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You May Need Some Legal Advice—7 Reasons Why Seeking Legal Advice Now Will Benefit Your Startup in the Future

Posted by on Jun 6, 2019 in Entity Formation, Governance, Intellectual Property, Startup, Your Entity

So, you’ve decided to start a business. You may be wondering, is it really necessary to consult with an attorney right now? The answer—it all depends on the nature of your business and how much risk you are willing to take. Small legal mistakes when establishing your startup have the potential to affect your business’ success and cost you and your startup financially in the future. We understand that hiring an attorney is daunting for a new business operating on a limited budget. However, there are a few business areas for which you should consider seeking legal advice early on in the life of your startup. 7 Reasons Startups Should Seek Legal Advice Now for Future Benefit: 1. Entity Formation: There are many different legal entity forms a startup may take—a sole proprietorship, general partnership, joint venture, limited partnership, corporation, or limited liability company. Each has pros and cons and different tax implications. Picking the right form for your startup has liability, legal, tax, and financial implications. While information on entity formation is available through the U.S. Small Business Administration and other resources, an attorney can advise you on which business structure is best based on your business plan and goals, as well as your personal liability and tax expectations. 2. Structuring Ownership, Control, and Responsibilities: If your startup has more than one owner, it is recommended that your startup have certain agreements prepared that outline the relationship between the owners—such as who has what responsibilities, who has the power to make certain decisions, each owners’ financial interest in the startup, and how to handle ownership termination. These agreements often take the form of operating agreements and buy-sell agreements for LLCs, or bylaws, restricted stock purchase agreements, and shareholder agreements for corporations. Ultimately, formal owner agreements help prevent future disputes and the need to hire a lawyer to resolve such disputes. Although such agreements may not seem like a priority in the early stages of your startup, they can be key to the future stability and security of your business. Additionally, these agreements are often easier to negotiate and prepare during the honeymoon phase of your startup, rather than down the road when money and emotions are involved. 3. Conducting Business Through a Website: If your startup conducts any business online, it is going to need a Privacy Policy and a Terms of Use Agreement. A Privacy Policy is a legal statement on a website that describes how personal data collected from users and customers of the website will be used. A Terms of Use Agreement is a policy on a website that describes the terms and conditions of users’ use of the website. Beware of blindly copying policies from other websites that offer similar services to your startup—often, policies are tailored to a specific business and will not provide you with adequate protection. An attorney can produce a custom Privacy Policy and Terms of Use Agreement for your website that provides you with the specific liability protection your startup needs. 4. Regulatory Compliance: Depending on the character of your startup’s business, you may be subject to state and federal regulations. An attorney can advise you on which regulations your startup is subject to and the steps your startup must take for compliance. 5. Protecting Your Startup’s Brand: Whether...

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FIELDS & FENCES: A Metaphor For Understanding Patents

Posted by on Mar 5, 2019 in Intellectual Property

One day, you are walking outside and come across a field. It is wide open and beautiful with rolling hills, trees, and ponds (and maybe even oil and diamonds). You look around, and there is no one in sight. For some reason, either no one has ever discovered this place before, or if they had, they never claimed it for themselves. So, like any entrepreneur, you want to claim it as your own. You ask yourself… How do I protect this? At this point, it is just an empty field. There is nothing to identify exactly what you are claiming or how much of it is yours. Worse yet, there is nothing to keep that pesky guy on the other side of the hill from claiming ownership. The fix? A fence. You bring a fence-building friend out to the property, and he is impressed. He agrees to build a fence for your property on two conditions. First, you have to show him and the rest of the world your discovery to prove that it is new and that no one else has claimed it before. Second, you can only keep the property fenced and others off it for a limited amount of time. Afterwards, you have to let others enjoy and use the field too. You think the tradeoff is fair and agree to his conditions. Your friend builds a fence that defines exactly what is and is not yours. Once the fence is built, your friend leaves and you are left alone to enjoy your new property. You are an expert marketer and salesman, and you make a small fortune by charging others to come and enjoy your land. Addressing the intruders… Unfortunately, the guy next door and his friends are persistent. They start trespassing on your property without paying or permission, even though you have it fenced! So, what do you do now? Your fence-building friend is gone and can’t help. And, besides, he is in the fence building business and not the trespasser removal business. It’s your property, which means that it is all up to you to (1) find the trespassers and (2) kick them out. So, you do just that, and once they’re gone, you go on making money and enjoying life in peace. After some time, your fence-building friend reminds you that you have to maintain the fence or it will come down. If you want to maintain the fence, you have to go to your friend and ask for him to do what is necessary to keep it in good shape (for a fee, of course). Otherwise, if you have lost interest in the fence, if you’re tired of extracting trespassing neighbors, or if your limited amount of time is up, no maintenance is needed and your friend will take the fence down so that others can freely enjoy the field (as was promised). Then, you are off to discover the next field… Is it time for you to build a fence? Like the field, inventions can be discovered by more than one inventor. However, only the first inventor to claim (or fence in) the invention in a patent application gets to own the rights to it. In the U.S., those fences (patents) are granted by our fence-building friend, the U.S. Patent...

