Optima Law Group Blog

Trade Secrets

We will be doing an informative blog post in November on the new Defend Trade Secrets Act of 2016 and how it impacts our clients. To prepare for that topic, this post is a general primer on the basics of understanding trade secrets. Enjoy!

 

What is a Trade Secret?

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets encompass all manner of confidential business information, including development, manufacturing, industrial and other commercial secrets. A simple, classic example would be a confidential customer or vendor list. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.

The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes. While a final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, clearly unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence.

 

How are Trade Secrets Protected?

Contrary to patents, trade secrets are protected without registration, that is, trade secrets are protected without any state run procedural formalities. Consequently, a trade secret can be protected for an unlimited period of time. For these reasons, the protection of trade secrets may appear to be particularly attractive for businesses. There are, however, conditions for the information to be considered a trade secret. Compliance with such conditions may turn out to be more difficult and costly than it would appear at first glance. While these conditions vary from country to country, some general standards exist which are referred to in Art. 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement):

·         The information must be secret (i.e. it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question).

·         It must have commercial value because it is a secret.

·         It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements, limited access rights, encrypted data etc.).

 

Patents or Trade Secrets?

Trade secrets are essentially of two kinds. On the one hand, trade secrets may concern information, data, methods, etc. that do not meet the patentability criteria and therefore can only be protected as trade secrets. This would be the case of customers’ lists or manufacturing processes that are not sufficiently inventive to be granted a patent (though they may qualify for protection as a utility model in certain countries). On the other hand, trade secrets may concern inventions that would meet the patentability criteria and could therefore be protected by patents. In the latter case, the business will face a choice: to patent the invention or to keep it as a trade secret.

Some advantages of trade secrets include:

·         Trade secret protection has the advantage of not being limited in time (patents last in general for up to 20 years from the filing of an application, and a typical patent term is 15-17 years). The protection therefore continues indefinitely as long as the secret is maintained as confidential and not revealed to the public.

·         Trade secrets involve no drafting, filing and registration costs.  Patents are expensive and have ongoing maintenance costs.  It is not uncommon for a single patent obtained in major countries (e.g. the US, Europe, Japan, Canada, Australia, China and South Korea) to costs in excess of $500,000 over the life of the patent.  Even a patent obtained only in the United States can easily cost $50,000-$100,000 over the life of the patent. 

·         Trade secrets have immediate effect.

·         Trade secret protection does not require compliance with formalities such as disclosure of the information to a Government authorities or publication of the details of the invention as required for a patent.

There are, however, some concrete disadvantages of protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability:

·         If the secret is embodied in an innovative product, others may be able to inspect it, dissect it and analyze it (i.e. "reverse engineer" it) and discover the secret and be thereafter entitled to use it.  Trade secret protection of an invention in fact does not provide the exclusive right to exclude third parties from making commercial use of it. Only patents and utility models can provide this type of protection.

·         Once the secret is made public, anyone may have access to it and use it at will.

·         A trade secret is more difficult to enforce than a patent. The level of protection granted to trade secrets varies significantly from country to country, but is generally considered weak, particularly when compared with the protection granted by a patent.  Often, an improper disclosure is done by lower level of employees (who should not have had access to the trade secret in the first place) who, even if sued in a court of law, has no funds to compensate the trade secret holder for its loss.

·         A trade secret may be patented by someone else who developed the relevant information by legitimate means.  This in turn could limit or exclude the original trade secret holder’s right to use the trade secret they created.

 

Thank you to the World Intellectual Property Organization for information used in this post.

 

If you have any questions about protecting your trade secrets or seeking patent protection, please do not hesitate to reach to us. We would love to hear from you at 858-964-4697 or info@optimalawgroup.com.

Equity Crowdfunding

What do you need to know about the SEC’s recently enacted Equity Crowdfunding rules?

 

Crowdfunding is an exciting innovation of our internet age. By using the internet as a medium to reach the masses, a company can launch an idea and ask many people to contribute money to fund their idea. The theory is that many hands make light work. Websites like Kickstarter.com and Indiegogo.com are excellent examples of the fundraising type of crowdfunding where the purchaser is essentially giving money to the company. This blog, however, is focused solely on what is termed “Equity Crowdfunding.” Equity Crowdfunding is when a company (“issuer”) asks many people (“purchasers” or “investors”) to contribute an amount of money toward their goal, and in return, the purchasers receive equity in the company. Under direction of the JOBS Act, Title III, the SEC has recently finalized a regulatory structure for this type of funding effective May 16, 2016. The final rules are over 600 pages, however, we have listed some of the highlights below. Note that this is only a small portion of the rules and we recommend contacting an attorney to safely navigate the SEC’s Equity Crowdfunding rules.

 

Who is eligible to Equity Crowdfund?

 

In issuing its final rules, the SEC outlined who is NOT eligible to use the Equity Crowdfunding rules:

·         Companies organized outside the U.S.;

·         Companies required to report to the SEC;

·         Investment companies;

·         Disqualified companies;

·         Companies that have failed to comply with the annual reporting requirement during the two years preceding the filing of a Equity Crowdfunding offering; and

·         Companies with no specific business plan or whose business plan is to engage in a merger or acquisition with an unidentified company.

