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When Does Your Employer Own Your Invention?

In general, the person who creates an invention owns it, and the mere fact that someone is employed at the time they create an invention doesn’t have an impact.

With that said, if the employer hired the employee to design a specific invention or solve a specific problem, the employee has a duty to assign the resulting patent. Where the employee is not hired specifically to design or invent, but nevertheless conceives of a device during working hours with the use of the employer’s materials and equipment, the employer is granted an irrevocable but non-exclusive right to use the invention under the “shop right rule.” A shop right is an employer’s royalty or fee, a non-exclusive and non-transferable license to use an employee’s patented invention.

Because these common law rules are a bit vague, most employers include a provision in an employment agreement allocating invention rights. In general, these provisions are enforceable, so long as they are reasonable in scope. However, there are several states that have enacted statutes limiting the application of these provisions. These states prevent an employer from assuming ownership of inventions that are created by employees completely outside the scope of employment.

Even in states without statutory limitations on an employer’s right to contractually require invention assignment, the extent to which a contract provision would likely be enforced to deprive an inventor of rights in an invention would depend on several factors, including the extent to which the product relates to the core business of the employer, the scope of work the employee was hired to do, whether any confidential information of the employer was relied upon to make the product, whether it will be sold in the same channels or to the same customers (in other words, how competitive it is to the employer), and whether significant resources of the employer were involved in the creation of the product.

Ultimately, the biggest determinant of whether or not an employer would ever pursue a claim to the patent depends on how successful the invention ultimately turns out to be or how much it could serve as a detriment to the company from a competition standpoint. If it is unlikely that the invention would be perceived as a threat, it is unlikely it would ever be an issue. Regardless, if it is an overwhelming success, an employee will have the resources to protect itself in any lawsuit.

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

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Co-Founder Divorce: Why It’s a Good Idea to Create a Prenup for Your Young Company

Founder disputes are one of the most common risks to a young company, but it doesn’t have to be that way. Whether it is a disagreement over a core issue or the waning interest some experience along the startup road, most companies face turnover in their early days, with key players rotating in and out.

While we know, considering the examples of Facebook and Snapchat, that companies can still go on to greatness despite an early founder breakup, that doesn’t detract from the problems that arise when founders leave while holding onto an equity stake.

Under these circumstances, ex-founders can create problems in one of two ways – either they can insist on maintaining influence in a company when they are no longer wanted or they can surface years down the road and claim a right to a company’s success that they had no part in creating. Either scenario is obviously problematic. But there are a few things companies can do to protect against the type of consequences that can arise due to a founder split:

  1. Don’t Rely On A Handshake: Step one may seem obvious, but it is surprising how often founders ignore the paperwork and barrel down the road in their haste to create the next big thing. The cost of engaging a lawyer to prepare an Operating Agreement for your LLC (or Shareholder Agreement for your corporation) is easily justified considering that you will have a mechanism in place to address issues like key voting decisions, how new members are admitted, or how distributions are divided. Even the task of sitting down with your team members and talking through some of these issues can be critically revealing and bring conflicts to the surface that are better to get out of the way sooner than later.
  2. Company Buy-Back: Especially for early-stage companies, consider a provision in your governing document that allows the company to buy out a member/shareholder upon majority or super-majority vote. This way, if one of the early members is not working out, there is an agreed upon mechanism to facilitate the breakup, with important issues such as the purchase price owed to the exiting member established by a pre-existing formula.
  3. Vesting And Reverse Vesting: Another protection for co-founders is to agree to a vesting schedule pursuant to which founder equity will be granted over time or upon the completion of certain milestones. For example, a founder is granted 16,000 units but she only receives them on quarterly intervals over 4 years, meaning she gets 1,000 shares a quarter. In that way, founders will not fully “own” their equity stake until they stay involved with the company over a certain period of time. A similar concept is known as “reverse vesting,” where a founder is granted his or her total equity allotment upfront, but the company is entitled to repurchase shares if the founder leaves.

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

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If I Withdrew My Patent Litigation Claim, Can I Re-File It Later on?