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The Importance of Governance in the Lifecycle of a Startup

Posted by on Oct 16, 2018 in Entity Formation, Governance

Governance refers to the “governing” or “decision-making” of a company. It helps ensure a company runs smoothly, but also that it operates equitably and appropriately to benefit all stakeholders. A common misconception is that governance is an issue for large companies and something that startups can address in later stages of development. While startups tend to be more focused on growth and viability than structure and management, establishing a governance framework is essential to manage expectations of early investors, partners, owners, and other interested parties that have an interest in the company’s success. Below is a list of items to consider when forming your legal entity and defining roles and responsibilities. When forming your legal entity: Choose an appropriate legal entity early that considers present and future growth, long-term structure and business goals. For example, LLCs and LPs can be problematic for a company anticipating venture capital funding Avoid exposing founders to personal liability (i.e. partnerships have unlimited liability) Ensure that business activities are conducted through the entity and not in a personal capacity. When defining roles and responsibilities: Formalize relationships and avoid casual business relationships (even between family and friends) Formalize in writing the roles and responsibilities for each founder and owner (i.e. day-to-day operation) Record all ownership percentages (i.e. of the founders, and other owners) Create a mechanism for dispute resolution (i.e. how to break a tie) Address the possibility of a founder’s or other owner’s departure from the company Important legal documents for establishing roles and responsibilities: Charter or Articles of Organization Bylaws or Operating Agreement/Founder’s Agreement Stockholder Agreement IP Assignment Agreements Non-Disclosure Agreements Meeting Minutes and Board Resolutions Decisions made now will impact and shape decisions made in the future. Defining structure and roles and responsibilities early on will save time, define, and maintain company culture (i.e. ideas, goals, brand, etc.) and decision-making, and make the company attractive to investors. If your startup or business has questions about governance and entity formation, our team is happy to help you navigate these decisions based on your unique...

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FILE PATENTS NOW, Sell Later – The On-Sale Bar is Alive and Kicking!

Posted by on Jul 11, 2018 in Intellectual Property

As you have probably heard us say more than once, you need to file a patent application BEFORE you sell or offer to sell your invention. Under the America Invents Act (“AIA”), if you sell or offer to sell your invention before filing a patent application, you are not entitled to patent rights in the United States. This rule of law is commonly referred to as the “on-sale bar.” A 2017 Federal Circuit Court decision affirmed the broad scope and drastic consequences of the “on-sale bar.” In Helsinn v. Teva, the Court considered four patents relating to a drug that helps reduce the side effects of chemotherapy. Two years prior to filing any patent applications, Helsinn agreed to supply a company with the subject matter of the patents. This sale was announced in a joint press release and in SEC filings, but the exact details of the invention were not disclosed to the public. After Helsinn sued Teva for infringement of various claims of those patents, Teva argued that the patents were invalid because of the prior sale. The Supreme Court agreed and found that the press release barred patentability, despite the fact that it did not disclose the details of the invention. The Helsinn decision stands as a not-so-gentle reminder that any sale or any offer to sell an invention prior to filing a patent application is a disqualifier, even if the sale or offer to sell does not disclose the details of the invention. Bottom-line – Do not sell or offer to sell your invention before you file a patent...

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USPTO No Longer Refuses “Disparaging” Trademarks

Posted by on Jun 29, 2018 in Intellectual Property

You’ve probably heard about the trademark dispute between a group of Native Americans and the Washington Redskins. For years the validity of certain Redskins’ trademark registrations has been challenged under a federal law that prevents the registration of disparaging trademarks. In 2014, six of the Washington Redskin’s trademark registrations were cancelled by the U.S. Patent and Trademark Office (USPTO). Then came The Slants, a band of Asian musicians. The band applied to register its name as a trademark. The trademark application was refused by the USPTO for being disparaging to Asians, and the band sued to appeal the decision of the USPTO. According to the band, they chose their name to “reclaim the term and drain its denigrating force as a derogatory term for Asian persons.” They also argued that the federal law preventing the registration of disparaging trademarks violated its First Amendment freedom of speech. The U.S. Supreme Court agreed and held that the law was unconstitutional. Since the decision in favor of The Slants, the Redskins’ six previously-cancelled registrations have been revived. Bottom-line – The USPTO will no longer solely refuse a trademark registration on the basis that it is...