 

How much can a company raise?

 

The SEC stated that an eligible company can raise up to $1 million of securities through Equity Crowdfunding. When a company is also issuing securities using other registration exemptions, the company must comply with the separate requirements of the exemption and the separate limits will apply. Companies will need to be especially careful during simultaneous offerings under Equity Crowdfunding rules and another Securities Act registration requirement. For example, issuing securities under a “quiet” Rule 506(c) offering prohibits solicitations and a company taking advantage of 506(c) and Equity Crowdfunding would have to ensure 506(c) purchasers were not solicited by the Equity Crowdfunding offer.

 

How much can an investor give?

 

An individual investor can only purchase, from ALL Equity Crowdfunding issuers, during a 12-month period:

·         The greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if       either annual income or net worth is less than $100,000; or

·         10 percent of the lesser of the investor’s annual income or net worth, not to exceed $100,000, if both annual income and net worth are equal to or exceed $100,000.

 

Are there any required disclosures?

 

The SEC requires that prior to launching an Equity Crowdfunding offering, the company must file with the SEC and provide to investor (and the intermediary) an offering statement. The offering statement has a whole host of required information with varying requirements based on the target offering amount.

 

What are the mechanics of Equity Crowdfunding?

 

Equity Crowdfunding must be conducted:

·         though a single intermediary that is an SEC-registered broker-dealer or an SEC-registered funding portal that is also a FINRA member; and

·         exclusively through the intermediary’s platform.

Investors are entitled to cancel their investment commitments at any time and for any reason until 48 hours prior to the offering deadline. Any material change in offering terms will require a reaffirmation of the investor’s commitment.

 

While Equity Crowdfunding has its advantages, it also has drawbacks and is not a fit for every company. As always, don’t hesitate to reach out to us if you have any questions about Equity Crowdfunding, other options for capital raising, or anything else relating to the success of your business. We would love to hear from you at 858-964-4697 or info@optimalawgroup.com.

Tips for Using Contracts like a Savvy Pro

Growing companies have many tools at their disposal. Contracts are one of those tools and mastering their use is another competitive advantage that will pay dividends in the long run. Here are our best practices for using contracts like a savvy pro:

 

1.Ensure that the contract is enforceable

·         Parties must be capable of contracting.

·         Parties must consent to the agreement.

·         Contract must have a valid legal object.

·         Contract must be supported by sufficient consideration (not necessarily money).

2.Always have it in writing

·         Oral contracts are sometimes unenforceable by their nature.

·         Oral contracts are difficult to prove and costly to enforce.

3.Avoid using agreements found on the internet

·         Contracts are not one size fits all – they need to be customized, as most are for specific business situations, facts, and jurisdictions.

4.Read and understand your contracts

·         If you are uncertain, have them reviewed!

·         “I did not know what was in it” is no excuse under the law.

5.Have clear deliverables and scope so that all parties are on the same page so there is little left to chance and interpretation

·         This will help avoid “scope creep”, in a services contract, for example, where the other party expands the scope of services they want over time for the agreed upon payment terms.

6.Using contracts with other parties helps weed out the bad apples

·         If they are not comfortable committing to terms in writing and being held accountable then that could be a red flag.

·         Working out a contract can also give you an insight into how easy or perhaps frustrating they are to work with.

7.Make sure the contract covers all key aspects/responsibilities specific to the situation

·         If important sections are left out, then you could be left in no man’s land with no agreement as to what is to happen between the parties in certain situations.

8.Don’t be bullied by take it or leave it ultimatums

·         If you are uncomfortable with the terms of a contract, and the other party will not compromise, then it may be best to walk away than to sign a contract that may keep you up at night for its duration.

9.Just because it looks like boilerplate does not mean it is not important – it can hurt you and your business

·         Sometimes key provisions can be snuck into the most unexpected places of the contract.

10.Track your contracts and know when they expire so you can take necessary and timely actions

·         You may need to re-execute another contract for your benefit and protection or maybe it is time to explore options with new parties to fill that need.

11.Re-evaluate your contracts when a material change occurs on your end

12.Safeguard your contracts

·         Store executed physical and electronic copies in a few different safe places so you will always have access to a copy in the event one is lost or destroyed.

13.Know who you are contracting with

·         Contracts are important to protect you, AND it is important that the other party will honor and respect them. Make sure they are someone you want to do business with.

 

If you have any questions about contracts or would like some assistance in drafting or negotiating a contract, please contact Optima Law Group at 858-964-4697 or info@optimalawgroup.com and we would be happy to assist however we can. 

The Basics of Trademark Protection

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is the same, but for services (not goods). All points made in reference to trademarks in this article are also applicable to service marks.

Trademark laws are primarily concerned with preventing marketplace confusion. Companies invest capital into marketing their products and services, and trademarking those marketing devices protects them from infringement. By obtaining trademark registrations, these companies add to their intellectual property portfolio and increase the company’s valuation. Two main concerns with marketplace confusion are that a consumer will mistakenly purchase a good or service, and that a company will use another’s mark and wrongfully benefit from the good will that the mark enjoys. 

Aside from the increase in company value, the main benefit of registering a trademark is the ability to prevent others from using the mark in a manner likely to create marketplace confusion. This provides protection against another company spoiling the good will that has been created in the mark, and prevents another company from taking part of the market share by wrongfully using the mark. A registered trademark creates a presumption of ownership in the registered owner of the mark, it places all other companies within the United States on constructive notice of the mark, after a period of time it makes the mark incontestable, and it may increase payment in a willful infringement case.

Ideally, registering a trademark would be enough to prevent infringement. In many cases it is, however, trademark owners must remain vigilant in enforcing their rights.  It is important for the owner of the mark to routinely check USPTO records and the marketplace for anyone who may be infringing their mark and take appropriate measures. Where some question exists about who has rights to a mark, the mark will be registered to the applicant who is able to show the earliest use in commerce. Additionally, in enforcing a mark, the owner must be aware of the class or classes in which their mark is registered. Remember, the ability to stop another from using a mark is dependent on the use of the mark being potentially confusing to consumers. Therefore, a mark registered and used in the apparel class will not likely prevent the same mark being used in the food and beverage class. Some marks, however, are so strong that they occupy the field in many classes. Consider Coca-Cola, for example. While typically associated with a beverage, the mark is so strong that the same mark would not likely be registered to a clothing company. 

Generally, in order to register a trademark the USPTO requires that the mark be used in commerce, the mark is not generic/descriptive, and not so close to another existing mark as to cause a likelihood of customer confusion in the marketplace. When an applicant intends to use the mark in commerce, but has not yet, the applicant can apply to reserve the mark. The more unusual a mark is, the more likely it is to be eligible for trademark. A mark that is merely descriptive or generic will be considered weak and might not be eligible for registration. A computer company would not likely succeed in trying to register “computer” as a trademark for one of their products since that merely describes the actual product, however “MacBook” is sufficiently unique and non-descriptive to allow the mark to be registered.

Should you have any questions about trademark law or how and whether to protect your marks, please do not hesitate to contact paul@optimalawgroup.com. We will be diving deeper in specific aspects of trademark protection in the near future. Stay tuned! 

Ten Things to Consider When Selecting an Entity

When starting a business, you must decide what form of business entity to establish. Depending on a number of factors, some of which hold greater weight than others, your choices might include: C-corporation, S-corporation, B-corporation, LLC, partnership, sole proprietorship, etc.

Entities are not one size fits all, so it is essential that you conduct a thorough analysis to identify which entity matches best with the ongoing needs and goals of your business.

Here are several key things to consider when selecting an entity for your business:

  1. What is the long-term exit strategy for the founders?
    • Will the business be acquired in five or 10 years?  
    • Will you pass the business on to children?
    • Will the business continue a noble cause indefinitely? (not-for-profit entity) 
       
  2. How will this venture be funded?
    • Will you self fund the venture? 
    • Will you target VCs, angel investors, or friends and family to invest funding?
    • Will you apply for grants/donations/public funding?  
       
  3. Does the entity need limited liability protection?
    • This depends on the type of business. Limited liability protection is essential for most businesses even if you aren’t selling sharp, dangerous objects. It does not hurt to have an extra layer of protection and other stakeholders (including investors) will insist upon it. 
    • It is useful so your personal assets will not be taken to pay debts of the company. Any kind of business can fall on hard financial times and into debt.  
       
  4. What is the expected financial performance the first 1-2 years?
    • Will the business be immediately profitable? 
    • Will it run at a loss for a period of time? 
       
  5. Do the founders need a unique arrangement between one another?
    • If profits will be divided according to ownership, then your entity choices are open. If not, then an LLC that allows for customization might be best.  
       
  6. Will all founders be active or will they be passive?
    • LLCs allow for some passive structures.
    • Corporations can have SOPs to reward and incentivize active founders. 
       
  7. How many owners will the business have and will any be non-US citizens?
    • S corps have restrictions on who can be a shareholder. 
       
  8. How much record keeping do the founders want to do/want to pay for?
    • Smaller consideration obviously, but sometimes people really care about this. They know they are going to have a tough time remembering to maintain the formalities of a corporation so they opt for an LLC. 
    • Record keeping can increase each year.  
       
  9. If the founders’ goals/plans for the venture change after a few years, can the chosen entity be converted or adjusted to align with these changes?
    • Perhaps you originally wanted to self-fund and now you want to raise capital from outside investors. Or vice versa. 
       
  10. Which state should be chosen for formation?
    • We usually look at either the state where the principal place of business will be, or a state like Delaware or Nevada with other advantages. 
    • Don’t just follow the crowd.

As you can see, you must take the time to analyze your business’ needs to determine the correct entity for it. If you need help with choosing an entity for your business, please contact Optima Law Group at 858-964-4697 or info@optimalawgroup.com and we can assist you through the entire process.

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