Tuesday, January 29, 2013

Is your IP house in order?


When I read Mike Cohen’s recent blog about IP audits, it reminded me that it’s been a while since I have had a client undergoing an audit by the Business Software Alliance (BSA).  The BSA is a nonprofit self-funded association of companies that, among other things, engages in the private enforcement of its members’ intellectual property rights through the audit of businesses for compliance with their software licenses. I appreciate the business benefit such an organization offers to its members, as well as the public benefit from the organization’s policies promoting the protection of intellectual property and encouragement of innovation.

Nevertheless, I can’t help but be grateful when my clients are not the target of a BSA audit. If selected for an audit, chances are pretty high that you will be out of compliance. But what may constitute noncompliance—and the cost of resolving such noncompliance—can be surprising.

It isn’t enough to be generally well-managed and not intentionally dishonest. You must have proof of purchase documentation for every piece of software in use (not just evidence such as the original disks or even an invoice, but a receipt or packing slip). How many companies keep that documentation? If you purchase hardware with preloaded software, is the software itemized on the documentation proving your purchase of the hardware? Is the company that is using the software also the company named in the purchase documents? Do the names on the invoice and license match exactly? These are only some of the issues that can create an appearance of significant noncompliance. They have nothing to do with intentional wrongdoing or even careless disregard for the intellectual property rights.

Proposed penalties for unlicensed software use (identified by the BSA as any products in use without adequate proof of purchase dated prior to receipt of a BSA audit letter) are calculated using a formula based on a multiple of the full retail license fee of the software at its unbundled rate. While the final settlement amount is open to negotiation, the BSA will assess an amount for its attorneys’ fees, and may require an additional fee for settlement confidentiality. Final agreements typically require the deletion of all unlicensed software and a commitment to implement procedures for future compliance. Unless a company determines to discontinue all use of a particular software product, the settlement may include an agreement for the license of additional software required for full compliance.

Some audit targets are selected randomly, but most these days probably result from a report by an informant, typically a disgruntled current or former employee. Under the BSA’s reward program, informants are paid for such information based on the amount of the settlement the BSA ultimately receives from a noncompliant organization. A potential reward can be as high as a million dollars if the settlement exceeds fifteen million. Most settlements are under $100,000, but the BSA reported eight in the first half of 2012 that ran between $120,000 and $625,000. 

The activity reported by the BSA suggests that the BSA is as aggressive as ever in pursuing the enforcement of software licensing rights, so if you haven’t already received a BSA letter, take advantage of the opportunity to clean up your records now. If you are already in the midst of an audit, there are still things you can do to enhance your settlement options. 

Thursday, January 24, 2013

SkinnyGirl Gets Divorced


few months ago I wrote about the real housewife turned mogul, Bethenny Frankel, and her massive deal to sell her SkinnyGirl drinks to Beam Global for $120 million.  In a matter of a few years, Bethenny went from near bankruptcy (despite her designer duds on the RHONY) to multi-millionaire.  She also went from single, to marriage, to motherhood in that same time frame.  And now, she is getting divorced.

I don’t pretend to be an expert in marital law, especially not in New York marital law, but I think this scenario lends itself to another discussion about owning closely held business assets and growing the company value, and the impact of premarital/postmarital agreements and divorce—as I discussed here and here.

Here are the basic facts: Bethenny built and advertised the SkinnyGirl brand prior to her marriage.  She grew the brand significantly as a member of the RHONY cast. About four years ago, Bethenny met her husband, Jason.  They were married a year or so after that and then welcomed a daughter a couple of months after the wedding.  The reason I point out the timing of the birth of their daughter is because Bethenny was pregnant when they negotiated and executed their premarital agreement.  A year or so after their daughter was born; Bethenny inked the $120 million SkinnyGirl deal. A year and a half or so from there, they are divorcing.