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Patent Rights Are Exhausted After Invention Is Sold

Posted by on Jun 14, 2018 in Intellectual Property

How far do patent rights go? Well, it often comes down to the sale of the invention. Typically, a patent holder’s patent rights in an invention extend only until the invention is sold – this is known as patent exhaustion. After a first sale, the patent rights in the invention sold are exhausted, and the purchaser is not bound by them[1]. The law, however, was unclear as to whether a patent holder could extend patent rights beyond the first sale by imposing restrictions on the subsequent use or sale of the invention by a purchaser. For two decades, lower courts held that certain restrictions could be used to retain some patent rights after the invention was sold. For example, some courts have permitted patent holders to restrict the resale or re-use of a patented invention. In 2017, the Supreme Court clarified the scope of the Exhaustion doctrine in Impression v. Lexmark. Lexmark, a toner cartridge manufacturer, sold toner cartridges at a lower price if the buyer agreed to a restriction on resale. Meanwhile remanufacturers were gathering up toner cartridges and refilling and reselling them. Impression Products, Inc., a remanufacturer operating in the US and abroad, was purchasing cartridges that had been bought with the resale restriction. So naturally, Lexmark brought suit against Impression for patent infringement. The Supreme Court held that when a patent owner sells an item, that product is no longer within the limits of the patent rights’ monopoly and instead becomes the private individual property of the purchaser. They based this decision on a common principle that sellers should not be able to impose “restraints on alienation.” Purchasers should be able to buy goods without fear that the goods are burdened by “a legal cloud on title.” Without this level of protection, purchasers would have to research all of the goods they intend to purchase to discover any burdens that patent holders may have placed on the goods. Consequently, the Court ruled that Lexmark could not impose a resale restriction on its cartridges that would allow them to sue a subsequent purchaser for patent infringement. The Impression Court determined that the Exhaustion doctrine applies to both domestic and foreign sales of patented inventions. Some have expressed concern that the foreign application of the doctrine will adversely impact the U.S. market for certain goods, such as life-saving pharmaceuticals, which are sold to foreign nations at discounted prices. Now it is possible for foreign purchasers to resell the discounted goods back into the U.S. market at a still-discounted price relative to the U.S. price while also earning a profit. Alternatively, the application of the doctrine to foreign sales may result in price increases for goods sold abroad. [1] Provided however, that the lawful owner of the patented device may maintain and repair the device, but may not reconstruct it. Bottom-line – A patent holder has no patent rights in a patented invention after the invention is sold. If you have questions about patents or other IP matters, please contact...

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Limiting Competition and Protecting Your Company: Non-Compete Agreements 101

Posted by on May 18, 2018 in Employment

What Is a Non-Compete Agreement? A non-compete agreement is a contract between an employee and his or her employer, and it restricts an employee from working with other employers in a similar field (i.e., “competing”) after departing the business. These agreements generally impose a time limitation on how long the ex-employee must avoid competing and typically restrict competition within a specified territory or region. Why Do I Need a Non-Compete Agreement? Non-competes can provide many benefits to startups, such as greater assurance that their confidential information, intellectual property, trade secrets, and other proprietary information will not immediately fall into the hands of a competitor; their customer relationships will be protected; and their training investment will not benefit another company. But not all non-competes are enforceable. When a non-compete gets challenged in court, most courts will look to see whether the limitations are reasonable given the circumstances of the employment. Some states, on the other hand, consider non-competes to be void unless they meet narrow exceptions. For example: Tennessee does not have any statute or regulation that generally governs non-competes in employment. But, it does have statutes and regulations that govern health care provider non-competes, and its courts have held that non-competes that attempt to restrict attorney competition are unenforceable. Georgia generally only allows non-competes to be used if: the employee is in sales, is a key employee or professional, the employee is involved in some form of management as covered by Georgia’s non-compete statutes, or if the employee regularly solicits customers for the employer. California is stricter than both Tennessee and Georgia, as non-competes are all but unenforceable except for extremely limited circumstances. Should Your Company Use a Non-Compete for a Particular Employee? Depending on your company’s needs, it may not be necessary for you to utilize a non-compete with each employee that you hire; rather, you may only want to do so with employees that have access to confidential information or are heavily involved in company sales. It really all depends on the circumstances of that individual’s prospective employment. Consider the following: Is the employee the “face of the company” to customers? Does the employee know the company’s trade secrets and confidential information, or is his or her work more general in nature? Have you provided the employee with unique or special training or knowledge? How much competition does your company have? If you decide that you want to utilize a non-compete in your company’s future hirings, here are some things the agreement should include: The reason for the agreement. The date the agreement will begin. Specific timeframes and distances from which employment with a competitor is barred. Particular identification of the type of conduct prohibited and a clear definition of competing companies. An explanation of what the employee receives in exchange for entering the agreement (this is known as “consideration”), which, in Tennessee, can be something as simple as continued employment with the company. What Should the Limitations Be? If you do decide to use a non-compete, you then need to consider what constitutes a reasonable limitation to impose on the employee after his or her employment ends. Example Limitations: One year and a 50-mile radius restriction. Two years and a 25-mile radius restriction. The breadth of the geographical and time limitations that you select will ultimately...

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Reaping Innovative Rewards With a Well-Sown NDA

Posted by on Apr 19, 2018 in Intellectual Property

Whether you are a recently forged startup or rapidly growing business venture, you likely have a strategy, technique, procedure, trade secret, or some other confidential information you hold dear to your success. The uniqueness of your innovation certainly is worthy of protecting as you work to cultivate and fertilize it with the expectation of ultimately reaping its rewards at harvest time. At some point in the lifecycle of virtually any business, however, the time will come when you want or need to share your confidential information with another party. Whether it be a customer, supplier, or consultant, chances are one or more strategic alignments with others will be deemed beneficial in order for your innovation to reach its full potential. For example, have you ever wondered about how to prevent a departing employee from poaching key design or development ideas, or how to prohibit a third party service provider from sharing your original concepts with a competitor? Confidentiality Agreements or Non-Disclosure Agreements (collectively, “NDAs”) permit you to exchange confidential information with others underneath the protection of legally binding contractual obligations that have appropriately identified your “secret recipe” and prohibited the receiving party from disclosing that information to anyone other than persons you authorize. NDAs may impose mutual restrictions on you and one or more other parties, or they can unilaterally proscribe one or more parties from disseminating your confidential information in a manner that does not comply with the NDA. While many NDA forms express similar concepts and attempt to offer the same protections, keep in mind that variations in fact and circumstance should influence how the NDA is tailored to your specific situation. Fundamentally though, any well-drafted NDA should at a minimum seek to address: The business purpose of the agreement The definition of the confidential information being shared The exclusions from this definition of confidential information The nondisclosure obligations of the receiving party The use and access restrictions of the receiving party The remedies of the disclosing party in the event of a breach The return or destruction of confidential information The non-solicitation of employees of one or both parties One startup-specific qualification should be noted here. If you are looking for potential investors in your business, careful thought should be given as to whether it makes sense to require them to sign NDAs before pitching your business. While a certain amount of due diligence is no doubt appropriate to vet investors and ensure your ideas are not stolen, practically, many investors will simply be unwilling to sign such a document. And, it would be a shame for you to expend significant time and resources to produce an NDA that is unusable. Bottom-line Every business has tangible and intangible assets to protect, and a well-drafted NDA may just be the crucial legal document your business needs to solidify the safety of what’s yours. *This blog post is brought to you by Jed...

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A Basic Primer on Damages Terms in Contracts

