Wahab & Medenica LLC Biz-Media-Law Blog

Celebrity Baby Spread Gets Copyleft License

2008-11-19T20:17:00.000-08:00

Who says celebrities have to be Paris Hilton's or Jane Fonda's, either too stupid or too radical to make a practical impact on the habits of ordinary people? There is a happy medium for the privacy challenged apple of the press’ eye, where their actions can influence even the contentious halls of IP licensing. The exhibit A of this phenomenon: Gwen Stefani, who, with her hubby, shunned the typical diamond soaked tabloid contract for centerfold picture spreads of her newborn. Demonstrating both a post election “maverick” streak and an unnerving knowledge of alternative licensing schemes, Stefani instead hired her own photographer and licensed the resulting photos through a Creative Commons license. No that’s not a typo. She licensed her photographs for creative sharing and limited commercial use. Gwen is more than fuel for the dance floor, she’s a copyleft progressive in pop diva clothes. That being said, she did opt for the standard issue space case rock star name for the licensed babe, Zuma Nesta Rock Rossdale. Yeah.

Lego Hits a Rainbow Colored Brick Wall

2008-11-17T15:27:00.000-08:00

Who has not dreamed of building a life size Lego house or the life size Lego statue of oneself? If you don't raise your hand, you are either lying or you were raised by wolves. Everyone loves Lego and it has been a uniquely iconic fixture of the modern childhood. Its charm has inspired more than a few adults to realize their fantasies in bricks that come from rainbow factories.

Apparently the Court of First Instance doesn't share that enthusiasm as it upheld a 2004 decision to cancel the brick's trademark status. Essentially it has ruled that Lego cannot avail itself of trademark protection from a EU trademark registered in 1999 to prevent competition from making mock blocks. The ruling came in response to a dispute between Lego and a Canadian company, Mega Brands, which manufactures blocks that were so similar as to be compatible with Lego. This is a major event that will greatly the landscape, but only once the case is further appealed to the European Court of Justice.

Even Curmudgeon Lawyers Get Social

2008-11-06T19:51:00.000-08:00

The near universal euphoria over social media marketing has even reached the most ad phobic professionals, lawyers. Considering the myriad ethical and professional restraints on the who, what, where, and how of legal marketing, it is both heartening and worrisome (lawyers love structural ambiguity, it keeps us contract attorneys employed) to see us venture into this realm. A Law.com article that touches on some approaches taken by lawyers thus far is here.

Breaking the Code—A Code of Ethics Emerges for Social Media Marketing

2008-11-05T14:27:00.001-08:00

In an increasingly social media dominated world where the old “word of mouth” adage has been steroided up with the power of the net, there is a palpable sense that rules and boundaries are needed. Attempting to step into the void, the Word of Mouth Marketing Association (WOMMA) has promulgated a Code of Ethics. That code calls for openness and transparency in the relationship and identity of the parties, the primacy of communications rules, and the protection of privacy and minors. While WOMMA’s code may appear toothless at first blush, it does address certain real world social marketing conduct such as "astroturfing." That’s where a brand will have a few pose online as a mass community of men and women on the street to support its products.

WHERE SHOULD I ORGANIZE / SET UP / MARRY MY CORPORATION OR LLC?

2008-11-03T09:42:00.001-08:00

Choosing which state in which to setup your LLC or corporation is like dating 50 people at once and being forced to marry one. As we all know, choosing a mate for life is simply an unscientific affair. And with choosing between states as opposed to mates, there is still the usual sorting through quirks annoyances and whether or not a state may simply look ugly the morning after the ceremony. Further confusing the process us the maze of state idiosyncrasies, from unique fees to unique common law and statutory frameworks.

There are however some major criteria one can use to cut through the din if confusing choices.

TAX QUIRKS
First and foremost does the state have quirky or imposing tax rules? For example some states charge special franchise fees that are either exorbitant or difficult to navigate. Sometimes the taxes are "hidden". In New York there is a little glitch when it comes to filing taxes for a LLC. The state charges a fifty dollar fee for each member of the LLC. So for an LLC that has many members you are looking at a significant fee. Even worse for an llc that has allot of passive members that came on board through some kind of private offering, it can mean thousands of dollars in tax filing fees. Hence this is a consideration for an operation that is really seeking to raise funds for deployment overseas. In that case, the LLC really doesn't have a state footprint and can elect to be formed in the more tax friendly jurisdiction.

MINORITY SHAREHOLDER’S
Another consideration is the state's approach to minority interest holders' rights. Some states such as New York actually have a separate minority shareholders doctrine to protect against abuse by the majority shareholder. The presence of this doctrine can cut both ways in terms of the parties' interests. Therefore it is another important factor to keep in mind when selecting an entity. For example one may ask whether they represent a minority investor stake or a dominant controlling or management stake when approaching this aspect of the equation. Delaware is more friendly to the majority position than NY is (which is why it is often a choice for large publicly traded corporations).

STICKING TO YOUR STATE
Another overriding question is the location, size and scope of your operation. It is generally best for small companies to organize in their home state. This is especially true where the “footprint” of the company (i.e., office and employee location, source of income, etc.) is limited to that state. Secondly, small companies often do not require complex financing and are really partnerships at heart, shrinking the allure of a Delaware state company. When organizing an entity in a foreign state (e.g., your business “footprint” is in NY but you organize an LLC in DE) you will likely have to pay redundant fees for a variety of things and negate any cost savings. For example, though NY has a costly “publication” requirement, if you form an LLC in DE and want a bank account in NY, you will have to satisfy NY’s “foreign LLC” requirements, meaning you will have to pay the publication fees anyway. Also, there tends to be greater variation between state corporation laws than between state LLC law, further negating any interstate advantage.