In general, there is no statute of limitations on a claim for patent infringement. However, the Patent Act specifies a time limit on monetary relief for patent infringement claims – damages are available only for infringement that occurs within the six years prior to the filing of the complaint. In general, a voluntary dismissal (unless it’s the second such dismissal associated with that particular claim) just serves to wipe the slate clean – it is as if the suit was never filed. In that sense, it does not serve to toll any limitation period.

In the event the suit has been dismissed twice, the claim is most likely barred by res judicata as the second voluntary dismissal of an action operates as a dismissal with prejudice.

One other issue to point out on the topic of time limitations associated with patent infringement claims, while there is no formal statute of limitations, a defendant can still assert the affirmative defense of laches to prevent a patent holder from pursuing a claim, asserting that the delay in bringing suit is unreasonable, and the defendant will suffer material prejudice due to the delay. There is no formal time for the application of laches – it just depends on the situation.

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

Can I Use a Competitor’s Name in Advertising?

Some of the most memorable advertising campaigns in history involve the comparative use of competing trademarks.

Coke vs. Pepsi; Burger King vs. McDonald’s; Bud Lite vs. Miller Lite… The list could go on and on.

If you are a major consumer brand, chances are you have thought about how to create your own consumer identity by comparison to or distinction from your competition.

But proceed with caution. A thoughtless ad campaign that carelessly namedrops another company’s trademark could land you in court.

The Quick and Dirty

In general, it is not illegal to compare yourself to your competitor in the advertising context, so long it is not untruthful, disparaging, misleading, or confusing to the public. Additionally, the use of a competitor’s trademark cannot lead the public to believe that the company is endorsing you.

But what do those generic rules look like in practical application?

 What You Can Say

1. Consumer Comparison Survey

Courts have held that it is legally defensible to conduct actual consumer comparison surveys and truthfully report the results. In short, anything you say about a competitor must be substantiated.

Remember the Pepsi Challenge? In its never-ending war against Coca Cola, Pepsi sought to prove its claimed superiority with an actual consumer taste test. At malls and other public locations, a Pepsi representative poured Pepsi and Coke into two blank cups and asked consumers what soda they preferred. Pepsi was lawfully entitled to publish its results, which it claimed showed that American consumers preferred Pepsi. But the takeaway is that anything you say about your competition that could be construed as “factual” (rather than obvious opinion-like statements that no consumer would take seriously) must be substantiated.

2. Brand References

Although a fine line should be recognized here between acceptable references and inappropriate endorsements, courts have held that the use of a trademark where there is no attempt to capitalize on consumer confusion or the commercial cache of a certain brand would be acceptable. For example, a court found permissible AOL’s effort to market to AARP membership with the following advertisement: “If you danced to the Beatles, cruised in a Thunderbird, or tuned into Dick Clark, you have earned . . . 100 hours free [Internet service on AOL].” Clark and Olive Enterprises, Inc. v. America Online Inc., 2000 WL 33535712 (C.D. Cal. 2000).

3. Compatibility Assurances

If your product serves as an accessory to another company’s product, you can advertise that compatibility. For example, compatibility advertising is frequently seen with i-Phone accessories – it is permissible for a company that makes i-Phone protective cases to mention Apple and its product the i-Phone in an advertisement about a protective case.

But caution should be taken here to ensure that compatibility advertising does not create an impression of endorsement or an affiliation between the two companies. For example, in a case between Stouffers and Weight Watchers, the Court found the following language likely to create consumer confusion: “Stouffers presents Weight Watchers exchanges for all 28 Stouffer’s Lean Cuisine entrees.” According to the Court, the use of the word “presents” between the marks “Stouffer’s” and “Weight Watchers” “creates the impression either that Stouffer owns Weight Watchers, or more likely that Stouffer is presenting these exchanges for Weight Watchers – in other words, that Weight Watchers gave Stouffer the exchanges to publish in the ad.” Weight Watchers Int’l, Inc. v. Stouffer Corp., 744 F.Supp. 1259 (S.D.N.Y. 1990).

