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CAN MY VENTURE-BACKED STARTUP BENEFIT FROM A PAYROLL PROTECTION PROGRAM LOAN?

With so many companies’ runways depleting in these unprecedented times, many companies are seeking relief through the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). One attractive program falling within the U.S. Small Business Administration’s (SBA’s) Section 7(a) loan program is called the Paycheck Protection Program (the “PPP”), where a business can receive a forgivable loan in amount up to 2.5 X its average monthly payroll for the prior year.

To be eligible for an SBA loan a business must meet the size qualifications for a “small business concern”, or alternatively, in the case of PPP, employ fewer than 500 employees. A businesses qualification as a “small business concern”, however, can be frustrated by a business’s association with other companies or investors as provided under 13 CFR §121.301.

These affiliation rules consider the amount of control or power a third party has to control the applicant. While the rules are somewhat nuanced and consider the totality of circumstances, businesses can conduct a simple back-of-the-envelope exercise to help determine eligibility:

  • Do any of our investors own 50% or more of the outstanding shares of our company?
  • Do any of our investors have the right to purchase (through options, warrants, or other means) 50% or more of the outstanding shares of our company?
  • Do any of our investors control a majority of our board of directors?
  • Do any investors have the right to prevent a quorum or otherwise block action by the board of directors or shareholders?

Where your company has to answer any of these questions in the affirmative, you will likely need to add in the number of employees and annual receipts of your investor (and the investors affiliates) to determine your eligibility as a “small business concern”. A notable exception to this rule applies where a company is classified under NAICS Sector 72 (food services, etc.). Additionally, there is some speculation that the Treasury will release guidance simplifying the guidelines for PPP eligibility, and potentially loosening the affiliation rules for these extraordinary circumstances such that a small business that is not controlled by a single outside shareholder will be eligible. Accordingly, if you fall into this camp, please stay posted.

Where your company can answer all of these questions in the negative, and where your company meets the prior referenced size qualifications, you company will qualify as a “small business concern” eligible for the PPP and other SBA Section 7(a) loans. In this case, we implore you to reach out to your SBA approved lender as soon as possible to submit your loan application.

Please acknowledge that this write-up is meant for informational purposes only and is not intended as legal advice.

By David H. Pierce

Protecting Your Hemp and CBD Brand Through Trademarks

The 2018 Farm Bill was passed on December 20, 2018, and, among other things, removed hemp from the definition of marijuana under the Controlled Substances Act (“CSA”). Prior to the passage of this Farm Bill, the U.S. Patent and Trademark Office (“USPTO”) could refuse any cannabis or cannabis-related trademark application, on its face, because the identified goods and/or services were unlawful under the CSA. In other words, because the good or service for which the trademark was being sought was not in lawful use in interstate commerce, the USPTO would not grant federal trademark protection. With the passage of the Farm Bill, the USPTO is having to change its review practices to handle the confusion that the Bill created as to the trademark rights of cannabis or cannabis-related businesses.On May 2, 2019, the USPTO issued new guidance addressed to its trademark examiners on how to handle trademark applications for cannabis-related products. The guidance reiterates that a product ‘must first be in lawful use’ to receive a federal trademark. As it relates to cannabis or cannabis-related trademarks filed on or after December 20, 2018, a lawful use determination “requires consultation of several different federal laws” including the CSA and the Federal Food Drug and Cosmetic Act (“FDCA”). The FDCA, which is overseen by the Food and Drug Administration (“FDA”), makes it unlawful to introduce hemp-derived foods, beverages, dietary supplements, or pet treats unless approved by the FDA. Additionally, under the FDCA, “any product intended to have a therapeutic or medical use intended to affect the structure or function of the body” is a drug. Drugs cannot be distributed or sold in interstate commerce unless approved by the FDA. At present, other than Epidiolex, a plant-derived CBD product used to treat two pediatric epilepsy disorders, no cannabis-derived drug products have been approved by the FDA. The FDA recently restated its viewpoint on the market for CBD products in a revised consumer update and is carefully monitoring the space, having issued 15 warning letters to cannabis-related companies selling products in violation of the FDCA.For trademark applications filed before December 20, 2018, the examiners may allow applicants to amend their applications to claim a December 20, 2018 filing date to overcome a refusal based on the CSA. As the trademark can still be denied for the other reasons as discussed above, examiners may also allow applicants to amend the original filing basis to an “intent-to-use” basis. With the date change and the “intent to use” change, the examiner will conduct a new search of conflicting trademarks in the USPTO’s records. If applicants choose not to amend their application, they can abandon the application and re-file or respond to the examiner’s office action with evidence to oppose the examiner’s determination. As it relates to hemp cultivation or production services, the examiners will investigate the applicant’s legal ability to cultivate and produce hemp. Per the 2018 Farm Bill, hemp must be produced “under license or authorization by a state, territory, or tribal government in accordance with a plan approved by the U.S. Department of Agriculture (USDA) for the commercial production of hemp.” However, the USDA has not approved any state, territory, or tribal government hemp production plan. Therefore, hemp cultivation or production services trademark applications could still be denied despite the 2018 Farm Bill.While there is still uncertainty about the future for granting federal cannabis or cannabis-related trademarks, applicants can seek state trademark registration or protect their rights against copiers at common law. Each trademark strategy must be tailored to the applicant’s business and products.Written by: Stan Sater and David H. Pierce  