Knowing the Trollz’ Name—Using the Courts to Identify Online Defamers

2008-09-07T19:01:00.000-07:00

There is no question that the final name calling frontier is the internet--the world wide web of mean. No other invention since the Gutenberg press has made it as easy to cast stones from the safety of one's own home. And on the way to work, we even twitter our slurs.

Though the enemies of good character have found the net's weapons numerous, victims have found little to no solace due to technical, geographic, and legal constraints. It is all about as fair as a gun duel at a convention for the blind and the character casualties are mounting.

Undaunted, there are those that still resort to legal action in the hope of restoring their good name. After all, it’s still illegal to make defamatory comments even if the web wizard is out of harm’s way when behind the curtain (the Communications Decency Act (“CDA”) makes web operators nearly immune from the defamatory conduct of their users). So given the near absolute in its protection of web site operators, injured parties now seek the identity of the actual defamer. Yet the law on forcing the wizard to cough up names is as fluid as the "identities" of chronic net trollz. It's all in flux and up for grabs as the lower courts wrestle with concepts that will have global implications.

The recent New York Supreme Court decision in Ottinger v. The New York Journal News (for those of you not in the know the operation state court in new York state is referred to as "supreme") illustrates just how urgent, nascent, and malleable this conversation is. There the court hashed out some basic criteria in determining whether it had the authority to order the New York Journal news newspaper which hosts the "loHUD" blog to reveal the identity of users who had posted defamatory content.

The action was styled as a complaint against Jane and John Does, since the posters were anonymous. In February, the plaintiffs served the newspaper with a subpoena seeking the identities of the posters. The newspaper responded by trying to quash the subpoena. The court noted that higher New York courts had not yet ruled on the issue (the closest instance being a 2007 case against Google which didn't reach the issue because the statements at issue were deemed not defamatory).

Not easily deterred from heeding the call of justice, the court made reference to two cases from different jurisdictions. Relying on a pair of New Jersey and Delaware state court decisions, the court engaged in an analysis to craft a solution.

The analysis was:

1. With regard to the constitutional requirement that the allegedly defamatory party must have actually intended to defame a public figure, the court held that since the identity of the poster was not yet known it would not view this as an obstacle to obtaining the party’s identity;
2. The court then examined the sufficiency of the evidence provided by the plaintiff to determine if a prima facie (that means a cause of action on its face seems valid) defamation case had been established;
3. Among other things, since the plaintiff provided the exact statement made by the two Does, the court could conclude that the statements were prima facie defamatory;
4. Based on the above, the court concluded sufficient basis exists to order the disclosure of the identities of the parties that made the statements

This is not a miracle case that will revolutionize online defamation law. However it does provide a significant boost to the victims, by leveling the playing field somewhat. Moreover, this case and its peers will bolster the further development of case law in this realm. From my perspective this is a welcome thing as the "conversation" so far has been entirely one sided in favor of the trollz.

Canada's Hit New Viral Video on Privacy and Social Networks

2008-07-29T07:31:00.000-07:00

Star Wars Kid fatigue? Leave Britney Alone Angst? Tired of vids that are viral but not educational? For those of you who are awakening to the awakening of privacy leftists versus the Facebook's of the world, a little known button up office of the Canadian government has just the viral vid for you. Guaranteed to give you all the tools and user friendly color coded charts and graphs to make you a an online privacy professor, it is remarkably informative, interesting, and mildly disturbing--just what you want from a three minute tour de force of infotainment.

You can see the video here.

The Single Location Restaurant with the Big Brand Vision can Apply for Federal Trademark Registration

2008-07-12T21:45:00.000-07:00

Let’s face it, being in the restaurant biz takes a certain kind of personality with a certain kind of vision. Given all the risks and hurdles, having just one street address is not what they’re in this for. Hence startup restaurants that have a single location often seek federal trademark protection with an eye towards being a chain or a franchise. However, the very real and very serious obstacle to registration, the requirement that the applicant show that the restaurant is engaged in interstate commerce, is one that is often cited against pursuing registration. Well as with all things in the law, there is no straight black and white line that bars such registration. And in fact, a restaurant with a single location may a seek a federal trademark registration, but only under certain circumstances.

Federal trademark registration is a clear asset to the startup restaurant venture. It demonstrates individuality and a unique concept. Often, those are the very touchstones necessary to attract third party investors. This creates a chicken and egg scenario, as the restaurant venture may have to expand to multiple locations in order to sustain a trademark application, but requires the capital to do so. However, the reality is that most restaurant ventures barely have the capital for the initial location and will require a perfect storm of good fortune to expand. As a result, early protection of the restaurant's name and logo can greatly enhance the chances of survival and expansion.

Usually, a restaurant will file for a service mark that includes the restaurant's name or logo, or a combination of the two. As with all trademark applications, the restaurant must adequately demonstrate to the Patent and Trademark Office that it is doing business across state lines (in “interstate commerce.”) For the restaurant chain with locations in more than one state, this is an easy task. In the case of our single location restaurant, it has to make a greater more nuanced effort to show that it makes an impact on interstate commerce.