Conclusion

With common sense and a good understanding of the legal parameters, companies can acceptably reference a competitor’s brand in an advertising campaign. But, given the heightened scrutiny trademark owners will give to the unauthorized uses of their market, caution should be taken to ensure that an advertisement avoids ambiguous language, which could cause consumers to be confused as to source, identity or sponsorship of the product or service. Anything even arguably deceptive or misleading must be avoided, and all direct factual comparisons must be substantiated.

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

Website Terms and Conditions, Why Do I Need Them?

Three Ways The Most Boring Page on Your Website Offers Critical Protection

Although web professionals spend almost no time on it, website terms and conditions govern the relationship between your company (or the entity running the website) and visitors, users and customers. So, as a founder, this page shouldn’t be ignored. Depending on the type of business you have, there are specific provisions you should include in your terms and conditions to make sure your company’s unique risks are mitigated. However, highlighted below are some general provisions that are a good idea for most companies with a web presence to address.

1. E-Commerce:

If you are selling goods through your website, your terms and conditions are especially important. You should make sure to include your return policy, whether you will make full refunds for dissatisfied customers, and what transit risk you are comfortable taking on – for example, will you be responsible if a product breaks when a customer is shipping back a return? Disclaimers on your liability and any warranty you make in reference to your product are also critical.

2. Protect Your Original Material:

When you put your work on the internet, you are literally making your hard-earned wisdom or recommendations available to the entire world. To protect against any improper third party use, you may need to prominently display notices regarding copyright or trademark. Additionally, to protect against a visitor who may use your content in a manner that you did not intend or who relies on the information you provide to his or her detriment, you should be sure to include appropriate disclaimers and limitations of liability.

3. User-Submitted Information:

If your site displays any information submitted by users (including standard “user profile” details), you should limit your liability from any libelous or offensive material, as well as any material that may infringe on the intellectual property of others. In addition to specifically disclaiming liability, you must also develop policies around when you will monitor and remove content and clearly state these policies in your terms and conditions.

To conclude, if given proper attention, you are entitled to largely ignore the terms and conditions of your website, so long as you initially make sure they adequately protect you and remain up to date. If so, the only time you’ll refer to them is to help you out of a jam. But if no attention is given to this boring little page, you may pay later with unmitigated legal exposure. Make sure to consult an attorney to ensure that your particular company risks are being appropriately mitigated.

 

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

2 Tips on How to Market Your Equity Crowdfunding Campaign

A business thinking through the best way to sell a successful equity crowdfunding campaign should remember these two important points:

  1. Focus on your network. While the relatively new ability to advertise a local public offering to everyday investors (see Invest Georgia Exemption Guide) significantly expands a startup’s traditional investor pool, the reality is that the vast majority of funds raised comes from a business’s pre-existing network.   In fact, recent reports show that only 6% of funds raised through equity crowdfunding come from strangers.  While this percentage is expected to increase as this market matures, for now, a business considering an equity crowdfunding fundraise will get more bang for its buck if it cultivates the relationships it already has – rather than expensive advertising campaigns designed to attract potentially new investors.
  1. It takes longer to attract investors in an investment offering than Kickstarter backers. Based on my own experience helping companies close investment crowdfunding offerings and my observations of the industry and consumer behavior, converting an investor takes significantly longer than converting a backer in a rewards crowdfunding context.  This distinction shouldn’t come as a surprise, since the Kickstarter mentality functions on novelty or consumer appeal, which is driven by the desire for instant gratification, while investing creates a more long-term relationship – often governed by complex terms that take folks a while to comprehend.  Nevertheless, it warrants pointing out to businesses who come to an equity crowdfunding transaction with the false confidence created by a successful Kickstarter raise.  If your strategy is to close a deal in 30 days, or to generate traction by immediately moving the funding needle, be mindful of the fact that an investment transaction is a different animal – even if it has the word “crowdfunding” after it.

