What is cease-and-desist?
A company receives a cease-and-desist order if they are doing businesses that the government deems risky or illegal. Corporations usually obtain one if they are selling products or services that are against the trademark, patent or any other intellectual property rights of a competitor or entity. Businesses can also get a cease-and-desist order from a federal or state agency if they have not complied with the regulations. Once news of a cease-and-desist order reaches the market, the prices of a share in a company can go down.
Cease-and-desist: when Uncle Sam places you in detention
Have you ever gotten detention? Or been grounded by your parents? You cannot do anything until you beg and plead for forgiveness and promise not to do whatever it is that got you in hot water.
A cease and desist is similar to getting grounded, but is a lot more expensive and can last a lot longer. Companies dread this order by the government since it can entail lousy media coverage and put a stop to the operations involved. Even if the sales or manufacturing of products halts, but costs are still being incurred. No money is going in, a lot of money is going out; that is how a cease-and-desist affects a business.
How can you get a cease-and-desist?
There are many reasons why the government might impose a cease-and-desist order. Most of the time, it happens when a company breaks specific rules or takes more risk than administrative or regulatory agencies believes allowable.
Here are other reasons why an order to halt business operations might be mandated:
- Infringing trademark, patent or any other intellectual property rights.
A corporation spends a lot of time and money in cultivating an excellent brand name. A brand name has a following due to its quality, marketing or other unique features. What will happen if a different company makes an inferior product using a well-known brand name? The value of the brand goes down, and the resources that the company invests in will be for nothing. Patents protect a company from a competitor copying a procedure or technology. A trademark covers a symbol, logo or slogan of a company.
- Violation of contract deals and provisions.
A company may suddenly receive a request to have their operations halted when a contract was not respected. For instance, there was a contract for a supplier to provide the necessary materials for production. However, the manufacturer may find a supplier that offers a lower price and then proceeds contract with to the second supplier while canceling the first contract. The primary supplier may send a “Cease and Desist” letter first, and if the company does not abide with the first valid contract, the supplier can then ask the court to make the first contract binding.
- There is a necessity to pause business processes for a special event, like an audit.
Government agencies do routine audits for some critical industries, and investors would also want to be assured that the money reported in the quarterly statements are factual. There are regulatory bodies that are not part of the government, like FINRA, that regulate the financial industry. FINRA may ask the Legal and Compliance Division of a corporation to assist them in suspected money laundering activities or ask the company to stop offering shares or stocks if people involved do not have the necessary licenses.
There are other reasons why a cease and desist order may be given such as an impending harassment case or even a defamation or libel accusation. One thing is clear though; a stop and desist order can be bad for business. Making sure that the companies you invest do not get detention from Uncle Sam is an excellent start in knowing which companies have excellent investment potential.