Two major cases support the position that a single restaurant location can form the basis for a federal trademark application. These are: Lobo Enterprises Inc. v. The Tunnel Inc., 3 USPQ2d 1446 (CA 2 1987), and Larry Harmon Pictures Corp. v. The Williams Restaurant Corp., 18 USPQ2d 1292, (CAFC 1991).

The cases, when viewed together, provide practical criteria that a single location restaurant can use to demonstrate it is a player in interstate commerce. In Lobo, two single location restaurants located in New York were embroiled in a dispute over an unregistered mark. The federal court found that it had jurisdiction based upon interstate commerce, due to the fact that one of the restaurants had extensively advertised in travel guides and magazines with interstate circulation. In the Williams case, the court rejected a strict bright line formula that required the restaurant be located on an interstate highway, served greater than 50% of its meals served to interstate travelers, or routinely places regular advertisements in some kind of interstate media.

Examining these two cases provides something of a manual for the single location restaurant owner to demonstrate its impact on interstate commerce. The first step is to build an objective record that demonstrates the single location restaurant is known outside the state. Articles from publications with a national or out of state circulation that focus on the restaurant are good candidates for this.

As with all trademarks, the touchstone of federal registration is “use.” Hence it is not enough to rely on third party write-ups of the restaurant. Actual advertisements in publications that circulate out of state are recommended, especially those that recommend out of state dining and entertainment. Hence, it is recommended that the restaurant owner engage in a targeted advertising campaign to out of state customers.

Location, location, location is the heart of the registration game as much as it is increasing the number of covers in a shift. The more the single location restaurant owner can demonstrate the operation sits at some kind of travel and/or transportation nexus, the better positioned he/she is for registration. So for example, being located near an interstate highway, or in the case of a dense urban locale, being located near subways and other transport hubs, is useful to demonstrate accessibility and attractiveness to out of state patrons. To the extent the restaurant’s model permits the identification of out of state travelers (e.g., a visitor’s desk if it you are running a bed and breakfast/restaurant, or the reservation desk, to the extent it requests the origin of the party), the owner should use that to collect data. Finally, proactively maintaining records that demonstrate sales to out of state parties, before and during the registration process is critical. Credit card data (to the extent it does not violate any privacy obligations is a good).

Turning Startup Money Down

2008-06-25T08:13:00.000-07:00

It is standard issue in my practice to be confronted with strong willed, able bodied, and risk be damned entrepreneurs. As a legal counselor it is my job to make hazards out there look like more than speed bumps to people who are not accustomed to hearing “that can’t be done.” And as an entrepreneur myself, I will say that it is not against the “by any means necessary” startup mantra to sometimes say no to money. For it is better to be savvy than gusty. And a true test of savviness for any startup is the how’s and why’s of its fundraising strategy.

The first stop on the money train for nearly every startup is the friends and family money. Always seems like a safe bet, and sure why not cash in all those years of Thanksgiving Dinner and family get together torture by taking a “donation” from your uncle Mike? The first legal taboo there, is the fact that most of us, including our friends and family, are not part of the “accredited investor” club. Being an accredited investor means that you are likely a member of the top percentiles of earning and net worth in this country (not Bill Gates wealthy by any stretch, since that is at the 99.99999999 percentile, but wealthy).

There is no need to guess the income parameters of the accredited investor definition as they are laid out in Accredited Investor SEC criteria (Rule 501(a) under the Securities Act of 1933) – which are related to a minimum level of yearly income or a minimum NAV (net asset value).

Not keeping the money in the accredited investor circle can have ugly consequences and hoping that Uncle Mike isn’t vindictive or simply panicky is not and option as your last Thanksgiving dinner demonstrated. Unaccredited investors, under certain circumstances can seek a variety of penalties against you and your company should things go bad or bumpy. In some cases, they can actually rescind the investment and demand the money back as if nothing happened…obviously that is a problem if the money has already been spent. So as part of your startup fundraising strategy, you should begin determining who are the accredited investors in the mist, the ones you have some kind of access to. It could be there is a would be angel investor relationship that you can develop.

The Software Reseller Agreement

2008-04-28T08:34:00.000-07:00

A common issue facing nearly all software companies is the sales force arrangements to move the software. In terms of complexity, direct branded sales are obviously the most manageable. But that is not always the most practical or cost effective approach. Sometimes, it makes sense to have someone else to sell the software. Though it may appear too complex a proposition at the outset, a sound strategy can lead to multiplied sales. And the core component of this strategy is a sound reseller agreement. Predictability and a clear plan regarding the fundamentals, such as territories, sales channels, duration, warranties, tech support, etc. should be addressed by the agreement to avoid harming your company’s intellectual property. The following is a list of some major issues that the reseller agreement should cover.

1. Exclusivity – Whether the relationship with the reseller is exclusive or not is perhaps the most significant issue to address and is often neglected until too late. Exclusive relationships generally mean that no other reseller can resell the software on the same terms. Of course, a software company should be very wary before entering such a relationship as it prevents others from competing and/or adding revenue streams. Exclusivity may mean exclusive to a certain territory or market or end user. If exclusivity is granted, there should be mechanisms in place to terminate the agreement altogether or transform it into a non-exclusive one if certain benchmarks/milestones, such as sales volume, are not reached.