A dramatic change in circumstances from the time of the negotiation to the agreement to the time of enforcement of the agreement can be one of the biggest reasons agreements are thrown out or the courts alter the terms.  Having children, when no children had been contemplated in negotiating the agreement, can change the overall “fairness” of the terms.  This has nothing to do with child support—child support cannot be negotiated in a prenuptial agreement—but it does have to do with the expectations of the parties, lifestyle, and needs.  Selling a business or some other windfall can also impact the agreement.  

I don’t actually know the terms of their prenup, but it is possible that Bethenny was aware of the value of the company at that time or may have even been brokering its sale.  If the parties were both aware of the $120 million value and the possibility of the liquidity event, it is difficult to argue that this is a change in circumstances such that the agreement should be ignored.  However, adding $120 million to the balance sheet from relative bankruptcy is a significant change to the household lifestyle.  

Another factor here is likely the length of the marriage and the time between negotiation and enforcement.  Because this was a short union (yet longer than this marriagethis marriage, and this marriage combined), there isn’t much argument that Jason enjoyed the benefits of this lifestyle such that it would be a tremendous hardship to go back to his previous life.

The point of all of this is not to analyze Bethenny and Jason’s divorce, but to point out the impact of a liquidity event in a business completely built by the entrepreneur spouse, closely followed by a divorce.  If there are pieces of a prenuptial agreement that should be re-addressed or clarified, think about amending it or executing a postnuptial agreement.  If you have no prenuptial agreement, think about a postnuptial agreement that addresses this situation.  Issues regarding who can own the company or force liquidation of the company can (and should) be addressed in a buy-sell agreement, but that does not ensure that a divorce court will follow those provisions.  If you have a business, especially with other family members, think through what might happen if a divorce were to follow a significant increase in the business’s value.   

Tuesday, January 22, 2013

The Book: Malcolm Gladwell, Blink: The Power of Thinking Without Thinking (Little, Brown and Company, 2005)


Why: In business as in life, snap judgments can get you where you need to go in less time and with less hassle.  Just make sure they’re based on the right factors.

I cannot tell you how many times during my now-distant youth I was lectured by someone older and presumably wiser about the power of the first impression.  This seemed a bit superficial to me, especially since I was a product of the late 1960s ethos that encouraged me at every turn not to judge a book by its cover.  The “p” word—prejudice—was the dark underbelly of American society that served as the focus of the lesson plan for many a young social studies teacher, not to mention the situation comedies we consumed on a daily basis, circa 1971.

I’m not saying this emphasis on social awareness was bad, or indeed that racial or other social prejudice is a problem that has now been (or can ever be) entirely eradicated, but there is a bit of a paradox here: how can we trust our first impressions while acknowledging that those impressions may lead us astray?

Enter Malcolm Gladwell, whose work I have previously praised here and here.   In Blink, Gladwell examines the power of the first impression, what he calls “thin-slicing”—the ability to make judgments by “filtering very few factors that matter from an overwhelming number of variables.” A decision made this way—the proverbial “first impression”—can indeed be a solid basis on which to act.  As Gladwell tells us, “there can be as much value in the blink of an eye as in months of rational analysis.”  (Hence the name of the book.)

But there’s a qualification here (a pretty big one, actually): you have to make sure you’re focusing on the correct few factors.  And it’s here that Gladwell goes into how snap judgments, to be useful, can be (and should be) educated and controlled.  This, in fact, is the way out of the paradox.  Decisions based purely on uninformed prejudice turn on factors that won’t necessarily lead to the best result.  In other words, taking a quick look at the table of contents will lead to a better judgment than relying on the appearance of the book’s cover.

As you may have come to expect, there is an entrepreneurial lesson lurking here, best illustrated by Gladwell’s case study of Coca-Cola’s doomed introduction of New Coke in 1985.  Coke’s ill-fated reformulation was a direct result of Pepsi’s “taste-test” marketing ploy, in which ads showed consumers tasting two unidentified colas and invariably choosing Pepsi over Coke.  Pepsi’s market share began to climb.  Coke did its own tests—with the same results.  Coke panicked and introduced New Coke, which was an unmitigated disaster.

