
The three things your customers want – guaranteed!

Online wholesale outlets Kristen mentions (where you can find Thimblepress):

ABOUND

Bulletin

Kristen’s questions for creatives who want to expand:

Where are you actually making your money?
Where are you spending your time? (What you're doing over there – is that actually making you money?)
Are you excited about it? Don’t invest in something that doesn’t excite you, just because others are. What about YOU?
Have you done the “time, heart, money” analysis like Katie Hunt from Proof to Product recommends?
Have you developed a brand book?
Can you make a pitch about your work?

Quotes:

“I have been running this business since 2012 and it looks very different than it did, but the integrity and the core values of our brand have always remained the same.”

“When you hire, if people don't align with your core values, it's going to make communicating with them and them going out and communicating for your brand super difficult.”

“You need saved three months of being able to pay your employees in a savings account because those times will get hard – things can happen out of your control.”

“One of the worst things I’ve done in my business is having to let people go – and that usually comes from hiring too fast.”

“I feel like I'm making a difference in people's day-to-day – even if they're little small differences. I visualize all those little small products, like every greeting card that goes out, those hundreds of thousands of push-pops of confetti, out into the world. And I think of every time we send something out, it's like a little red heart. So I picture all these little red hearts everywhere.”

“A legal lesson I learned the hard way - if you file for a provisional patent application, make sure you follow up within a year later and file the actual patent, or you lose that right forever.”

“Don't look around at what everyone else is doing and make the right decisions for you, your family, your company, your faith, all those things like are so important.”

“Don't make work your idol – make it part of your life, but not the hero. Because you're the hero - not what you do.”

“I always say people don't ask for what they want enough. Pitch yourself as much as you can. The more you ask - just mathematically - the more yes’s you're going to get.”

“You have to big be your biggest cheerleader. If you're not going to be excited about the things that you're doing, how do you expect anyone else to be excited for you?

“For promoting yourself, sometimes you have to yell when even when you think it's a whisper, especially on social media. Sometimes, I feel like I'm saying things over and over again, and that I feel like I'm yelling at them but truthfully, it’s not that because we’re all inundated with noise.”

“I always say it boils down to three things. People just want to feel seen, loved, and heard. If you can make your customers feel seen and loved and heard, I would say job well done.”

Resources: