Amtrak Train Crash May have Been Caused by Excessive Speed

Traverse Legal’s litigation attorney team is investigating the cause of the Amtrak passenger train which derailed 13 of its 14 cars off both sides of an overpass and onto rush hour traffic below.  The accident killed three people and injuring more than 100 others.  It has been reported that the train may have been going 80 MPH in a 30 MPH zone.  It has also been reported that the passenger commuter train owned and operated by Amtrak did not have Positive Train Control, a technology designed to prevent these types of accidents. For more information, visit our train accident blog. Or contact us to receive updates and more information.

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Legal Ramifications of the FCC’s Vote to Repeal Net Neutrality

As anyone who even mildly uses the Internet undoubtedly knows, the Federal Communications Commission (“FCC”) voted yesterday to repeal net neutrality.  “Net Neutrality is the principle that Internet service providers [(“ISPs”)] must treat all data on the Internet the same, and not discriminate or charge differently by users, content, website, platform, application, type of attached equipment, or method of communication.”  Essentially, without net neutrality, ISPs like Comcast, AT&T, and Charter will be able to charge for different types of internet packages similar to how we pay for cable (which is already annoying enough in itself, amirite?)  This means that we could be paying more for having high speed internet or accessing certain websites and applications like Facebook, Netflix, and Spotify.

The repeal of net neutrality is not only troublesome from a personal standpoint (if the repeal stands then we all will be paying more to access internet services we both want and need on a daily basis), but from a legal standpoint as well.  For instance, what if someone is defaming you online but you don’t have paid access to the website they are defaming you?  How are you able to monitor and protect your trademarked brand or copyrighted work if infringement is occurring on inaccessible websites?  Could cybersquatters start to run rampant registering domain names that are likely to cause confusion?  Are ISPs violating the First Amendment by restricting the type of content people can see on the Internet? The questions are endless and cannot be fully evaluated until an internet without net neutrality is reality.  The internet is already moving much faster than the law can keep up and eliminating net neutrality would only complicate internet legality further.

As a law firm that not only practices Internet Law but also operates nearly all of its critical functions and client communication on the internet, the FCC’s vote to repeal net neutrality is alarming.  Traverse Legal’s founding Attorney Enrico Schaefer commented that, “Many ISPs already have monopoly power in many areas of the country. Allowing them free reign to charge websites and end-users money for preferential treatment of data transfer is a fundamental change to the internet. Why fix something that is not broken?”

Despite all the hype, we likely will not see changes to the way we access and surf the internet for awhile.  The fight for net neutrality is far from over as several States, including Illinois and Iowa, have already declared their intent to appeal the FCC’s decision.  There could be months of court battles before a final decision is rendered.  Traverse Legal will continue to monitor for updates on net neutrality as more information comes to light.

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Founders’ Friday: Key IP Considerations for Buyers in M&A Transactions

In M&A transactions, buyers often assume that intellectual property (IP) rights will automatically transfer with the purchase or that any existing issues relating to the IP assets to be acquired can be cured by general representations and warranties. While getting strong representations and warranties covering IP is useful (and recommended), relying on remedies for breaches of IP-related representations and warranties can result in a failed deal or leave the buyer faced with unexpected scenarios after closing. If the target company’s IP rights are important to the deal (and they often are), then those rights must be investigated thoroughly during, and early on in, the due diligence process—in order to gain a comprehensive understanding of the IP assets being acquired and to properly ascertain the value of those assets. Failing to conduct a thorough and appropriate due diligence review of a target company’s IP prior to acquisition can lead to severely detrimental consequences. One of the most notable examples of this is Volkswagen’s acquisition of Rolls Royce, which has become somewhat of a cautionary tale.

In 1998, Volkswagen purchased the assets of Rolls Royce Motor Cars for over $700 million. Unfortunately for Volkswagen, however, ownership of the Rolls Royce trademarks was not confirmed during the due diligence process. Volkswagen closed the deal, only to later discover that the purchased assets did not include the Rolls Royce trademarks—a valuable, if not critical, part of the assets Volkswagen thought it was acquiring. In fact, those trademarks were owned by BMW, pursuant to a prior agreement that Volkswagen had overlooked. As a result, Volkswagen was left with the necessary rights to manufacture the Rolls Royce automobile, but was ultimately forced (for a period of time, at least) to market the car under the Bentley brand.

The Volkswagen-Rolls Royce transaction should illustrate the importance of conducting a thorough IP due diligence review during the course of negotiating an M&A transaction. No aspect of this review should be overlooked, but a few of the more significant are worth highlighting. Here are four of of the most common IP-related issues that buyers should consider when undertaking a merger or acquisition:

1. The target company may not own or have sufficient rights to transfer the IP assets to be acquired.

Often, the ability of the target company to continue to operate its business is heavily dependent upon ownership of, or sufficient rights to, critical patent and other IP rights. The target may represent that it owns (or otherwise has sufficient rights to transfer) the IP assets to be acquired, while in fact it does not. This will not necessarily be an intentional misrepresentation, however. Patent and other IP rights may be lost, may never properly vest in the target company, or may be significantly encumbered due to a number of circumstances—the most common of which include the following:

• the target company failed to appropriately register the IP with the applicable governmental body;

• the IP assets are encumbered by liens;
• the target failed to require its employees, agents, or independent contractors to assign rights to IP they developed using company resources;
• the target developed certain key IP jointly with another party or using government or university resources, which may restrict the transfer of that IP, mandate sharing or ownership of the IP with the joint inventors or government or university entities (as the case may be), or require payment to the relevant party in connection with the buyer’s acquisition of the IP;
• the target obtained rights to certain of its IP via an invalid assignment—for example, a trademark assignment that failed to include the express assignment of the “goodwill of the business” as required, which will typically void the trademark assignment altogether;
• the target previously assigned rights to the IP to a third party or to an affiliate of the target company; or
• ownership of the IP is shared among the target’s affiliates.

Any of these scenarios will affect the value of the IP assets to be acquired and whether the acquisition is possible at all. Thus, it is critical that the IP due diligence process include a thorough search and review of all registrations for the target’s IP assets and their chain of title, any joint or co-ownership issues, any liens or other encumbrances on the IP assets, and all assignments of the IP assets, including confirmation of IP assignments by all employee, agent or independent contractor inventors.

2. The target’s IP is subject to license or other agreements that restrict its use or transferability.

In some cases, the IP assets to be acquired in an M&A transaction will be subject to certain contractual provisions that will either limit the buyer’s ability to exploit that IP as expected or prevent any transfer of the IP altogether. The following are the most common examples of scenarios that can lead to these unfortunate results.

• the target company has granted a third party a license to use its IP, and
  • the license is exclusive with respect to a particular field of use or territory, precluding the buyer from exploiting the IP in overlapping fields of use or territories that may be key to the buyer’s business; or
  • the license is non-exclusive, but grants the licensee either an option to convert to an exclusive license or a right of first refusal in the event of a pending acquisition; or
• the target company has licensed certain IP assets from a third party, and:
  • the license grants only non-exclusive rights to the target, leaving open the possibility that competitors will hold or be able to obtain a license to the same IP, which the buyer may deem critical to the ongoing business;
  • the third-party licensor has retained the exclusive right to use the IP within a particular field or territory;
  • the licensed rights do not include the right to any improvements or enhancements of the licensed IP, which would permit the licensor or third-party licensees of the licensor to develop new versions of the IP and compete with the buyer;
  • the governing agreement requires continued payment of license fees or royalties that will be the buyer’s obligation post-acquisition;
  • the license terms do not allow for sublicensing of the IP, which may be critical to the buyer’s intended business model; or
  • the license terms expressly prohibit assignment of the license to the buyer.

It is therefore important to scrutinize all of the target company’s agreements pursuant to which an IP license is granted to or from a third party—focusing, in particular, on terms governing exclusivity, scope and fields of use, territorial limits, rights to enhancements and improvements, sublicense rights, and assignability.

3. Third-party claims may prevent or limit exploitation of the target’s IP assets.

There exist various types of third-party claims that may create significant barriers to a buyer’s exploitation of acquired IP assets to the expansion of the target’s business as planned. The scenario no buyer wants to face following an M&A transaction’s closing is the discovery that, along with the IP assets, the buyer has acquired an expensive litigation or other proceeding involving claims that the acquired technology infringes a third-party right or that the acquired IP assets are invalid (e.g., due to “prior art”). These proceedings can be devastating in and of themselves, in terms of both cost and the company time and resources they can require. But, further, they may result in the buyer’s being precluded from exploiting the acquired IP assets as expected. It is therefore critical to identify any pending or threatened infringement or invalidity claims involving the target’s IP, and to do so early on in the negotiation.

But what about potential infringement or invalidity claims that may be lurking around the corner? Though no proceedings have yet commenced or been threatened, there may still exist certain third-party rights or allegations that would ultimately block the buyer’s ability to exploit the target’s IP. Therefore, a thorough analysis of the buyer’s freedom to operate, consistent with the buyer’s operations and future plans involving the IP to be acquired, should be conducted before completing the transaction. A freedom-to-operate analysis will not uncover all potential risks, however. For example, certain third-party blocking rights may not be discoverable, or may not exist altogether, prior to the deal’s closing. These include unpublished patent rights or any reverse engineering or independent discovery by competitors of technology the target company had protected only through trade secrets. It is therefore important to consider the impact of potential risks that may not be identified in a freedom-to-operate analysis, taking into account the relevant industry, the technology underlying the IP assets to be acquired, and the target’s policies and efforts relating to protection of its trade secrets.

4. The target company’s technology may incorporate certain open source software components.

Another key IP-related consideration in M&A transactions is the use of open source software in the development of target company’s IP, which may lead to certain unexpected issues relating to ownership and licensing of the acquired IP assets, as well as compliance issues with respect to governing open source license terms.

Open source licenses typically require that any technology incorporating the licensed open source software is made generally available for free use by third parties under the same terms as the open source license. If the buyer is expecting to use the target company’s technology exclusively, then discovering that the technology incorporates open source software that is subject to such free-use rights could ultimately be a deal breaker. It is therefore critical that the buyer understand whether, and the extent to which, any open source software has been used in the development of the target’s IP assets to be acquired. And all terms of the governing open source licenses must be given thorough review and consideration during the IP due diligence process.

If the M&A deal ultimately survives the IP due diligence review, what is uncovered during the process will inform the process of drafting the purchase agreement in the deal—in particular with respect to:

• carefully drafted disclosure schedules that list the IP assets being acquired, and any exceptions to or encumbrances on that IP; and
• representations and warranties that take into account all IP-related risks discovered during due diligence, and the target’s indemnification obligations for any breach of those representations and warranties.

In sum, IP due diligence in M&A transactions can lead to a reevaluation, restructuring, or repricing of the transaction as initially proposed. It is therefore essential that the IP due diligence review is comprehensive, thorough, and conducted early on in the deal.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed, in part, by Lia Smith.

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Trademarking Marijuana Brands: Can It Be Done?

The question of whether you can trademark your marijuana related brands is one that has become increasingly common as more states move toward medical and recreational legalization.  Under the United States Patent and Trademark Office’s (“USPTO”) “Lawful Use Rule,” the use in commerce on a federal trademark registration application cannot be for an illegal purpose.  As everyone is undoubtedly aware, marijuana is still considered illegal under the Controlled Substances Act and therefore marijuana or marijuana paraphernalia related use is commerce is not acceptable by the USPTO.

Federally registered trademarks have cleared the application process by tactfully asserting a use in commerce that is not obviously marijuana related.  For instance, marks such as GOT MARJIJUANA?, I LOVE MARIJUANA, and MARIJUANA MONKEY, are registered trademarks for various types of apparel, which equates some form of brand protection.  This allows brand owners to have their foot in the door of federal trademark registration if marjiuana ever becomes federally legal.   One brand, MARIJUANA 420, is even registered for uses such as herbal molasses, hookah tobacco, and molasses tobacco.  In short, gaining brand protection is possible but not easy.

Some cannabis growers have turned to state level trademarks to protect their marijuana brand.  While state trademarks are less robust compared to their federal counterparts, they do provide some protection, which is better than none.  For instance, GGStrains, the growers behind the popular and award winning marijuana strain “Gorilla Glue,” trademarked “Gorilla Glue #4” with the states of Colorado, Nevada, and Washington, where recreational marijuana is legal.  It should be noted, however, that GGStrains recently settled with the actual glue Gorilla Glue and has rebranded Gorilla Glue #4 to GG4 and/or the Original Glue and so the validity of their registered state trademarks may be questionable now.

In the alternative of registering a trademark, cannabis businesses can always assert common law trademark rights to their marijuana products, but common law trademarks are not exceptionally strong.  However, as the Marijuana industry continues to boom it is important for marijuana businesses to establish a brand and keep records of how long they have been using it and in what capacity.  That way, when the time comes for federal registration to be available, marijuana business can be ready.

For more information on marijuana law, visit Traverse Legal’s extension website MarijuanaAttorney.Pro!

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Founders’ Friday: Five litigation tips every business owner needs to know.

Complex litigation attorney Enrico Schaefer shares five (5) tips for company founders and business owners.  Watch the video below… (transcript coming soon).

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Top 4 Legal Issues in eSports

Sports have been a lucrative industry for a long time now and so the regulations surrounding them have been well established. In this new age of technology, eSports are beginning to gain traction, and since this is such a new field it is unclear what legal issues will present themselves. Already, eSports have attracted millions of spectators and have been broadcasted online via Twitch, YouTube, and even ESPN and Fox Sports. Most notably, League of Legends has a Worlds Championship that in 2016 had 12 million more viewers than the NBA finals for the same year. With revenues growing into the billions, infrastructure being built specifically for eSports spectating, and investors getting in on the game, eSports are a rapidly growing industry that cannot be ignored. Just like any new and growing industry, there are new issues to navigate that can pose unique legal issues. Here are some to be aware of:

1. Player Representation: It is well established with traditional sports that the players have managers to help them make business deals and navigate legal situations, the case is currently not the same for eSports players. Right now, most eSports athletes are self-represented or represented by one of their family members, which leaves them fairly exposed. As a product of this, players are not being paid what they should right now, despite large cash prizes for tournaments. Formal representation would help the players get the compensation they deserve as well as level the playing field when negotiating contracts with sophisticated companies with skilled legal representation.
2. Intellectual Property: In traditional sports, leagues copyright, trademark, and license their own intellectual property, but with eSports, the IP is owned by the game publishers, studios, and commercial organizations. This can make things like marketing tricky and it will be important to make sure all of the proper permissions are obtained. Another example of this issue is that eSports athletes do not own their own avatars, which puts them under the control of the creators. Since the avatars are shown on screen and not the players, the use and popularity of the actual player’s image will take a while to gain traction in the industry. Right now, the player’s image does not have much value for sponsorship like that of other traditional athletes, but this may change with effective representation. Another IP issue is deciding whether or not a company’s ownership of a game gives it legal control over its use as an eSport. Broadcasting rights and other uses of IP will need to be carefully considered in tournaments and championships, but direct contracts between the organizers and game publishers are becoming a common way to sidestep the issue for now.
3. Gambling: Gambling is already commonplace in traditional sports, but is untested in the eSports world. It is likely that real money eSports gambling will be subject to the same rules as traditional sports gambling, but there will be unique complications. Children have much more access and anonymity in eSports, so underage gambling will be a large concern with children stealing their parents credit cards. ESports also allow for gambling for in-game items such as skins. This kind of gambling will need to be regulated so that these in-game items are not exchanged for real money. Other factors that can complicate eSports gambling include match fixing, in-game cheating, and insider information.
4. Regulation: Finally, possibly the largest issue currently facing eSports is that there is no formal body of regulation. There are some national organizations, but no global authorities yet. Without a global authority, international tournaments will be difficult due to lack of consistency in rules and regulations. Right now, individual games are regulated by the game publishers, but it will be interesting to see how national or global rules fit in once they are established. The sustainability of the eSports world is only possible if there is consensus in regulations on issues such as cheating, match fixing, and doping. There are different conversations considering a pan-regional regulatory body, national regulation, eSport-specific regulation, and tournament-specific regulation. Still others propose following traditional sports governance. Only time will sort out these different approaches.

ESports is a new and fascinating industry that poses interesting legal questions. Many issues will be resolved by following traditional sports and video game precedent. Other issues are completely unique and eSports will have to set its own precedent. Either way, it will be important to be aware of the issues and approach them with caution.

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Founders: Are Machines (AI) Legally Safer for Your Business Than Humans?

A natural part of keeping a business competitive is investigating new technologies. Amazingly, current technology includes artificial intelligence (AI), that has the ability to learn and change its responses as it gathers data over time. Currently AI is capable of serving as a virtual assistant, managing and organizing stock rooms, proofreading and editing documents, and driving cars. It is undeniable that AI will revolutionize how we do business. While adopting AI technology may be a good move for business, a prudent business owner will also consider whether relying on AI over humans will create legal liabilities? The answer will vary based on the business and technology, but the general answer, we submit, is most likely not.

1. If your business has fiduciary responsibilities to your clients: AI will likely be legally safer.

AI works faster and more efficiently than a typical human employee. AI allows your business to save time and money; benefits that will transfer directly to your client. If your business has a fiduciary responsibility to your clients, using AI to complete tasks quickly may soon become a legal duty – especially if a human performing the same task would cost exorbitantly more. However, if a task is so complex that using AI would still require a human to review the work, there may not be a fiduciary duty to implement this technology.

2. If AI will replace a human employee: AI will likely be legally safer.

For example, if AI replaces your stock room worker, there will be less legal risks for you, as an employer. AI does not have legal rights regarding wages, retirement, health plans, and working overtime. If AI gets damaged or injured as it’s moving boxes, it cannot sue you for negligence. AI does not require a working environment to meet certain safety criteria. AI cannot sue for discrimination or harassment. When it comes to legal liabilities employers face from hiring humans, AI is likely to be the legally safer option- that is until AI gains civil rights.

3. If AI makes a mistake: It depends.

There is still an open question as to whether AI will create more liability for employers if the AI makes a mistake. For example, if your business uses self-driving cars for deliveries, and the car gets into an accident, it is not clear who will be liable for the accident. If a human was the driver, the employer would be vicariously liable if the accident occurred within the employee’s scope of work. However, mistakes that occur with the use of AI may arise from either programming errors, or user errors. If the accident was caused because of an issue with the product itself, the employer may be able to shift liability onto the manufacturer. However, the law is unclear, and an employer may still be just as responsible for the accident as if a human had been driving. However, if the accident occurred based on a user error by the employer, such as putting in an incorrect address or overloading the vehicle, the employer will most likely be liable for damages because the employer’s act caused the accident.

If your business chooses to “hire” an AI machine, make sure to evaluate not only how it will help your business financially, but how it will affect your business legally. Currently, there are not extensive laws on AI, so the question of whether AI or humans will be legally safer will continue to evolve, likely at a slower pace than the technology.

 

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed, in part, by University of Texas law student Hayley Ostrin.

 

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Top 5 Legal Issues Inherent in AI and Machine Learning

In modern times, life is less about keeping up with the Joneses and more about keeping up with the Jetsons. Technology has infiltrated almost every aspect of life, to the point where a dead cellphone feels like a lost limb. With developments in artificial intelligence and machine learning, battery-dead devices will begin to feel like lost companions. Artificial Intelligence (AI) and machine learning both refer to software that can adjust how their coding reacts to input over time, as they “learn” more about the information they are receiving. From Siri to smart cars to online advertisements, artificial intelligence is currently affecting life. The full range of rewards, and risks, that arise from the use of these technologies has not been fully explored. However, there are at least five legal issues innately associated with AI and machine learning.

1. AI computes faster than Congress. Technology has been developing at the most rapid rate since the Industrial Revolution; quicker than the law can pace. So, when legal issues arise, more often than not, they are a case of first impression. Lawyers who have an AI case fall into their lap will be treading into uncharted territory, without a map, and trying cases in front of judges who may not comprehend the technology.
2. Who is at fault? If an accident involves AI, trying to find the liable party is like playing a science-fiction version of Clue. A smart car hits a pedestrian, who is the guilty party? The programmer in the office with the source code? The owner on the road with the car? The manufacturer in the lab with the testing protocols?
3. When artificial outweighs intelligence. AI often has to identify objects such as cars, or people. However, because AI relies on cameras and coding, things like contrast, color, and image density affect AI’s “thinking” much more dramatically than humans’. A person would not be likely to miss a white semi-trailer “against a brightly lit sky.” A human would not mistake a pattern of dots or lines for a starfish. AI also can reflect biases of the developer; as seen in many software programs’ tendencies to develop racial biases.
4. Humanizing robots. As technology develops, AI gets closer to actual consciousness. The United States already granted rights and legal responsibilities to non-human entities, namely corporations; it is not unfathomable robots and machines utilizing AI will be granted the same. Facebook has already created AI sophisticated enough to develop their own, non-human language. Were the civil rights of these machines violated when Facebook decided to shut them down? If AI commits a crime, can the software itself be held liable? Switzerland faced that very problem when a robot bought illicit substances online.
5. Privacy no longer exists. AI already tracks and predicts individuals’ shopping preferences, political preferences, and locations. The data accumulated and shared between these technologies has already created many controversies within the legal field. However, AI is starting to tackle more controversial subjects, such as predicting sexuality and propensity to commit a crime. Will these predictions be able to be used in trial? Or will the AI serve as experts, to be cross-examined to determine the validity of their opinions?

When it comes to AI and machine learning, there are currently more legal questions than answers. But don’t worry; robots may have legal answers for us soon enough. When they do, will we be ready to listen? Law, including AI lawyers, is but one area to be disrupted by AI.

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Founders’ Friday: The Emerging Legal Marijuana Industry

So you want to get in on the emerging marijuana industry? Despite the fact that 29 states currently allow the cultivation, sale and distribution of marijuana for medical purposes and legal recreational use in 8 other states and the District of Columbia, there remains significant barriers into the entry of this industry given that it remains illegal to grow, sell or otherwise distribute marijuana on a nation-wide basis because it remains contrary to federal law. Until federal law changes, your marijuana growing or distributing business will be limited to your state where marijuana has been state legalized, and therefore, you will have a single market for your marijuana product which cannot cross state lines. This is not to say that limiting your marijuana business to a single state cannot be a lucrative enterprise (e.g. marijuana dispensaries), however, some innovators are looking to develop businesses that support the marijuana industry, and therefore, are able to offer those products on a wider scale in all states where marijuana is or will become legalized.

For example, there are many new industries that are being targeted by entrepreneurs and investors that support the growing, distribution or consumption of marijuana and that are not illegal under federal law.   Virtually all states require a method of tracking marijuana from the growth facility through testing to transportation, to distribution and ultimately for resale in order to properly regulate and tax the marijuana product. Companies are materializing, such as bar coding and packaging companies to securely track the supply chain of marijuana. There are also industries such as LED grow lights, testing labs and kits that measure potency, and prefabricated buildings designed to grow marijuana that are able to exist because of the wider reach of their markets.

Agricultural innovators are looking for ways to grow marijuana with less water since many legalized states have water distribution issues as well as methods and products that will assists in accelerating the growth rate of marijuana products. All of these innovations and products that support marijuana growth and distribution will be available to the entire legalized marijuana market as opposed to being limited to a single state. Additionally, the European marijuana market is presently twice in revenue as the United States legalized marijuana market presently at around $67 billion annually.

Innovators in the emerging marijuana industry will look for products that support marijuana growing and distribution as those products are available to market globally rather than limited to single the state distribution as is the marijuana product itself. Of course even if your enterprise involves growing, distribution or sales and is limited to a state marketplace careful planning and establishing a brand as with any other product or commodity is the key to the success of your business.  Founders know that with early risk comes the chance for early reward, but, as a regulated industry, albeit one with changing regulations, it will be important to understand and navigate legal issues facing your business.

Ultimately, founders looking to participate in the legal marijuana industry must know the following:

1. What regulations apply to your marijuana business
2. Is your marijuana business legal, considering state, international and potentially federal laws
3. How do you best structure your marijuana business in order to mitigate your legal risk and maximize your revenue potential

 

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed by Traverse Legal marijuana attorney Mark Clark.

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Establishing Patent Venue

The Federal Circuit. recently rejected the patent venue test established by Judge Gilstrap of the Eastern District of Texas.  The three-judge panel found that Judge Gilstrap applied an incorrect legal standard in Raytheon Co. v. Cray Inc. when he refused to transfer the patent suit after applying his own test and determining that Defendant Cray maintained a “regular and established place of business” in the district where only one of its employees worked from home.  The Federal Circuit, though, ordered the case to be transferred to a different district.

 

In its decision, the Federal Circuit set forth three general requirements to determine where a defendant maintains “a regular and established place of business” including: (1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.

 

Applying its own test, the Federal Circuit found that Defendant Cray’s employment of one sales representative who worked from home in the district was insufficient to establish proper venue when Cray did not store, display, distribute, or manufacture materials from this location and had no involvement in selecting or paying for the location in the district.  As such, the Federal Circuit found that Defendant Cray fails to maintain a regular and established place of business.

 

In light of the Federal Circuit’s rejection of the Gilstrap test and narrowing of the patent venue standards, we foresee a significant decrease in the number of patent infringement cases filed in the Eastern District of Texas.  Due to the fact that patent infringement suits can only be filed where a defendant resides or where a defendant has committed acts of infringement and has a regular and established place of business, other districts will most likely experience a significant increase in patent infringement cases.

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Four Thoughts Before Bringing a Trademark Infringement Lawsuit

Once you have determined that your trademark is likely being infringed, there are a few different enforcement options you can pursue.  A cease and desist letter is typically the most cost-effective option, but particularly egregious instances of trademark infringement can often call for initiating a lawsuit.  Before you decide to jump in to trademark infringement litigation, here are four things you should consider:

(1) Know Your Business Model and IP Rights

To be successful in a trademark infringement lawsuit you need to be thoroughly acquainted with your business model and intellectual property rights.  You will need to have proof of not only your registered trademark(s), but know important dates such as your first use in commerce of the trademark.  Were you using your trademark before the alleged infringer? Has your trademark registration ever lapsed? Have you ever assigned – or been assigned – your trademark rights?  How much do you spend on marketing related to your trademark? Have you experienced instances of confusion between your trademark and the mark of your potential infringer? These are all things you need to think about prior to initiating a trademark infringement lawsuit.

(2) Trademark Litigation is Expensive & Time Consuming

Trademark infringement lawsuits can cost on average anywhere between $120,000 to $750,000 depending on the complexity of the case.  During the pendency of the lawsuit, you are responsible for paying your Attorney’s monthly bills.  While recouping Attorneys’ Fees from the other side is possible, these fees are not awarded until the end of the case.  Further, trademark litigation can take years to resolve, especially if the dispute is highly contentious.

(3) Be Realistic With Your Goals

Even if you win your trademark infringement lawsuit, the Defendant is not always capable of paying money damages awarded at the end.  If the Defendant is insolvent, i.e. not collectible, you may have spent those expensive Attorney’s Fees referenced above for no reason.  Before diving into trademark infringement litigation, ask yourself what you would be willing to settle for.  A certain dollar figure? The infringer ceasing use of your trademark? Knowing your bottom line will help you throughout the litigation process if the prospect of settlement ever occurs.

(4) Hire an Experienced Trademark Attorney

To ensure the most effective representation and smoothest process possible, you will want to hire an Attorney who is experienced in trademark litigation.  An experienced Attorney will be able to provide insight to the validity of your case and advise you of strategy every step of the way.  If you are going to pursue trademark litigation, having a skilled Attorney on your side is worth the investment.

If you think that your trademark has been infringed and would like to discuss your options related to litigation or otherwise,  contact a Traverse Legal Attorney today.

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Founders’ Friday: Key Considerations for Startups When Negotiating Your Commercial Lease

For any company, negotiating a commercial lease on the tenant side is a complex process. For startup companies, however, there are certain issues that will be of greater importance than for the typical commercial tenant. The needs of startup and technology companies can differ significantly from those of larger, more established tenants—in particular, because they have enormous potential for growth and innovation, but with timelines that are nearly impossible to predict at the outset (i.e., when searching for and securing a “home”). As a result, the typical standard-form lease, which tends to be highly landlord-favorable, is likely not appropriate for the particular circumstances of most startups. This usually means startup founders will find themselves involved in a lengthier, more complex negotiation process than they expected. Here are some of the key considerations startup founders should focus on during that process:

1. Permitted Uses.

A startup tenant’s business plan or other requirements may change significantly during a relatively short timeframe, forcing the company to change directions, which can often mean putting the leased premises to a new use. In a commercial leasing context, permitted uses are those activities that a tenant is expressly allowed to engage in at the leased premises. Typically, these lease clauses are drafted narrowly to favor the landlord, and there may not be significant room for founders to negotiate. For startup tenants, however, broad permitted use clauses are worth the extra negotiating effort, as they will allow greater flexibility for continued growth and development—which may happen in ways the founders did not anticipate when they had their first seedling of an idea. At the broadest end, startup founders should negotiate for a permitted use clause that allows the premises to be used for “any and all legally permitted uses.” If the landlord will not agree to such a broad definition, the next step is to negotiate for broad categories of uses—making an effort to encompass any future uses the company may reasonably envision expanding into in the future.

2. Preferential Rights.

Given the potential for rapid, exponential growth that is so characteristic of startups, preferential rights should be a key focus of founders when negotiating a commercial lease. Preferential rights in a lease are those rights that favor the tenant over a third party. For startups, the most important of these rights are expansion rights and purchase options, each of which provides additional flexibility for the tenant and can play a critical role in enabling a startup to grow without interruption or delay, while avoiding potentially enormous relocation costs.

A purchase option gives the tenant a preferential right to purchase the building where the leased premises are located. Expansion rights (or options for additional space) are usually valuable to tenants who anticipate needing more space because of their company’s projected growth. Expansion rights allow tenants the option to expand into adjoining premises in the building where the leased premises are located, typically as the additional space becomes available. Landlords prefer not to grant tenants purchase options or expansion rights, and successfully negotiating either requires significant bargaining leverage, which the typical startup may be lacking initially. Sometimes, however, landlords will use these preferential rights to incentivize a desirable tenant to enter into a lease—something the startup founder should keep in mind during lease negotiations.

When a landlord agrees to grant a tenant preferential rights, the option can be structured in several ways. For the startup founder, there are several key considerations to keep in mind here—including:

• Option term: Preferential rights can be structured as a one-time right (e., it is triggered upon a definitive event and the tenant has a limited time within which to exercise the right) or an ongoing right (i.e., the tenant may opt to exercise the right at any time during the term of the lease). With ongoing rights, even if a tenant declines to exercise its option upon any particular offer by the landlord, the landlord will be required to reoffer the option to the tenant throughout the term of the lease. In particular for startups, whose circumstances may fluctuate continually, structuring a preferential right as ongoing has the potential to provide a significant benefit.
• Time periods: Preferential rights are generally drafted to include precise time limits for exercising the option after receiving an offer by the landlord. The startup tenant should ensure sufficient time to adequately consider the offer, taking into account several resources—including any required internal approval procedures and time to secure necessary capital.
• Alternative protection—termination rights: If the landlord will not agree to any preferential rights, the startup tenant may find itself with additional leverage to, and should, demand early termination rights (see the discussion of “Early Termination Rights” below).

3. Specialty Alterations.

Startup companies have become known for offering specific amenities aimed at attracting specialized employees—and retaining them. Founders should therefore keep in mind their particular business needs when negotiating lease provisions relating to leasehold improvements. The alterations clause in a commercial lease outlines the tenant’s rights and obligations when undertaking any improvements to the leased premises.

When negotiating an alterations clause, startup tenants should expect the landlord to require consent before certain improvements can be made. Landlord consent rights can be especially restrictive with respect to specialty alterations—those that are unique to the tenant’s business and not likely to be used by a successor tenant (e.g., that climbing wall that’s going to attract your next big designer). Startup founders should therefore negotiate for a narrow definition of “specialty alteration” in the lease, in order to limit the scope of landlord consent required. Ultimately, though, founders should evaluate the relative value of their desired improvements in order to prepare for a compromise with respect to allowing the landlord consent rights for the lower-priority alterations. Keep in mind, as well, that commercial leases will typically obligate the tenant to remove any specialty alterations at its own cost and expense at the end of the lease term.

4. Protection of Intellectual Property and Proprietary Information.

For any company, intellectual property and proprietary information are two of its most valuable assets. For the startup tenant, protection of these assets can be of heightened concern as the company tries to establish itself among (or ahead) of its competitors. Founders should therefore consider negotiating to include within their commercial leases certain security-related requests—including, for example:

• required security protocols for all visitors;
• closed-circuit television monitoring of all entrances and exits;
• advance notice before any entry by the landlord other than in an emergency;
• execution of a form non-disclosure agreement before third parties are permitted access to the premises; and
• the right to remove any alterations containing its intellectual or proprietary property.

5. Exit Strategies.

Whether their startup has grown out of its childhood home or switched directions in a way that requires a different space, founders often find themselves negotiating to get out of their existing commercial lease. To that end, absent a contractual breach by the landlord that confers a termination right under the lease, founders can negotiate for assignment and subletting rights or the right of early termination (or both).

Assignment & Subletting. Given the startup company’s potential for rapid growth and future acquisition, assignment and subletting rights can be a highly valuable tool for founders. An assignment transfers a tenant’s entire leasehold interest for the remainder of the lease term to an assignee. A sublease transfers all or part of the premises for potentially less than the full term of the lease to a sublessee. When negotiating for either of these rights, startup tenants should try to secure the ability to assign or sublet the premises without the landlord’s consent. This is one of the most heavily negotiated points in a commercial lease, however; and landlords are generally reluctant to agree to such a term. The most typical compromise is to require that the landlord cannot unreasonably withhold its consent to any assignment or sublease, and startup tenants should negotiate for such a consent standard, at a minimum.

In addition, it is important to pay attention to whether a change in control of the tenant (e.g., a change in ownership of the tenant or its parent entity) will be deemed an assignment under the lease. For the startup tenant, a corporate acquisition may be the ultimate goal or an eventual necessity. Ensuring the flexibility to complete a corporate structure change or acquisition highlights the importance of negotiating for tenant-favorable landlord consent requirements in assignment and subletting clauses. Ideally, a change in control or sale of the tenant company will be included as a “permitted transfer” under the lease, so that these transactions do not require the landlord’s consent or qualify as a tenant breach.

Early Termination. Even when a tenant is able to secure assignment or subletting rights and a new tenant has been found (and consented to by the landlord, if required), the landlord will most often continue to hold the existing tenant primarily liable for its obligations under the lease for the remainder of the lease term. Further, startup companies may not be in a position to devote the resources required to identify a new tenant and negotiate an assignment or sublease agreement. For this reason, an early termination right is a highly attractive alternative for founders. An early termination right allows a party to a lease to cancel the lease before the expiration of the lease term. This right can be hugely beneficial for a tenant whose landlord cannot adequately accommodate the growth of its business—and, therefore, especially valuable to the startup tenant. Early termination rights are not easily negotiated, however; and they will typically be coupled with an early termination fee or penalty of some sort. But startup tenants can, and should, negotiate for lease terms that minimize these expenses such that an early termination may remain a valid option under the right circumstances.

In short, negotiating a commercial lease is never a simple process. Throughout this process, however, the startup founder will generally benefit from focusing on those lease provisions that may affect the startup’s ability to grow and develop its business—both in the short- and the long-term.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed by attorney Lia Smith.

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Court Ruling Aids Anonymous Online Posters in California

On July 21, 2017, California’s First District Court of Appeal issued a published opinion in ZL Technologies v. Does 1-7 (July 21, 2017) 2017 DJ DAR 6999. In its opinion, the Court established new hurdles for parties to establish the identities of online posters of defamatory statements. This decision will impact those individuals or companies who file defamation lawsuits in California against anonymous authors known as “John Doe” lawsuits, which are lawsuits against unknown posters and which seek the identity of the anonymous poster.

When an anonymous individual posts defamatory material online the victim must file a John Doe lawsuit seeking first the identify of the poster in order to pursue its claims for defamation or other wrongs committed against the individual or business bringing the claims.

IN  ZL Technologies, anonymous individuals posted allegedly false statements in a review about their former employer on Glassdoor.com, an employee review website. After the lawsuit was initiated the Plaintiff employer subpoenaed Glassdoor to obtain the posters’ e-mail addresses and other identifying information so the employer identify and name the posters by name in the lawuit as defendants. Glassdoor opposed the subpoenas on behalf of the posters to preserve their anonymity even thought Glasssdoor itself was immune from liability under Section 230 immunity under the Communications Decency Act.

Although the Court of Appeal permitted the Plaintiff employer to proceed with its efforts to discover the identities of the anonymous posters, it attempted to impose a balancing test between the Plaintiff employer’s interest in pursuing a defamation claim and the posters’ interest in remaining anonymous. It held that litigants seeking to subpoena websites to determine the identities of anonymous posters must first (1) give notice of the subpoena to the posters (through the website) so the posters can fight the subpoena; and (2) must establish a prima facie case of defamation on par with that necessary to defeat an anti-SLAPP motion. Although several other states have suggested this test it has not been adopted until now in California.

The ruling is a significant victory for review sites such as Yelp and Glassdoor whose review model depends upon the anonymity of reviewers posting reviews, and will impose additional hurdles on those attempting to identify and pursue claims against those who post defamatory material online in California.

 

 

 

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Founders’ Friday: Top Things to Know as a Blockchain Founder

Blockchain, Cryptocurrency, Bitcoin, Ethereum, Smart Contracts…all of these surely make the ears of eager founders perk up.  Rightfully so, as Blockchain Technology has been considered the next big thing, destined to revolutionize the Internet and how transactions occur.  Opportunities abound, including in stock market trades or other financial transactions, including lending, land registry, smart contracts, supply chain, e-voting, insurance, asset management, healthcare, music, government, etc.

Before going any further, let’s all make sure we understand Blockchain transactions.  Generally speaking: (1) a user requests a transaction; (2) that transaction request is broadcast through a network of node computers for validation via algorithms; (3) upon verification, the particular transaction is added to the ledger, which contains a block of data for each prior transaction; and (4) the blockchain is updated permanently, without the ability to change it, and the transaction is complete.  It is decentralized, verifiable and incorruptible (theoretically).

So what should you as the founder of Blockchain business know?  Wherever you may fall within Blockchain Technology and its use in your business, you should be aware of some things:

1. ICOs (Initial Coin Offerings) are a Funding Option.  While Ethereum has made ICOs all the rage, and an ICO may be a viable way to raise capital for your business, you must understand that ICOs pose risk.  ICOs are increasingly on the SEC’s radar, including being the subject of an Investor’s Bulletin. Be mindful of the ever-changing landscape of regulations, which may impact whether traditional fundraising or crowdfunding may be preferable.
2. Beware of Humans.  While smart contracts allow for automatic execution when specific conditions are met, they are coded and thus require human creation.  This means human error is possible, which means the risk of liability remains.  In addition, while it is true that with no central point of failure and being secured using cryptography, Blockchain applications are considered safer from hacking and fraud, hacks have occurred, including the famed DAO Hack, which ultimately modified how Ethereum operated once the hard fork, or change in the code, was implemented.  Typical considerations involving indemnification and limitation of liability should be considered in all relevant contracts.
3. Intellectual Property Ownership.  Consider your intellectual property and whether you can claim exclusivity to your works, particularly in light of the fact that it exists in the distributed public Blockchain network.  Patents have been filed and more will follow.  Just like any business, you must consider your intangible property (brand, code, methods, works of authorship, etc.).
4. Resources are Scarce.  Blockchain developers are fetching a pretty penny these days.  Surrounding yourself with the proper team and ensuring your employment agreements (including non-competes) are enforceable will be important.
5. Lots of Unknowns with Inevitable Disputes.  Whether it is the Blockchain’s impact on data privacy or questions surrounding legal enforceability of smart contracts, many areas of law will be developing alongside the Blockchain.  As we saw with the explosion of Internet law, advising clients with limited or no legal precedent will be an ongoing challenge.

As with any early adoption, risk abounds, as does opportunity.  Understanding how to navigate the Blockchain, both practically and legally, will likely be required of all founders in the coming of what some are calling Web 3.0, regardless of whether you are operating a Blockchain business.

Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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Founders’ Friday: Top Things to Know as a SaaS Founder

The definition of a founder is “one that founds or establishes.”  Extrapolating from there, a SaaS founder is one that founds or establishes a software delivery model in which software is provided on a subscription basis and centrally hosted.  In simpler terms, it is any founder running a business that involves software as a service (SaaS), platform as a service (PaaS), infrastructure as a service (IaaS), or most things provided via cloud computing (aka the cloud).  As a SaaS founder, there are several things you should be aware of as you embark upon and progress through operating your SaaS business.  Here is a list of the Top 3 things to know as a SaaS founder:

1. A software license is different than a software as a service subscription agreement.  If you are truly running a SaaS company, you are not making software available for purchase or download.  Instead, you are providing authorized users access to the software via the cloud.  Your customer agreement should include subscription service terms rather than software license terms.  Even lawyers can confuse the two, particularly where clients are not certain about their business model and offering.
2. SaaS requires subscription pricing instead of perpetual pricing.   Whereas traditional software licensing carries with it a perpetual license to that which is purchased (with the option to upgrade), SaaS requires renewed subscription in order to maintain access, including access to services.  While perpetual may have been best for the business, customers more often than not are demanding SaaS these days.  This not all bad for business, this means customers are willing to pay recurring subscription fees, which means a SaaS founder can calculate MRR better, use it to raise capital and ultimately have quality data point for calculation of a multiple upon exit.
3.  Successful SaaS companies require ongoing infrastructure, including quality people.  Unlike a traditional software license that is sold without the requirement to provide ongoing service (absent a separately purchased support plan), SaaS requires hosting in the cloud and provision of services, including maintenance, backup and security (though read the fine print) by the company.  When updates are made to a SaaS product, customers automatically get those and access to the necessary people to ensure uninterrupted usage.  The software development lifecycle is thus front-loaded while a SaaS subscription is spread out over time.  SaaS founders must plan (and budget) accordingly.

Bonus 4th Thing to Know as a SaaS Founder: SaaS subscriptions will likely be a major part of your company operation.  Whether it is SalesForce to manage leads and prospect, Slack or Skype for internal correspondence or Dropbox for file storage or an array of others (e.g. Amazon Web Services or Microsoft Office 365), be sure to manage your subscription-based assets.  Software asset management solutions (which may also happen to be a SaaS subscription) can help identify your subscriptions, control costs and manage them.

Make no mistake about it, from startups to the biggest businesses around, SaaS continues to dominate.  A founder should know the business, or at least surround him/herself with those that do.

Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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#FTC Compliance Coming to #Instagram

Popular social media outlet Instagram is a known for tastily inserting (obvious) advertisements into users’ feeds, but has also become a breeding ground for influencers, such as celebrities, who post glamorous shots adorned with products from various companies.  Previously, it could be impossible to know which of these influencers were just product enthusiasts or actually getting compensated for their plug unless influencers willingly inserted the #ad or #sponsored hashtags into their post.  Now, Instagram will be rolling out a new tool that would allow influencers to tag their paid posts with “Paid Partnership,” along with the name of the advertiser.

Instagram’s new tool is aimed at establishing compliance with the Federal Trade Commission’s (“FTC”) advertising guidelines, which require advertisers to “clearly and conspicuously disclose either the payment or promise of compensation prior to and in exchange for the endorsement.”  Along with the tool will come enforcement policies to ensure acquiescence with the FTC guidelines.  Before this tool, a study estimated that over 90% of Instagram’s top 50 celebrities had violated the FTC guidelines in regard to sponsorship disclosures, with the FTC recently sending ninety (90) influencers notices related to violating these guidelines.

For example, Scheana Marie, a star from Bravo’s hit series Vanderpump Rules, frequently posts about products on Instagram.  In a recent post, Scheana displays herself wearing sunglasses from Diff Eyewear, along with a product code to receive a discount.  Note that no advertisement disclosure is present:

In another post, Scheana dons a Detox face mask which clearly includes the #ad hashtag:

Scheana is arguably an influencer for both of these Instagram posts, but only disclosed that one of her posts was an advertisement.  Hopefully this new tool helps to clear things up for both influencers and their followers as well.

Instagram’s “Paid Partnership” tool has only been released to a limited number of businesses, but is set to be available to all users soon.  If you are a company utilizing influencers, or are an influencer yourself, on Instagram and want to make sure your posts are legal under the FTC Guidelines, contact a Traverse Legal Internet Attorney to explore your options.

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Founders’ Friday: How to Prioritize Legal Spend

As you launch your start-up, there are so many things competing for your limited dollars.  Whether it is marketing and advertising (e.g. Facebook Ads), website design (including mobile), product development or employee/independent contractor costs, every penny counts.  So how are you supposed to set your legal budget and prioritize your legal spend?  This is particularly true when you are bootstrapping.  Even if you are financed, your investors want quality legal work for a reasonable fee.  Whatever your situation, a legal budget is a prerequisite and prioritization of your legal needs is an absolute must.  Don’t trust me as a lawyer saying it?  Ask a fellow founder.

Just as you must decide how much and where to spend advertising budget, there are many aspects that should be considered when determining the amount for your legal budget and the necessary legal spend items.  An experienced startup or entrepreneurial lawyer can help prioritize legal needs and advise you regarding legal spend, even before you spend your first legal dollar.  A one size fits all “startup package” may not be best for you, despite so may firms beginning to offer the same these days.

My firm has prided itself on curated legal services.  What does this mean?  Rather than providing template documents that may not be applicable (e.g. Proprietary Invention Assignment Agreement where nothing has been done at the time of formation of the entity or an Advisor Agreement that may never be requested or required), the process focuses on the startup and understanding its immediate and long-term goals.  From there, a curated startup package that can provide immediate return on investment (ROI) becomes clear, which may include, among other things, items from the following:

1. Incorporation/Formation – entity type, equity structure and ownership/control
2. Intellectual Property – applicable IP (e.g. patent, trademark, copyright, trade secret)
3. Agreements – customer (e.g. EULA), employee/independent contractor, supplier/manufacturer and other agreements
4. Financing – debt/equity structures
5. Policies – content, BYOD, employee, etc.

So how does it work in practice?  A couple examples are illustrative.  First, a recent SaaS startup that was not initially planning to do a financing came to me, and I recommended the following: Multi-member LLC with equity and ownership reflective of the co-founder arrangement, a Pilot Agreement with NDA for initial beta users, a Software as a Service Agreement for customers and a service mark with the United States Patent and Trademark Office (USPTO) in order to protect the brand.  A patent, provisional or otherwise, was not going to be helpful here.  It was all done on a flat fee.

In another example, a software and operating system related to logistics startup required incorporation in order to secure initial financing from institutional investors, a EULA mindful of the license provided by a university and a provisional patent application.  I identified an initial fee and alternative fee arrangement moving forward.  In both situations, there were additional legal items the company needed, but the initial legal budget would not allow for it.  Therefore, we focused on prioritization and working within the initial budget.  As revenue comes in, additional legal spend will make more sense, thus ensuring ROI.

It is worth noting that I regularly encounter founders, typically first-time founders, who try to project a minimalist legal budget in hopes of getting some free legal work.  They often cite competing “startup packages” that provide them incorporation, a trademark application and a website terms of use, or something similar.  While all those items may ultimately be necessary, and apply in some situations, I always challenge the entrepreneur in order to understand why those items are needed now or prioritized over other items.  Oftentimes, an educated entrepreneur with respect to the scope of legal needs depending upon business type, industry and goals will ultimately see the value in a prioritized legal budget.  I push back, not because I am interested in higher fees but in order to help the founder understand the scope of the legal need, estimate a realistic legal spend and ultimately prioritize those legal needs.  If I ultimately am going to offer alternative fee arrangements, I first make the founder aware that my doing so, akin to any investor, depends on the founder and the startup business itself.

In the end, a successful startup will ultimately be able to secure the “nice to have” legal items.  Before then, however, founders should be wary of any advice, legal or otherwise, or service offerings that fail to prioritize, for example, a trademark for a lifestyle brand business or a Privacy Policy for a online data aggregation business.  A smart founder does not knowingly advertise to the wrong demographic.  Similarly, I submit, a smart founder should not spend on legal matters that do not provide an ROI, now or in the future, particularly when compared to other legal needs.

Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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Founders’ Friday: You’ve exited, time for some Fun(d)!

Congratulations! You successfully exited your startup. You are loaded with cash (hopefully) and already contemplating the next venture to sink your teeth into. You’ve likely asked yourself, what should I do now? Retire to a beach and live the rest of your life drinking coconut water out of actual coconuts and having fun? No, you didn’t get to where you are by sitting around on a beach all day. The novelty will wear off, and you can always go on a nice long vacation as you wish. Having worked with startup executives and founders, and recognizing “the kind,” you probably want to take your shekels and make them grow. Funds may be for you.

So, while we can all agree now that you’re not retiring, now what? Start another company? Knowing how much you put into your last venture, you may not be ready to dive back in and do it all over again. So where does that leave you, besides with lots of free time and lots of capital? One option is going to traditional route of growing your wealth: giving your money to a financial planner (they usually take an annual fee of 1%) and earning 4-10% over a long period of time. That sounds easy enough, but let’s face it, you didn’t acquire your capital because you went the traditional route. You’re a risk-taker, a dreamer, a doer, a founder, a creator, a leader and an entrepreneur. You want to find something that utilizes your skill and expertise and provides for big return on your investment. Here’s an idea, you can help other founders get their visions off the ground by investing in early-stage startups. You’d be able to maximize your investment, pass on your knowledge and give back to the community that helped foster your success. Sounds like a win-win, no? Admittedly, it is your call, and deservedly so. Nonetheless, let’s evaluate some of your options for investing in other startups:

1. Invest Directly into Startups

This is a good option if you are looking for a low-cost way to invest in startups. I would recommend creating a single member limited liability company or even series limited liability company and make investments through this vehicle to provide yourself liability protections. However, in this scenario, you’d be responsible for finding your own startups to invest in, doing all of your own due diligence, and taking on all the risk. On the plus side, you’d be reaping all the benefits and not paying any fees to investment managers. If your goal is to make a few smallish investments in a handful of new ventures and you have a good sense of opportunities, this may be a good option for you.

Attorney Tip: Talk to a startup attorney and executives in the space who can give you some further perspective on companies and industries with which you may not be as familiar.

2. Invest in a Private Equity and/or Venture Fund

This is a good option if you want to be hands-off (like with a financial planner) but give yourself the opportunity to make “alternative investments” (investments in private companies that are not available on the traditional market). In this scenario, you’d be giving your money to an investment advisor who would then be pooling your money with other investors and investing in multiple portfolio companies. Private equity funds typically invest in more established companies who are raising later-stage financing, preparing to go public or looking to get bought-out. A typical PE Fund will raise money for a year, invest that money for 3-5 years and then spend 3 years exiting those investments. A Venture Fund is going to make investments in earlier-stage companies and will have similar hold periods to the PE Fund. The typical economic structure of a private fund is as follows: investors get a return of their money, then a preferred return of 6-10% and 80% of the profits after that. The fund manager/sponsor will typically receive a 1-2% management fee on assets under management and take an incentive allocation of 20% of the profits.

Attorney Tip: It is imperative that whether you are making investments directly into startups or through a private fund, you have an experienced attorney review all disclosure and investment documents, including the private placement memorandum (PPM), limited partnership agreement and subscription documents.