2. Products – Though it may appear obvious to you what your company sells, carefully defining the products to actually be resold is critical. One not so obvious consideration is updates and new versions of the software…are they different products that are not included under the agreement? Complimentary applications may also be considerations. A product definition may also provide for bars against resale of competing software.

3. Price - The Agreement should lay out payment terms. There is a great deal of latitude on how such terms can be setup. Unit by unit price payment can be the norm, or profit sharing arrangements can also be provided for. The reseller often asks for protection against price increases. However, bear in mind that antitrust considerations may have to be taken into account.

4. Ownership – It may appear unnecessary to state that the Intellectual Property rights in the software should remain with the developer. However, it is good practice to specify that no IP is being transferred and that, rather, the agreement is merely a license to resell. The agreement may further specify that the reseller is not authorized to make copies of the software if applicable and may impose other restrictions on use. Finally, if the reseller is actually modifying or enhancing the software, there should be a mechanism for allocating the various IP involved.

5. Territory – Many reseller agreements delineate the geographic region within which the reseller may operate (e.g., North America versus Canada). Another related restriction is the bar of sales to certain classes of end users or market niche.

6. Term – A common tug of war between the parties is the duration of the agreement. Though there re arguments for both sides to either have lengthy or a short term contract. Typically the reseller will desire predictability through a lengthy term that doesn’t provide many opportunities for termination. On the other hand the developer will want a shorter term to allow it to engage in other opportunities or quickly terminate a problematic relationship, especially an exclusive one. .

7. Termination - In conjunction with term there is termination, which can occur on or before the term duration. Another tug of war, the developer will want the widest range of termination options, such as termination at will at any time, whereas the reseller will to limit termination to specific issues. Termination also does not automatically close the door on the relationship, as there are the ongoing concerns regarding rights to sell off any outstanding inventory as well as the rights/duties regarding support of remaining customers.

8. End User License – The resold software must have an end user license agreement, or “EULA.” In some cases, the reseller will provide a EULA, especially where the software is being rebranded under the reseller’s brand name. In any event, the EULA must provide for certain essentials, not the least of which is the protection of the developer’s intellectual property. Also, the EULA may provide a site or machine specific license.

9. Maintenance and Support – The developer’s responsibilities do no not necessarily end once the reseller accepts to resell. An oft overlooked component of the reseller agreement is the support policy and responsibilities. The developer may have to provide the reseller support, or in some instances as part of the reseller arrangement, the developer will provide support directly to the end user. Decisions must be made with regard of the level of support often referred to “tiers,” such as on site service versus telephone support.

Itty Bitty License Clauses Should Be Feared

2008-04-23T15:25:00.000-07:00

Media license clauses should be scrutinized, even the itty, bitty bits living in sentences longer than a line for free money. The now ubiquitous phrase "now or hereafter known," which innocently modifies the list of formats through which a song, movie, book, etc. can be exploited by the licensor is an itty bitty with Gojira sized implications.

Consider the recent Richard Reinhardt (p/k/a Richie Ramone) complaint that was nixed as a result. He alleged that the Defendants, WalMart Stores, Inc., Apple, Inc., RealNetworks, Inc., Taco Tunes, Inc., Ramones Productions, Inc., Estate of John Cummings (a/k/a Johnny Ramone), Herzog & Strauss and Ira Herzog, all infringed on Reinhardt’s copyright to six songs penned while one of The Ramones, by digitally distribution. According to him, the digital revolution did not extend to his work. However, what Richie did not count on was that old phonograph agreement he already signed contained the itty bitty "now or hereafter known." On Friday, April 18, SDNY, Judge Scheindlin dismissed the complaint citing the fact that future techs (aha! digital downloading) were within the license’s scope as "now or hereafter known."

So again, don’t take any language for granted, especially clauses that appear to expand the scope of a right.

Being Taft-Hartley'ed for a Prodcuction

2008-04-14T13:20:00.001-07:00

A common problem faced by producers of anything from indie film to YouTube video is the employment of unionized actors. For example SAG actors add a variety of complications to the mix. One of the foremost issues is the mixing of union and non union talent. Ordinarily this will result in a violation of the union collective bargaining agreement that governs the SAG actor. However the law recognizes the right of any non-union worker to work in any operation, regardless of the presence of a union.

The federal statute that codifies this principle is the Taft-Hartley Act. That statute was designed to limit the power of unions by preventing them from barring non union people from working as a bargaining tool. Of course statutes rarely make an impact without paperwork. Hence for the non-SAG party to perform, SAG will have to be notified. SAG usually will provide a Taft-Hartley waiver form that can be filled out by the Producer. That process is often referred to as being Taft-Hartley'ed.

The actor applying for the waiver has to possess a unique skill or characteristic that renders them indispensable. For example, an actor with special military training, a child actor, or an actor with certain language skills may pass muster. The Producer should also keep in mind which SAG Producer agreement governs the production in order to gauge the best route of compliance.

Apple Files TM Opposition Against NYC

2008-04-04T14:58:00.000-07:00

NYC has unveiled its “GreeNYC” apple-shaped logo and filed for registration with the Patent and Trademark Office (“PTO”) and Apple is not digesting it well. Continuing its quest to assure that absolutely no high fiber fruit are used to brand the goods and services of others throughout the known universe, Apple has filed a trademark opposition against the city.

The suit here is not a “suit.” It is a TM Opposition, which is a special filing made during the 30 day “Opposition Period.” The PTO provides this period for various parties to step up and be heard as to why the registration of a proposed mark will be injurious to them. Think of it as the Intellectual Property equivalent of the wedding ceremony finale, where anyone who thinks the bride and groom won’t have a happily ever after gets to “speak now or forever hold their piece.” (It should be noted that even after registration is granted by the PTO, a cancellation petition can also be filed.) Likely this will all dissolve into a settlement that will bar NYC from certain uses deemed encroaching by Apples, particularly those that involve computing technologies, music, and other Apple mainstays.

Despite my tongue and check tone, the reality is that Apple needs to police the integrity of its brand. Secondly, the fact that Apple does routinely file oppositions against marks seeking registration serves as a lesson to entrepreneurs: they should carefully vet their trademark to assure they won’t set off the “Fi Fi Fo Fum” of a brand giant.

Punished for Punitive Damages--Globalization Has Not Caught On In the Courtroom

2008-03-31T16:27:00.000-07:00

As the world becomes increasingly global and markets feel the collective sting of close integration, the legal world is still bragging about its 8-track player in an all digital world. Each nation’s legal system is its own fiefdom that doesn’t play nice with others. Sure, there are treaties with regard to a myriad of topics from child labor to tax treatment of investors, but these are patchwork and often subject to their own set of difficulties.

One of the greatest difficulties facing us all is the enforcement of legal judgments in one nation against a party that resides in another nation. And as our products wind through the production pipeline and have their passports stamped now more than we do, this is a serious issue. More now than ever the incompatibilities between various national litigation frameworks merits attention.

The first stop in the headache express is the enforcement of punitive damages awarded by US courts against foreign manufacturers. Punitive damages, long a foundational concept in English and US law has no analogue in virtually any other part of the world. In short, when it comes to damages above and beyond what is necessary to make a plaintiff “whole”, everyone else in the world uses metric as opposed to inches.

So where does that leave the US plaintiff? Answer: In a world of worthless paper, as foreign courts, short of expressing contempt for punitive damages can and often do simply refuse to enforce them in any capacity. The foreign courts that deign to try to understand their red, white, and blue neighbors, point to the history of the concept and its goal of deterrence against large scale interests. However, they then declare the logic to be counter to their jurisprudence.

The New York Times ran an interesting and detailed article on the new frontier of legal globalization. To those that have tort cases against foreign corps, take the article as a serious note of caution (the story of a woman who lost her son due to an Italian made helmet and then lost out on her punitive damage award is telling).

To Delaware or Not to Delaware?-- that is the Incorporation Question

2008-02-21T10:17:00.000-08:00

When setting up tech ventures or other businesses that require venture capital, the automatic assumption is that Delaware is the hip place to be. Sometimes, I am asked in lieu of the assumption, should the entrepreneur setup the entity in DE? As the first state in the union (let’s face it, other than that distinction DE is not a top tourist attraction,) DE needs something to keep up with the other 49 states. And that is its very advanced and now famous corporate law framework, which offers certain advantages over incorporation in other states. The usual suspects offered for this phenomenon should be kept in mind when you setup your entity. Not all states fit all needs.

If yours is a company that will likely have real corporate governance issues in the long run (read: shareholder suits, board of director power struggles, a national or international market, SEC issues, IPO hopes), DE might be the place. Delaware has a large and well honed body of business law to provide consistency and predictability. Other states can and often do deal with such issues on a first time basis, meaning their law is in flux. When you’re aiming to be the next Google, wondering what a Tennessee court that is less experienced (though I am not in any way suggesting less talented or bright) in these areas might be dangerous. In addition, certain specialty corporate litigation benefits from specialized courts without juries. For example, disputes over internal affairs are often filed in the DE Court of Chancery, which is a court of equity, meaning no jury.

Delaware is very outsider friendly and definitely makes it easy to have an entity without being in DE. For example, DE does not impose any residency requirement, but it does require that you hire a third party agent to receive service of process that is filed through the state (this can usually be cheaply acquired through services that specialize in this). Secondly, the DE corporate division processes administrative filings rapidly and cheaper than other states. And like New York, DE accepts faxes as legally binding filings, making filing and amending fairly quick and painless. Finally, if your company doesn't conduct business in Delaware, it will not be obligated to pay DE corporate taxes. However, it will be required to pay a franchise tax each year (think of it as a yearly fee).

Certain parties even demand that companies are incorporated in DE before going public, such as VC’s, etc. This is likely due to the long standing trend that public companies be formed in DE, coupled with a sense of security given DE’s pro corporate body of law.

No matter where you incorporate though, you have to bear in mind that you will have to comply with the local states in which you do business (tax, tort, contract, etc.) The internal affairs of the company may be governed by DE law, but that’s only one side of the coin.

HotOrNot? for VC's--TheFunded.com

2008-02-19T13:26:00.000-08:00

I often get asked by my clients about how the various venture capital players stack up against each other. It is a difficult question to answer as so many of my clients have differing needs, personalities, and subjective lenses through which they see the startup world. Luckily, the web has provided a solution through social networking and snarkiness. In early 2007, Adeo Ressi took the HotOrNot lens to VC’s, by providing entrepreneurs the opportunity rate and often rant about their particular VC experience on TheFunded.com.