Commentary by Stan Sater & David H. Pierce.  David is a corporate and IP lawyer at Founders Legal. He can be reached at [email protected]

Dealing with Copyright Trolls

The ease of sharing pictures online has made it both lucrative for legitimate artists to monetize their works and simpler for opportunists (“copyright trolls”) to victimize unprepared websites with extortion schemes disguised as legitimate copyright enforcement practices. To escape being targeted by the latter, websites that host user-generated content can utilize the “safe harbor” provisions (Section 512) of the Digital Millennium Copyright Act (“DMCA”) to shield them from copyright infringement committed by users. In return, the DMCA “safe harbor” requires the website to adopt “notice and takedown” procedures allowing the copyright holder a streamlined way to report infringement and have the infringing content taken down.

Copyright holders who send a copyright notice to a website to remove the copyright-infringing material must include certain information to the website. The copyright notice must (i) identify the infringing material, (ii) provide the location of the original material, (iii) include the submitter’s contact information, (iv) state that the notice is entered in good faith, (iv) confirm that all information in the notice is factual, (v) state that the person sending the notice, under penalty of perjury, has the authority to act on behalf of the copyright holder, and (vi) sign the notice. Before sending the notice, the owner must also consider whether the use of the work is protected by fair use.

Copyright trolls abuse the DMCA requirements in search of easy money – big money. Copyright holders with registered U.S. works can seek statutory damages—up to $150,000 per work for willful infringement—for copyright infringement. For U.S. works, the Supreme Court has provided that a copyright owner cannot sue for copyright infringement until they have registered the work with the U.S. Copyright Office. For foreign works, copyright holders may file suit without registration per the Berne Convention (however, foreign works may not be awarded statutory damages or attorneys’ fees unless the foreign work is first registered with the U.S. Copyright Office). While these sometimes substantial damages seem harsh for a website merely hosting content posted by users, full compliance with the “safe harbor” provision of the DMCA can negate liability.

Additionally, the DMCA provides a means to fight back against overly aggressive copyright trolls (albeit through a sparingly used provision). Section 512(f) of the DMCA allows the website owner to file a lawsuit seeking costs and attorneys’ fees against any copyright notice sender who knowingly misrepresents information in a DMCA notice. The caveat is that the website must prove their harm as a result of relying upon the misrepresentation. While Section 512(f) lawsuits are scarce, one hopeful lawsuit on Section 512(f) was filed in August 2019 by YouTube against a copyright troll. Unfortunately, YouTube settled the lawsuit out of court with the copyright troll apologizing for his conduct and admitting to sending dozens of false takedowns. Thus, whether Section 512(f) is an effective means to deter DMCA takedown abuses is not yet a settled issue.

In any case, because of how easy it is for potentially infringing material to end up on a website, copyright trolling will persist. While the settlement fees copyright trolls request might seem reasonable relative to the costs of a potential copyright infringement lawsuit, websites should seek out help to evaluate the claim and strategize the most efficient way to handle the situation.

 

Written By: Stan Sater and David H. Pierce

 


Commentary by Stan Sater & David H. Pierce.  David is a corporate and IP lawyer at Founders Legal . He can be reached at [email protected]