 

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

Georgia Intrastate Crowdfunding and How It Helps Pitching

Now, in Georgia and a growing number of states, so long as a company is planning to keep a securities offering local (with all investors –both accredited and non-accredited – coming from the same state in which the company is formed), a company can freely pitch an investment offering to anyone, as long as the members in the audience certify their state of residency (such as filling out a sign-in sheet prior to or at the beginning of the pitch event). With only residency to vet, an intrastate offering is the least administratively taxing while offering companies the largest investor pool to choose from. A major win for any company in an intrastate friendly state.

One quick word of caution – the federal and local laws addressed above are complex and require strict adherence. In each case, there are basic filing prerequisites, among other things, that must be followed before a company can legally participate in a public pitch event under any of the mechanisms addressed above. Please use SmartUp’s free consultation tool for more information. We can help you assemble a securities offering best suited to fit your company’s needs.

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

Federal Changes That Make It Easier to Pitch Your Startup

In the last few years, two important shifts have happened in the local and national securities space that make it easier for companies to take part in pitch events without fear. The one that has garnered the most attention operates at the federal level. The JOBS Act, passed on April 5, 2012, has now made it legal for young companies without a stable of rich uncles to advertise a securities offering to any high-net worth individual, so long as the company verifies that all the investors in the round are actually accredited.

JOBS Act: What Does This Mean for Pitch Events?

Now, if a company accepts the added administrative burden of verifying investor eligibility (and limiting the offering to only accredited investors), it can pitch an investment offering to anyone, including the general public. However, only high net-worth individuals are permitted to invest – even if interested investors are in the room who do not meet the accredited standards.

But What About Everyone Else?

At the local level, some states are relaxing the general solicitation ban even further to permit companies to advertise an investment offering to the general public – and more importantly – to actually sell securities to the 97% of the public who are not considered high net-worth individuals. Currently, 14 states (and growing) have updated securities regulations to allow the middle class to invest in local companies. Georgia is one of them. Startups and small businesses in these states have an unprecedented opportunity to both advertise their funding needs and actually garner investors, now that the investor pool has expanded to include all investors, regardless of income.

For more information on rules in Georgia read: Georgia Intrastate Crowdfunding

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

Where Can You Pitch Your Idea and in Front of Whom?

For almost 100 years, companies seeking investors have had to be very careful not to “advertise” an offering – or else risk attracting the ire of federal regulators. To be specific, federal law requires all sales of securities to be either registered with the SEC (aka, “publicly traded” like Apple or Facebook) or else qualify for an exemption from registration. The exemption most commonly invoked by young companies is Rule 506 under Regulation D, which allows a company to raise an unlimited amount of money from high net-worth individuals, so long as the company refrains from engaging in “general solicitation.”

What is a high net-worth individual?

A high net-worth individual – also known as an “angel” or “accredited” investor – makes at least $200,000 in annual income or has at least $1 million in net worth (not including primary residence). Basically, these folks range in the top 3-5% of the American public, and (until very recently) they have been the only class of investor eligible to invest in young companies. However, because of the ban on general solicitation, an entrepreneur essentially had to have a pre-existing network of rich uncles in order to make an offering of securities under Rule 506 because of tight restrictions around what could be said to the public about a securities offering.

What is general solicitation?

The type of activity covered by “general solicitation” – and therefore forbidden by companies relying on Rule 506 – includes the following:

• Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

• Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

In short, because young companies have not been permitted to broadcast news of a securities offering (even to “high net-worth individuals”), the safe course until very recently was to limit a young company’s investor base to friends and family, or to those with whom the entrepreneur has a pre-existing relationship.

How Did Companies Pitch Without Violating the Ban on General Solicitation?

Although entrepreneurs (and angel groups) have not always followed the letter of the law, the safest route for a pitch event involving members of the general public was a “demo day” – or a product focused presentation that omits any reference to a capital raise, funding need, investment opportunity, etc. This means no business plans, financial projections, growth rates, etc.

The only time an investor could truly pitch an investment opportunity was in a room of exclusively accredited investors that were previously known to the entrepreneur or event organizer.

 

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan

How to Choose a Good Business Name

One of the early defining moments in the life of a startup is choosing a name. It’s generally the first thing the public knows about you – your first business “pitch” when you really think about it. And it serves as the centerpiece of your brand, so it’s important that you select something that you’re proud to put out into the world.

