Frank Rotella – A Practical Approach to Business
The Legal Supplement is focused on making business owners aware of different legal issues. Talking to business owners about actual legal issues that he or she experienced is an effective way to create awareness. One such business owner is Frank Rotella. Frank’s company, Rofami, Inc., is a diverse New Jersey based company in the fitness, health and wellness industry. Rofami offers workshops to aspiring business owners, personal training courses, corporate wellness programs, fitness related products, and is very active in charitable work and fundraising. And Rofami circulates a health and wellness newsletter to more than 40,000 readers. Rofami has grown by leaps and bounds since Frank’s first foray into the business world.
Frank’s first step into the business world occurred shortly after coming up with an idea while working out. He had recently graduated from the University of Virginia and was working in the financial industry. Frank played football at UVA, and like most athletes, he had used surgical tubing or resistance bands for corrective exercises and rehabilitation. But anchoring a resistance band behind a door or to another object is cumbersome and inefficient. So Frank’s idea was to create a loop system that strapped to a wall or door that anchored the resistance band and allowed the band to move up and down so the user could pull from different angles. This idea went into prototype, and from the prototype emerged FITSTRAP ®.
I asked Frank about legal issues he’s faced over the 10+ years as a business owner in the fitness, health and wellness industry. Frank offered three solid experiences, what he learned, and what practical business advice he offers others based on those experiences.
Money Better Invested in Marketing/Sales than Patenting a Product
Frank successfully patented his FITSTRAP product over 10 years ago. But if he knew then, what he knows now, he wouldn’t have invested money in the patent process. Rather, he would have invested the money in marketing and distributing a product like FITSTRAP to create brand recognition. He tells aspiring entrepreneurs to create a solid product, work hard and market the product well. In his experience the patent itself doesn’t generate money and offers little to no protection (practically speaking) against a bigger competitor from taking the idea, reverse engineer it, and then sell a competing product.
Why? Patent litigation is extremely expensive, and is cost prohibitive for most small to medium size businesses. The World Intellectual Property Organization (WIPO)’s published a special report in February 2010 that average litigation fees and costs often exceed what’s at stake when damages are less than $1 million. And as noted by the WIPO report, and by Frank, some patent litigators agree to take cases on contingency. But the likelihood of winning must be high and the amount of damages in excess of $1 million. My suspicion is that the vast majority of fitness and training products will have serious difficulty showing $1 million in revenue, let alone $1 million in damages caused by the patent infringement. So bigger companies don’t hesitate to violate a patent if there’s little chance that the owner i.e. small to medium size business owner) has enough resources to enforce its patent rights or will do so given the realities of patent litigation. Frank also mentions to entrepreneurs that well developed products can be licensed to a bigger company with its more established contacts, defined distribution channels and resources to enforce patent rights if necessary.
Lawyers and Contracts
Many business owners choose to go about it alone when contracting with another individual or business. There are many pitfalls in going this route depending on the deal’s complexity, the money at stake, the parties’ sophistication and experience level, whether one side has a lawyer and a number of other factors. Rofami’s lawyer is involved whenever it enters into a contract. Frank offered an example where hiring a lawyer saved Rofami money, time and stress. And a general concern when entering into contracts.
In Frank’s example, Rofami had granted another company the exclusive right to distribute Rofami’s product. A downside to an exclusive licensing agreement from the “licensor’s (Rofami) perspective is total dependence on the licensee (the distribution company) to do its job. Rofami’s lawyer requested a minimum royalty payment and express termination (out clause) if the distribution company failed to make the minimum royalty payment and allowed Rofami to gain immediate possession of its inventory. This language was included in the license agreement. License agreements are generally governed by state law, and in particular, breach of contract laws. When the distribution company failed to timely pay Rofami the minimum royalty payment, the license agreement was terminated. The out clause saved Rofami significant time and money because essentially Rofami was able to bypass the different steps to establish breach of contract, quickly recover possession of the inventory, and limited the distribution company’s wiggle room. So not only were significant litigation fees and costs saved, Rofami quickly gained possession of the inventory and liquidated it rather than the inventory sitting idle in a warehouse while the parties fought in court.
Frank’s general concern is making sure that discussions regarding expectancies under the contract line up with the actual written language. While I suspect most readers know this is a problem, but why it’s a problem or what the implications are, is most likely less known. Let’s put this into a hypothetical. Company A contracts with Company B to manufacture a component part to a fitness product. Company B is an upstart company with little capital. Company A verbally tells Company B that Company A will pay Company B 50% of the total purchase price as a down payment to begin manufacturing of the component part. Company B needs all of the money to purchase the materials and supplies to begin manufacturing. Instead, the contract contains language that Company A will pay Company B 15% of the purchase price, and in fact Company A pays the 15% which triggers Company B’s obligation to begin manufacturing. Without the money needed to purchase the materials and supplies, Company B risks materially breaching the contract.
The above hypothetical is clear cut, and I’d expect most people who read the contract would discover it. But this sort of discrepancy can be easily glosses over in what is seemingly an insignificant provision early on, only to become a key provision during litigation down the road. Now to why catching the discrepancy is important and the implications. Arizona, like most jurisdictions, has an evidentiary rule that keeps out evidence of any inconsistent verbal statement made before or at the time of the contracting. This is called the “parol evidence” rule. So in our hypothetical, the verbal statement is inconsistent to the contractual language, and is inadmissible. So Company B will most likely be unsuccessful arguing that its obligation to perform (i.e. manufacture the product) was never triggered. . Frank’s business advice to fitness, health and wellness entrepreneurs is to hire a lawyer to protect your interest when signing a legally binding document.
Frank’s very practical and well reasoned, and you can see why Rofami has grown by leaps and bounds under his leadership, and why he’s successfully ventured into educating other business owners. Frank’s business advice is also consistent with what I tell clients and prospective clients regarding transactional issues. You can spend some money on attorneys fees in the front-end, or risk spending significantly more money in the back-end of the relationship (i.e. litigation) if things go sideways.