3. Sponsor your own Private Equity or Venture Fund

If being hands on is more your speed, which is likely, but starting another company isn’t the right decision now, you could always launch your own Private Equity or Venture Fund. Some benefits of sponsoring your own fund include: (1) the ability to have others invest alongside you; (2) making the asset management fees instead of paying them; and (3) getting a return on both your investment in the fund and the incentive allocation you’d receive as the fund’s sponsor. The downside is that you probably don’t know what you’re doing and will need to be educated on the process. But, if investing alongside friends, family, colleagues and other founders appeals to you, then sponsoring your own fund makes a lot of sense.

Attorney Tip: An experienced fund attorney can walk you through the entire process and handle all regulatory and compliance needs.

If none of those options are appealing, then maybe beach life is the right call. Otherwise, seek the advice of experienced corporate counsel to help you navigate your options post-exit.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed by startup and corporate attorney Stephen M. Aarons.

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ESPN’s UDRP Complaint for NotSportsCenter.Com Fails

On June 6, 2017, ESPN filed a Uniform Domain Dispute Resolution Policy (“UDRP”) complaint with the National Arbitration Forum against the owner of NotSportsCenter.Com.  As the owner of the registered trademark SPORTSCENTER (Reg. No. 1627702), ESPN sought to have the NotSportsCenter.Com domain name transferred to their possession.  Unfortunately for ESPN, they were unable to establish that the NotSportsCenter.Com domain name was being used in bad faith.

To succeed on an UDRP claim, the complainant must establish that the domain was registered in bad faith, evidence of which can include registering the domain primarily to sell it to the trademark owner; registered the domain in order to prevent the trademark owner from using it; registering the domain to disrupt the business of a competitor; or using the domain name for commercial gain by creating a likelihood of confusion with the trademark owner’s mark.

The UDRP panel here found that no bad faith was present because NotSportsCenter.Com “does not attempt to disrupt [ESPN’s] business, as it offers parody material regarding sports, and does not purport to keep users from visiting [ESPN’s] website.”  Additionally, the UDRP panel found ESPN’s delay in bringing the complaint (six years after NotSportsCenter.Com was created) was material in denying the transfer as well.

Before jumping into a UDRP complaint to regain a domain you believe to be rightfully yours, be sure to consult with a Traverse Legal attorney first.  We can provide a preliminary assessment so that you can understand your chances of success — particularly whether bad faith exists — before you file a complaint.

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Founders’ Friday: Is my Business Legal?

Is my business legal?  This is a question I get all of the time, both at the idea/infancy stage of a business as well as later on as a business iterates over time by offering new products or services.  So, let me give you the quick answer: It Depends.  No, that is not a cop out answer, it is the truth.  Why you might ask, well, because I need to know, at a minimum, the following:

1. What is your business (i.e what product or service are you offering)?
2. Are you operating in a regulated industry (e.g. banking, insurance, pharmaceutical and health, tobacco and alcohol, real estate, etc.)?
3. What specifically are you looking to accomplish (e.g. manufacture a product without infringing a patent, email prospective clients with a marketing campaign, brand a new service and advertise it, post a website comparing your services to that of a competitor, sell aggregated data about your customers, conduct an online sweepstakes, post an endorsement/testimonial via social media, etc.)?
4. What is your risk tolerance, especially when considering what the potential upside could be versus potential legal disputes/liability.

Once I have this kind of information, I am in a position to, as they say in law school, issue spot.  Put another way, I can identify what area of law is implicated by what you are looking to accomplish for your business and, knowing that, educate you about the legalities (e.g. intellectual property laws, privacy laws, truth-in-advertising, etc.) involved so as to provide recommendations/advice.  More often than not, your business or idea is not entirely unique and there is either precedent to provide advice or an ability to draw upon experience in similar situations to provide guidance.

It is rare that an entire business model is illegal (enter the exception of Napster).  However, it is entirely possible that an aspect of the business may be “illegal.”  Regardless, the question should be: “Would this business idea subject me to a credible claim for liability, and if so, how can we mitigate or eliminate that while still allowing my business to accomplish its goal?”  With both the business owner and attorney focused on this question and methodology to arrive at an “answer,” the attorney-client relationship as well as the well-being of the business should be improved.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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URS vs. UDRP: What is the Difference?

As an alternative to the Uniform Domain Name Dispute Resolution Policy (“UDRP”), the Internet Corporation for Assigned Names and Numbers (“ICANN”) introduced the Uniform Rapid Suspension System (“URS”) in 2013, which serves as more streamlined and less expensive approach to recover a cybersquatted domain name.  After several years following the implementation of the URS, the UDRP remains the preferred option based on the number of filings for each.  However, what process is right in your case will depend on the specific variables particular to your case.  Let’s review some of the differences between the URS and UDRP processes.

The URS is limited to “new” generic top-level domains (“gTLDs”) following ICANN’s 2012 application process, which does not include many common gTLDs such as .com or .net. The exceptions to this are the domains .travel, .cat, and .pro, which have adopted the URS in renewals of their registry agreements. Only two country codes, .pw (Palau) and .us (United States) have adopted some variation of the URS. While both the URS and UDRP are options for these “new” gTLDs, the UDRP is the only option for the older “legacy” gTLDs.

The burden of proof under the URS procedure is tailored in such a way that only the clearest, open and shut cases of cybersquatting are guaranteed. The “clear and convincing evidence” and “no issue of material fact” standard requires trademark owners to prove that the registered domain name is identical or confusingly similar to a word mark:

(1) for which the complainant holds a valid national or regional registration and that is in current use; or
(2) that has been validated through court proceedings; or
(3) that is specifically protected by a statute or treaty in effect at the time the URS complaint is filed.

Additionally, trademark owners must prove the registrant has no legitimate right or interest in the domain, and that the domain was registered in bad faith.

Under the URDP procedure, the standard is more relaxed and only requires trademark owners to show that is more likely than not the domain was registered in bad faith and with no legitimate right or interest from the non-trademark holder.  On top of the high burden of proof, trademark owners in a URS proceeding are limited to a small 500 word-count explanatory statement, making it difficult to meet the burden of proof with limited space to craft factual and legal arguments. In contrast, URDP proceedings allow for a complaint of up to 5,000 words, with options to correct inadequacies, and allow supplemental findings, while no such provisions exist under the URS. Additionally, the URS requires that unregistered trademarks are not protectable unless they’ve been validated in court proceedings or protected by a statute, whereas URDP proceedings are accessible to common law trademark holders.

When selecting whether to proceed under the URS or UDRP, the effectiveness of the remedy is a top consideration for registered trademark holders. Even if a trademark owner meets the high standard required to satisfy the URS, the remedy may not be considered adequate. The URS only allows for suspension of the domain name for the remainder of the registration period, with an option to extend the period by a year. Once the registration expires, the domain is again up for grabs, potentially allowing another cybersquatter to claim the same domain, which starts the process over again. Decisions are also subject to appeal to a URS panel for up to 6 months, with an option for an additional 6 months available, which can potentially lengthen the “speedy” option. Under the UDRP, a successful trademark owner can have the domain registration either transferred to their control, or canceled, with appeal to a federal court under the Anti-Cybersquatting Protection Act (ACPA) being the only way to continue the dispute.

Despite the price difference (URS proceedings start at almost $1,000 less than UDRP proceedings) and time different (URS decisions typically take seventeen days versus two months under the UDRP), many domain registrants still find the UDRP to be the best option for attempting to resolve domain dispute cases.

If you have questions about whether the URS or UDRP is right for your cybersquatting issue, contact a Traverse Legal attorney today to discuss your options.

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Revenge Porn Laws By State

Revenge Porn is commonly defined as the sexually explicit pictures or video shared on the internet without consent, through any medium, including uploading them onto websites, social media, or sending them via text message or email. Often times, an ex will post or share intimate photos or videos shared with the purpose of harassing or embarrassing the other person. With this growing phenomenon, states are beginning to enact laws to combat revenge porn. Thirty-Seven (37) states and Washington, D.C. now have revenge porn criminal statutes, which are summarized below.

Alaska
Classifies revenge porn as harassment, which is a misdemeanor, punishable by a fine of up to $2,000, and/or up to 90 days in Jail.

Arizona
Establishes that revenge porn is a felony, and punishable by up to three years and nine-month state prison term. Threatening to distribute revenge porn is a misdemeanor and punishable by up to six months in jail, three years of probation, and/or a fine of up to $2,500.

Arkansas
Establishes that revenge porn is a misdemeanor and punishable by up to one year in Jail, and a fine of up to $2,500.

California
Classifies revenge porn as disorderly conduct, which is a misdemeanor punishable by up to 6 months in jail, and a fine of up to $1,000.

Colorado
Establishes revenge porn as a misdemeanor, and punishable by six to eighteen months in jail, and/or a fine of $500-$5,000. In addition, the court may fine the defendant up to $10,000, which goes directly to the Colorado crime victim compensation fund.