That in itself is threatening to VC’s, which are a selective and secretive lot. In a recent move, registered entrepreneurs can post and share VC term sheets for an added dimension of being in the know. As any entrepreneur familiar with VC’s knows, the term sheet is the ultimate forensic tool for piecing together the scene of a deal.

As one can imagine, the VC’s have been subject to all manner of perceived libel and are probably not thrilled at the prospect of being ranked or scrutinized. The site’s goal of ranking VC’s is a bit of role reversal, but in the end, with proper discipline among its membership it can prove to be a very valuable tool. In his Wired interview, Ressi claims his site is designed to properly channel VC’s into: “backing savvy entrepreneurs to move the fundamental technologies of humanity forward.” Well, Adeo if the site simply provides a real forum for open discourse on the subject, then I think I will be happy with that.

Forming New York Professional Entities

2008-02-07T07:27:00.001-08:00

A New York professional entity (PLLC, P.C.) is a unique intersection of the business law and the licensed professions. In short, if you are a licensed professional in New York State, through the New York State Department of Education, (e.g., doctor, architect, etc.) and you with to open an entity to do business, then you must establish a professional variant of the standard LLC or corporation (hence P in PLLC or the P in P.C.). Under Section 6507 of Title 8 of New York State Education Law, the Department must issue Certificates of Authority to any professional seeking to organize an entity under Section 1503 of the Business Corporation Law. The “Certificates” certify “that the individuals organizing the professional service corporation are licensed and currently registered to practice in their respective professions. Hence, before you get the blessing from the Department of State for your entity, you have to go through the Department of Education.

The interesting thing to note that if you want to provide your special brand of services to the public, you can do so without opening an entity as a sole proprietor (meaning no business entity, just you and the public). However, the very nature of most professional services means tremendous personal liability and a maze of malpractice issues. So in the end it’s a checkmate on the chessboard of options. In any instance where there is a high level of malpractice liability, an entity is the first best level of defense. Hence, those individuals must almost always seek to organize as a professional entity. Of course, the standard array of malpractice insurance must also be acquired, but having an entity to render services through and enter into contracts on behalf of you is highly advised.

Opening a PC or PLLC is not any more difficult than opening the standard LLC or Corporation, but requires a letter to the Education Department requesting a Certificate of Authority with an attached copy of the formation papers for the proposed entity. Once that certificate is acquired it is submitted to the Department of State with the formation papers. Although, as with all such matters, it is best to consult an attorney.

The Share Tax Boogeyman--Section 180 of the New York Tax Law

2008-01-28T16:38:00.003-08:00

Forming a New York state corporation is often the first step that entrepreneurs take before commencing operations. These entrepreneurs often think that a corporation is the structure that favors them for a variety of reasons (IPO, multiple traunches of capital, stock options, etc.) And coupled with the apparent ease of online filing, they use the basic filing options available to them (i.e., a form). Unfortunately, that often means no forward planning as to the number and variety of shares the corporation is formed with.

The standard New York incorporation form used generally provides for 200 non par value shares, which is far beneath the needs of most emerging growth companies that chose the corporate route. Indeed, the 200 share threshold is likely only useful for “closed corporations” (i.e., private corporations with a handful of shareholders, such as the family company). In a scenario that requires the grant of stock to a variety of founders, consultants, angels, and other parties, it is immediately clear that 200 shares will not suffice. In such a scenario, the capital stock (“capital stock” simply means all stock, including all classes) supply will have to increase to meet the various early stage growth demands.

If you have incorporated in New York State or some other state that imposes a share tax on the issuance of new shares, then you should be wary of the number and class of shares your company issues at any stage of its growth. New York State imposes a share tax on the issuance of non par value shares that can be as high as $.05/share. So if there is a new company that was formed with the standard 200 share form, but now needs 10,000,000 shares to satisfy its needs (say for example, there needs to be shares for three founders and two consultants, where some of the founders have bought in a few percentage points of stock at a $1,000,000 valuation), it will have to file a certificate of amendment with the New York State Department, enlarging its capital stock pool. Although this seems simple enough, if the share pool was increased from 200 non par value shares (non par value means there is no minimum price at which the corporation is obligated to sell the stock) to NPV 10,000,000 shares, the corporation would be hit with a share tax, under section 180 of the New York Tax Law, of $.05/share minus the original share tax paid upon formation of the corporation (which in this case means $500,000 – $10 or $499,990). Obviously, that is not a palatable situation for any company, mature or otherwise. One has to be aware of this tax to properly structure their capital stock pool accordingly.

An alternative is to issue stock with a minimal par value. Hence, in the above example, the corporation can opt to issue 10,000,000 shares of stock with a par value of $.001/share. This will only make them liable for a $10.00 tax under section 180.

Getting a Business Divorce from your LLC Without and Operating Agreement May Force you to Stay in the Marriage

2008-01-22T07:10:00.000-08:00

An LLC is the premiere small business entity for a reason. It is efficient, flexible, and generally easy to run. But as with all entities, an LLC is still a union of partners that are in it for better or for worse. Sometimes however, better gives way to worse and the partners may have to split…they have to divorce. And although one would like to believe that the separation of partners is a professional affair, it can often be as bitter, vicious, and out of bounds as the separation of spouses.