Posted by on Mar 12, 2018 in Draft Your Contract, Limiting Liability

When entering into arrangements with clients or engaging vendors, startup companies may be faced with a confusing array of contractual terms, including terms that reference various types of damages. Such terms are worthy of attention due to their potential financial implications. For example, an agreement might include a limitation of liability clause that reads something like this: IN NO EVENT WILL LICENSOR BE LIABLE UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER UNDER ANY LEGAL OR EQUITABLE THEORY, INCLUDING BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, AND OTHERWISE, FOR ANY…CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, OR PUNITIVE DAMAGES … You may understand that this provision purports to eliminate the software vendor’s (licensor’s) liability for these types of damages if there is a problem with the product in question. But what, for example, are consequential damages? Obtaining an attorney’s advice when signing contracts is advisable—particularly when they contain terms such as these. However, having a very basic understanding of these types of damages concepts is also helpful. Following is a very general, limited overview of damages concepts. Keep in mind that the meaning of these terms and the applicable categories can vary from jurisdiction to jurisdiction and based on the type of contract in question (e.g., a services contract versus a contract involving commercial goods, such as software). Measures of Damages There are a variety of theories and approaches to measuring damages used by courts in different contexts. The most common approach in situations involving the breach of a contract is to attempt to define the aggrieved party’s “expectation interest” and put them in the same position they would have been in had the contract not been breached. For example, Startup Company signs a contract with Slipshod Software, under which it pays Slipshod $100,000 for a software license. However, the software does not function. As a result, Startup Company incurs $10,000 in personnel costs finding and vetting alternative software with comparable features for its business, which it licenses for the best available price of $115,000. Due to the delay in securing the software, which Startup Company needed for its business, Startup Company loses two clients, which would have yielded $50,000 in profit. Startup Company/Slipshod Example $100,000 licensing cost for nonfunctioning software $10,000 additional expense in personnel costs $15,000 above $100,000 for licensing new functioning software $50,000 profit loss from clients who leave = $175,000 expectation damages Startup Company can argue that its expectation damages total $175,000, including the $100,000 it had paid Slipshod Software, the $10,000 in personnel costs in finding comparable alternative software, the extra $15,000 for the alternative software, and the $50,000 in lost profits.  Awarding these expectation damages approximates the position Startup Company would have been in if Slipshod Software’s product had functioned properly. Direct Damages  In the previous example, Startup Company can argue that it suffered $115,000 in direct damages (the $100,000 original licensing fee and the extra $15,000 it had to spend to obtain comparable alternative software). Direct damages, also called “general damages” in some contexts, are damages that naturally result from a breach of contract (i.e., the damages any party would usually incur in this situation). Here, any company that requires this type of software for its business would need to recoup its licensing fee from Slipshod Software and would need...

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Cybersecurity 101 for Startups

Posted by on Jan 30, 2018 in Cybersecurity

Every business, including startups, has data to protect. So, it’s not really a matter of if, but when an organization will experience cyber and data privacy threats. This post will provide tips on how to proactively protect data related to employees, customers, vendors, operations, and intellectual property. From creating password strategies to setting up incident response plans, there are many things organizations can do to potentially save a ton of stress, cash, and even reputation. Prepare: Designate a person or team to handle information security and preparedness. A designated internal team member may be an executive or someone in legal, HR, or marketing. Someone designated outside the company may be an attorney, public relations representative, or an insurance contact. Make a plan to address cyber incidents. Prevent: Train your employees regularly. Most breaches result from human error. Hacks can be caused by phishing, ransomware, identity theft, and email compromise. Use strong passwords. Change them regularly and don’t share them with anyone. Password tip: a strong, smart password is private, unique, and is changed every 90 days. A good rule of thumb is to create an acronym from a sentence. Use symbols for some of the letters and include both upper and lowercase letters. For instance, you can use capital letters for proper nouns. Be sure it includes numbers, too. Example: I<32soSicfBR! / I love two scoops of Snickers ice cream from Baskin Robbins! Some password security tools we recommend include multi-factor authentication (2FA), biometric authentication (finger print, voice print, facial recognition), and password managers. Avoid public Wi-Fi. Use only secure internet connections for business matters. Protect computers by using firewalls, updating software, installing antivirus and antimalware, encrypting sensitive information, and regularly backing up files. Work with trusted business partners and know how to contact them. Dispose of data and media safely and securely. Respond: Mobilize your entire team, both internal and external. Examples of internal team members include information security officer, executive-level officer, in-house legal, marketing, and human resources. External examples include outside counsel, public relations, and insurance. Stop the breach – determine the cause of the breach and take necessary steps to stop it. IT professionals and/or forensic experts may get involved at this point. Notify all appropriate parties including affected customers, insurers, and law enforcement. Make any and all appropriate reparations including discounts, damages, free credit freezes, and credit monitoring. Seek any and all appropriate remediation. Hopefully this provides a solid foundation for where to start with cybersecurity. Threats and solutions are constantly changing, and it’s important to remain up-to-date with all operating system,  antivirus, and antimalware updates. While there are many things that can be done to hardware and software to protect information, perhaps the most important action to take is educating and training employees and service vendors who access company data. Remember, human error is almost always the cause for a breach. Brief Case Study Following Target’s 2013 holiday season hack of over 41 million credit and debit card accounts, Target was required to employ “an executive or officer with appropriate background or experience in information security” to implement and maintain its information security program through implementing a new IS program, changing network system policies, executing data encryption guidelines, and ensuring vendor compliance. If you have any questions regarding cybersecurity for your startup, please reach out to...

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