Connecticut
Defines revenge porn as voyeurism, which is a felony punishable by a state prison term of one to five years and a fine of up to $5,000 for the first offense and for subsequent offenses or those involving a victim under the age of sixteen, it is a felony punishable by a state prison term of one to ten years, and a fine of up to $10,000.

Delaware
Classifies revenge porn as a violation of privacy, which is a misdemeanor punishable by up to one year in jail and/or $1,000 in fines. With some aggravating circumstances, this can become a felony punishable by a two-year state prison sentence and/or a fine of $500-$2,000.

Florida
Establishes revenge porn as sexual cyber-harassment, a first-degree misdemeanor, punishable by up to one year in jail, and/or $1,000 fine. Subsequent offenses result in a third-degree felony punishable by a state prison term of up to five years, five years of probation, and/or a $5,000 fine. Florida also outlines that victims can file a civil suit allowing relief in the form of injunctive relief, or the removal of the material, $5,000 in monetary relief, or the actual monetary damages suffered, whichever is greater, as well as reasonable attorney fees.

Georgia
Classifies revenge porn as an invasion of privacy, which is a misdemeanor of a high and aggravated nature, punishable by one-year in jail and a $5,000 dollar fine, with subsequent offenses resulting in a felony charge punishable by a one to five-year state prison sentence, and/or a fine of up to $100,000.

Hawaii
Defines revenge porn as a violation of privacy in the first degree, which is a class C felony punishable by a state prison term of up to five years, and/or a fine of up to $10,000. Additionally, the court may impose destruction of all material violating the statute.

Idaho
Defines revenge porn as video voyeurism, classified as a felony. Idaho’s punishments are decided on a case by case basis, but seem to range from state prison terms of three to five years, and/or a fine of up to $5,000 based on the cases that have emerged.

Illinois
Defines revenge porn as non-consensual dissemination of private sexual images, a class 4 felony punishable by a state prison term of one to three years, and/or a fine of up to $25,000.

Iowa
Classifies revenge porn as harassment in the first degree, an aggravated misdemeanor, which is punishable by up to two years in jail, and/or a fine of $625 to $6,250.

Kansas
Classifies revenge porn as a breach of privacy and/or blackmail, which is punishable with up to 18 months of probation, with subsequent offenses within five years elevating the offense to a felony punishable by four to five years in state prison.

 Louisiana
Defines revenge porn as nonconsensual disclosure of a private image, punishable by a state prison term of up to two years with or without hard labor, and/or a fine of up to $10,000.

Maine
Defines revenge porn as Unauthorized dissemination of certain private images, punishable by one year in jail, and/or a fine of up to $2,000.

Maryland
Establishes revenge porn as a subsection of harassment, and is a misdemeanor punishable by up to two years in jail and a fine of up to $5,000.

Michigan
Establishes revenge porn as a misdemeanor punishable by up to 93 days in jail, and/or a fine of up to $500, and one year in jail, and/or a fine of $1,000for subsequent offenses.

Minnesota
Defines revenge porn as nonconsensual dissemination of private sexual images, establishes grounds for a civil cause of action, awarding victims monetary relief of all financial damages caused, amounts equal to profit made from dissemination of material, a civil penalty up to $10,000, along with all court and attorney fees. Injunctive relief and confidentiality in filings is also outlined in the statute. In criminal proceedings, nonconsensual dissemination of private sexual images is a misdemeanor if the dissemination was not posted on a website, for profit, or meant to harass the victim, and punishable by up to 1 year in jail and/or a fine of up to $3,00. If any of those mitigating factors apply, or in subsequent offenses, the punishment is a state prison term of up to three years, and/or a fine of up to $5,000.

Nevada
Defines revenge porn as unlawful dissemination of an intimate image, a felony punishable by a state prison term of one to four years, and/or up to $5,000 in fines.

New Hampshire
Defines revenge porn as nonconsensual dissemination of private sexual images, a felony punishable by a state prison term of three and a half to seven years, a fine of up to $4,000, and often up to five years of probation

New Jersey
Classifies revenge porn as a third-degree invasion of privacy, punishable by a state prison term of up to five years, and/or a fine of up to $30,000.

New Mexico
Defines revenge porn as unauthorized distribution of sensitive images, A misdemeanor punishable by up to one year in jail and/or a fine of up to $1,000. Subsequent offenses result in felonies punishable by a state prison term of up to eighteen months, and/or up to a $5,000 fine.

North Carolina
Defines revenge porn as disclosure of private images, a felony for those over the age of 18, and subsequent offenses of those under the age of 18, which is punishable by four months to two years in jail, while first time offenders under the age of 18 face a class 1 misdemeanor punishable by 120 days in jail and a discretionary fine.

North Dakota
Defines revenge porn as distribution of intimate images without or against consent, a misdemeanor, punishable by up to one year in jail, and/or a fine of up to $2,000.

Oklahoma
Defines revenge porn as nonconsensual dissemination of sexual images, a misdemeanor punishable by up to one year in jail, and/or a fine of up to $1,000, as well as provide injunctive relief for the victim.

Oregon
Defines revenge porn as unlawful dissemination of an intimate image, a class a misdemeanor, punishable by up to one year in jail, and/or up to $6,250 in fines. Subsequent offenses result in class C felony charges punishable by a state prison term of up to five years, and/or a fine of up to $125,00.

Pennsylvania
Defines revenge porn as unlawful dissemination of intimate image, a misdemeanor if the victim is over the age of 18, punishable by a state prison term of up to two years, and/or a fine of up to $5,000. It is also a misdemeanor in if the victim is under the age of 18, but instead punishable by a state prison term of up to five years, and/or a fine of up to $10,000. The statute also establishes a civil cause of action, through which victims can collect up to three times the actual damages (loss of money, reputation, or property), or $500, whichever is greater, reasonable attorney and court fees, as well as additional relief which the court sees fit.

South Dakota
Classifies revenge porn as an invasion of privacy, which is a misdemeanor if the victim is at least 18 years of age, punishable by up to one year in jail, and/or a fine of up to $2,000. If the victim is under the age of 18 and the perpetrator is at least 21 years of age, it is a felony, punishable by a state prison term of up to two years, and/or a fine of up to $4,000.

Tennessee
Defines revenge porn as unlawful exposure, which is a misdemeanor, punishable by up to eleven months and 29 days in jail, and/or a fine of up to $2,500.

Texas
Defines revenge porn as unlawful disclosure or promotion of intimate visual material, which is a misdemeanor punishable by up to one year in jail, and/or a fine of up to $4,000. The statute also establishes civil liability to the victim, awarding actual damages, including damages from mental anguish, court costs and reasonable attorney fees, exemplary damages requested by victims, as well as injunctive relief.

Utah
Defines revenge porn as the distribution of intimate images, a misdemeanor punishable by up to one year in jail, and/or a fine of up to $2,500. Subsequent offenses result in felonies, punishable by a state prison term of up to five years, and/or a fine of up to $5,000.

Vermont
Defines revenge porn as unlawful disclosure of sexually explicit images without consent, which is a misdemeanor punishable by a state prison term of up to two years, and/or a fine of up to $10,000, violators who disclose material for financial gain are subject to a state prison term of up to five years, and/or a fine of up to $10,000. The statute also gives victims a civil cause of action against defendants allowing victims to recover actual damages, court costs and reasonable attorney fees, as well as obtain injunctive relief. Pseudonyms are offered for confidentiality.

Virginia
Defines revenge porn as unlawful dissemination or sale of images of another, a misdemeanor punishable by one year in jail, and/or a fine of up to $2,500

Washington
Defines revenge porn as wrongful distribution of intimate images, which is a misdemeanor punishable by one year in jail, and/or a fine of up to $5,000.

Washington D.C.
Establishes that revenge porn, as it applies to the disclosure to another individual, or publication for general public when publisher is a third-party whom obtained the material from an unauthorized disclosure, is a misdemeanor punishable by up to 180 days in jail and/or a fine of up to $1000. As it applies to the publishing for access for the general public from the original accessor of the material, it is a felony punishable by up to 3 years in prison and/or a fine of up to $12,500.

West Virginia
Defines revenge porn as nonconsensual disclosure of private intimate images, which is a misdemeanor punishable by up to one year in jail, and/or a fine of not $1,000-$5,000. Subsequent offenses face felony charges punishable by a state prison term of up to three years, and/or a fine of up to $10,000.

Wisconsin
Classifies revenge porn as illegal representations depicting nudity, which is a class A misdemeanor, punishable by nine months in jail, and/or up to a fine of $10,000.

Revenge porn cases are becoming more and more prevalent, and with criminal statutes in place, plaintiffs are finding that they can collect damages in civil cases. Have you been the victim of revenge porn? Do not hesitate to contact Traverse Legal Attorney today to explore your legal options.

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