The critical difference in a separation of partners is that the LLC should provide a reasonable framework to facilitate the exit. Yet often, LLC’s do not have that framework, because they lack an Operating Agreement. In New York, an Operating Agreement is the basic partnership agreement for LLC members (i.e., partners), and should, among other things, specify an exit strategy for individual members or the whole enterprise. The most critical thing to keep in mind is that in New York, an Operating Agreement is both statutorily mandated and, as per certain court decisions, necessary to release members from each other. In short, the Operating Agreement not only lays the foundation for day to day operations, but also for the dreaded divorce scenario.

Consider the case of Horning v. Horning Construction LLC. There, Horning a successful construction business owner, eventually gave two of his employees, Klimowski and Holdsworth, a one-third interest each in a new entity, Horning Construction, LLC. That LLC became the successor to Horning’s business. However, the three members never could finalize the terms of an operating agreement. When Horning eventually offered to sell his interest to the two remaining members for a price he considered fair and equitable, he was rebuffed. Unfortunately, as these things tend to become, the situation became hostile and Horning simply wanted to make an exit.

Since he could not get the other members to agree to buy him out, he sought to have the LLC dissolved and liquidated by court order. Section 509 of the New York Limited Liability Company Law states that if a member withdraws from the LLC, where there is no operating agreement, he can get fair market value for his interest. However, Section 606 provides that without an operating agreement, a member cannot withdraw without causing dissolution first. The court focused on Section 702, stating that in the absence of an operating agreement, dissolution can only occur, "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement."

Under the Section 702 standard, the court concluded that dissolution was not justifiable. Ironically cursed with success, Horning could not distract the court from the fact that the LLC employed over 40 people and was more than fully operational. As far as the court was concerned, the LLC could carry on its business. Accordingly, Horning was simply trapped.

With regard to his failure to setup an operating agreement and giving the interest to the other members, the court stated “he did this without prior or contemporaneous execution of an operating agreement giving him fair exit rights in the event of future disharmony. Moreover, during the next few years, despite having failed to secure an operating agreement to protect him, he transferred the business of his corporation to the LLC (something he did not have to do if he was dissatisfied with the parties' arrangements. . .”

Dissolution or withdrawal in the absence of an operating agreement is not simply there for the asking. The court in Horning made clear that dissolution as a very last resort, given the LLC laws’ apparent desire to preserve continuity and minimize disruption to ongoing business concerns. Hence an operating agreement is absolutely critical to being able to escape ugly situations, or get a business divorce.

Free Business Consulting Services

2007-12-11T13:53:00.000-08:00

Don’t have any money for a business consultant? If you don’t mind being a student project, then you should turn to the Small Business Consulting Program at Columbia Business School. This is a semester long program that matches up talented business students with businesses in need of guidance. Every semester, a business is matched up with a group of students that evaluate how the business is doing from all angles before making suggestions. A business interested in this program must submit an application by the appropriate deadline, and in the final phases of the selection business owners are asked to attend a student/client mixer so meet and explain their businesses. All the students have access to mentors with significant experience in the industry. You can find more information about the program at http://www0.gsb.columbia.edu/students/organizations/sbcp/index.htm

Anti-Layering Provisions In Convertible Notes

2007-11-23T10:37:00.001-08:00

Definition for the day: Anti-Layering Provision. A common scenario in start-up finance involves use of the convertible note. Simply put, an angel puts in money in the venture in the form of debt through a promissory note. That note however, will not be a run of the mill "IOU." Rather, it will have a variety of special provisions that make the debt more "secure" for the angel. The most obvious of this is the option to convert the debt into equity at some discount, hence the term “convertible.”

Another less obvious provision is the so called "anti-layering" clause. This clause will prevent the start-up from issuing debt "in-between" the convertible note and some designated class of senior debt. So for example, where a start-up has already issued some notes and/or secured some bank debt (the "Senior Debt"), it may offer not to add any more layers of debt that is senior to the convertible note and junior to the Senior Debt. Hence, the anti-layering provision is another way of making the angel more secure.

In the end, one will find that all the start-up jargon out there is not as impenetrable as it seems. Usually, they mean exactly what they say.

Anti-Layering Provisions In Convertible Notes

2007-11-23T10:37:00.000-08:00

In the end, one will find that all the start-up jargon out there is not as impenetrable as it seems. Usually, they mean exactly what they say.

How to Fund a New Media Company

2007-10-24T08:57:00.001-07:00

New media companies are always looking for potential investors to take them off the startup ground. In doing some research on the subject, I came across the Peacock Equity Fund – something to keep in the back of your mind for all you media start-ups out there. Peacock Equity is a global fund of $250 million which was introduced in April 2007 by a partnership between GE Commercial Finance and NBC Universal. The fund focuses on companies developing technologies, platforms or business models that are a “strategic fit” to NBC Universal. The Fund will invest in these industries in the range from $3 to $25 million at a time. The areas that the fund focuses on are (and I am quoting from their website):

Advertising: Digital Ad Sales, Advanced TV, Web, Mobile, Media Measurement, Other Digital Platforms;
Digital Content & Communities: Avatars/Virtual Worlds, Focused Verticals, Multi-Platform Reach, Content Complementary to Existing Brands or Demographics;
Health: Consumer Content and Tools, Multi-Platform Reach;
Technology: Collaborative Filtering; Recommendation Engines, Knowledge/Predictive Management, Automated Content Identification, Broadcast Technologies;’
Wireless/Online: Content, Gaming/MMOGs, Advertising, Distribution, Search, Personalization, Services/Technologies.