You brainstorm, wait for inspiration, ask for feedback – the process can drag on and on. For a year, my best friend and I devoted the majority of our phone conversations to the all-important topic of what to name the various business ideas we were working to hatch. Finally, after settling on names that suited both of us, the real work began. Could we get the domain?

In today’s era of the Internet and mobile services, the reach of your company is only limited by your customers’ ability to find you. So it makes sense that most startup founders stake the company name on the availability of the domain. But with the ever growing scarcity of good “.com” options, what do you do when a top level domain is not available for your enterprise?

Many startups fall prey to these common pitfalls when forced to think outside the “.com” box.

So how can you choose a good business name?

1. Drop Vowels: Famous internet brands, like Flickr and Twitter (known as Twittr when it first launched), have popularized the trend of dropping the vowels in their company name, which makes it easier to score a .com domain. In fact, Flickr founder, Catarina Fake credits domain acquisition challenges as the driving motivations behind the name: “We tried to buy the domain from the prior owner… He wasn’t interested in selling…. We liked the name “Flicker” so much we dropped the E. It wasn’t very popular on the team, I had to do a lot of persuasion.” While some might argue that a deliberate misspelling makes for an edgier – more distinctive – identity, other founders have faced challenges with this approach. According to Ustav Agarwal, founder and CEO of the gamified music sharing app “nwplying.” “Nowplaying described the product in its simplest form, but it was too common a hashtag for us to possibly differentiate ourselves and create a brand around it – hence the term nwplyng, i.e. ‘nowplaying’ sans vowels,” he says. “Plus, the domain name nwplyng.com was easily available.” But would he recommend this approach to other entrepreneurs? No. “Users misspell it way too often,” he shares, “even the ones using it regularly – and that means you lose out on network effect and app downloads.”

2. Add a Verb: When DropBox wasn’t initially able to acquire DropBox.com, it settled for GetDropBox.com. Same for Atlanta-based startup Gather, which you can find at gatherhere.com. While this is may be a better alternative than abandoning a name you really love just because the .com version is unavailable, there are some practical downsides, explained in detail in this article. In short, be prepared for customer confusion – from lost emails sent to the official owner of the top level domain to less effective marketing campaigns, diluted by the traffic diverted to the domain reflecting your company’s name. Not to mention inevitable questions from investors, anxious to see your company legitimized by securing the straightforward “.com,” sans verb. For customers and potential investors, the “add a verb” approach can often amount to a red flag that begs a larger question – when will your company be legitimate enough to buy the original domain?

3. Choose a Country Code Domain. Enterprising companies like Bit.ly and About.me played the .com scarcity to their advantage, embracing country code domain alternatives to the point that they incorporated the whimsical suffix into their name. This trend is here to stay, with the creation of more and more generic top level domains to choose from (such as “bike,” “food,” and many other common nouns), but keep in mind the reality that customers still have to find you. And a trendy new domain – while it may work for your company name – can cause consumer confusion. As explained here by Eric Bieller, founder of Sqwiggle, “Letsfeast.com used to be found at lesfea.st, which is clever, but extremely difficult to explain to someone audibly.”

With a matter as critical to your company as its name, make sure to consult with a domain attorney before you settle for anything less than the top-level domain of your dreams. A solid understanding of the legal leverage you have – before you try to negotiate with a cybersquatter – can literally translate into a cost savings in the hundreds of thousands. At least that’s what it meant for a recent client.

This is especially true for companies that have expended considerable resources developing brand goodwill. Your hard work should be leveraged to make the acquisition of a top-level domain much easier and more affordable, so you don’t have to settle for the compromises listed above.

 

If you are interested in more detail related to your situation it is best to speak with an attorney.

Megan K. Johnson is a business lawyer with over 7 years of experience. She helped champion securities crowdfunding at the local level and worked with the first company to successfully close an equity crowdfunding involving everyday investors. She is a partner at Founders Legal and can be reached at [email protected]

megan