In accessing their website (http://www.gelending.com/Gmc/Peacock/SubmitProposal.html), you can submit your proposal as to why you think your company should receive between 3-25 million. In other words, you need to have a solid, airtight, fabulous business plan. No nondisclosure and confidentiality agreements will be accepted.

Prior companies that have received Peacock funding include: Healthline, IGA Worldwide, Trion World Network, Inc., Firebrand and ADiFY.

Second Life and Second Jurisprudence

2007-09-19T11:29:00.001-07:00

If any one doubts the power of the new Internet look no further than Second Life--that virtual wonderland-where you can thrill to the view of your palatial gated manor and take flight in your jet car to visit the gay, straight or "furry" neighbors. It only seems like a fantasy until you realize that servers populated like small cities complete with laws and all the trappings of society compete for our waking life. Why is a universe with all the social dynamism of the ''real" world called "virtual," especially when your Second Life can make you real cash? Is jurisprudence (and no I do no mean the law) prepared for all this world has to offer? Are we prepared for a future when "on line" versus "real world" is no longer a valid distinction? Second Life and other "metaverses" offer a rich vision of how the net will change our lives...and then came the lawyers.

While even now the real world struggles mightily in defining property Rights (consider the Supreme Court decision on the limitations of eminent domain in Kelo v. City of New London), the virtual world cannot expect to be shielded from the shrill call of "hey that's mine!" When the call is heard, will the bar respond with a litany of unmitigated liability?

Property rights are the cornerstone of any modern civilization. And as the societies that don't live on servers have grappled with this essential principle, so too will the Second Life's out there. With few exceptions, the virtual world relies on a pastiche of honor systems and internal rules to maintain “law and order.” And when that doesn't work, there is the Terms of Service Agreement. However, as greater emphasis on commerce competes with socializing, then theft, fraud and the call for "human liberties" will undoubtedly make the virtual world behave more like the real one. And frankly the draconian tone of a Terms of Services agreement is a far cry from what the founding fathers had in mind in 1776.

Consider the case of Marc S. Bragg (he is also accepting donations to pursue his suit and he has succeeded in evading a removal for arbitration). By allegedly exploiting a technical loophole in Second life that enabled him to acquire virtual properties at a significantly reduced price he caught the eye of the wrong people. Thinking that he had found his way to being a binary billionaire, his cottage industry was summarily seized and destroyed. One pictures acres of pixels razed by polygon storm troopers. Far less dramatic was the push of a button to make Bragg’s empire vanish-- his account terminated based on a violation of the Terms of Service Agreement. Confronted with what argues is an illegal taking, as an attorney and as an American, he did his duty... he filed suit. While I and others do not see this case as a dispute over property rights (largely because terms of service agreement appears to cover this situation which really hinges on a breach of contract principle; rather than property rights), it does speak of things to come. For example, does Bragg have a proportionality argument? Is Second Life evolving into a public arena that must apply state and/or federal laws rules and regulations, what about the constitution?

In existence for nearly a decade the new generation of MMORG'S aggressively blur the lines between life m the flesh and life or the other side of a keyboard. It's much easier to be flip about losing a plus five sword of orc smashing then about the loss of a virtual factory that generates REAL money for Virtual employees and investors. It this trend continues, and there's no indication it won't, a crisis is looming. And certainly at that time there will be more than enough call within the legal community to establish real world legal systems in wonderland.

Now is the time, not when a crisis occurs, when we should examine cyber jurisprudence in a cyber society. Left to their own devices, lawyers have a way of siphoning the joy out of anything. Stories like Bragg's probably have most attorneys drafting retainers for the personal injury claims of the 21st century rather than trying to shape a sustainable legal framework for cyber society. As we have discovered in the real world, the Internet has rarely offered easy opportunities to co-opt existing law.

Yet, we are presented with an unprecedented opportunity to re-imagine the role of law, to redefine its relation with people, to create a legal system heretofore undreamed of. The architects of Second Life, Wikipedia, and others are anything but traditional. Why shouldn't lawyers be similarly uninhibited? What should the role of an advocate be in a world of polygon avatars? As lawyers, our first question should not be how to make real law apply to the virtual? It should be: how do we make new institutions for a new world?

How many Lawyers does it Take to Unscrew a Light Bulb (or a Lawsuit)?

2007-09-19T11:25:00.001-07:00

The Answer: None. Adding to the absurd no defense stories of corporate many headed embarrassment, consider the recent suit filed by André Agassi of tennis fame against Target of bourgeois shopping fame. Apparently, Target, with its no doubt sizeable roster of in and outside counsel failed to clear the use of Agassi’s name on a pair of sandals that shipped to a variety of outlets.

Come again? How could this be? Surely, the mega brand has no appetite for knock offs and could have simply licensed the name. Rather, Target found out that the name was entirely unlicensed when presented with a suit (or presumably a cease and desist letter beforehand). So this must be a case of the many headed corporate bureaucracy where one head ignored, tuned out, or simply did not talk to the other. The legal clearance pipeline is a serious one that can, as demonstrated, here break down with even the most established an prominent players. However, you don’t need an attorney army to unscrew a lawsuit before it begins.