Turns out that people only preferred Pepsi’s lighter and sweeter taste if they were consuming just a sip.  People who drank an entire can often found the sweetness cloying and, more often than not, preferred Coke.  Coke’s advertising machine also added to the allure of the classic drink.  At the end of the day, Coke executives learned that they were basing their judgment on the wrong factors.  In Gladwell’s words, they learned that, “in the real world, no one ever drinks Coca Cola blind.”

The lesson here is clear, although not necessarily easy to implement: snap judgments can be extremely valuable, so long as they are based on the right factors.  Determining what those right factors are is the challenge.

Thursday, January 17, 2013

…and a UAV in every house…

Unmanned Aerial Vehicles (UAVs) have been around for many years. More recently, UAVs have been getting international attention because of the US military’s use of drones for monitoring and identifying enemy combatants and, at times, of armed drones for deploying deadly payloads on suspected terrorists.

The international debate has been swelling while the use of UAVs has increased, corresponding with the scale-back of the US military presence in Iraq and Afghanistan. The premise has been that using technology that can be operated from a safe distance preserves precious lives and resources while increasing the scope of US surveillance and intelligence-gathering.

Meanwhile, you may have noticed that, on the domestic front, UAVs have quietly become part of a growing national debate, illustrating a new tension between advances in technology and traditional notions of privacy.

Not all UAVs are created equal. At last check, there were nearly 1,000 companies, including several hundred contracting with the US Department of Defense, with some form of UAV technology, ranging from nano-UAVs—aircraft that weigh less than 8 ounces, equipped with a camera and sensor technology, that can remain in the air for over 10 minutes—to the hulking UAVs manufactured by large defense contractors like Northrop Grumman.

For years, agriculture consultants and large ag producers, and more recently farmers, have moved “to the skies” for surveillance of crop conditions. With advancing technology, the ability to scan the surface can provide valuable information about the presence of moisture, the effectiveness of chemical applications, and the presence of certain risks to crops.

On the security front, border patrol agents and customs agents monitoring sea ports and large portions of unfenced and unpatrolled borders with Canada and Mexico have experimented with the use of UAVs to broaden the reach of the gate-keeping function of the Department of Homeland Security.

In each of these cases, the consensus is that if there is a convenient, safe way to use technology to monitor and survey land, assets, and the movement of people (especially to where they shouldn’t be), there is a compelling interest to use technology.

A couple of recent cases, however, illustrate controversial uses of drones.

Example 1: in connection with surveillance of the Brossart family, suspected of being in possession of half a dozen pilfered cows, local law officials enlisted the use of a Predator Drone to determine the whereabouts of suspected armed individuals at the family’s rural residence. The cattle “rustlers” were taken into custody peaceably and law enforcement gave credit to the use of the drone to avoid a Ruby Ridge-like” episode.

Example 2: hunters shot down an animal rights activist drone (broad sense of the term—it flew and had a camera) that was collecting aerial video of hunters at a private hunting club. The “perpetrators” have likely achieved folk hero status at the club. No further commentary here on whether it was the hunters or the activists that were the “perpetrators,” but you can see the outline of a perfectly good debate.

Privacy advocates are extremely worried about such domestic use of UAVs, and for good reason. The Fourth Amendment ensures that private citizens on private property are protected from unreasonable searches. Case law developed since the passage of the Bill of Rights has provided some stretching and tightening of what qualifies as a warrantless search—whether your right to privacy extends outside of your home and whether or not pictures from airspace are prohibited (GoogleEarth™ anyone?).

Also, the compelling protection and security argument can’t be ignored when considering the interests of the government (safety, security, defense, etc.) versus an individual’s right to privacy. (No privacy argument without a Benjamin Franklin quotation - In 1755, and numerous times prior to and after the birth of the United States, "Those who would give up essential liberty, to purchase a little temporary safety, deserve neither liberty nor safety”).

Congress is now getting into the picture. Rep. Shelley Moore Capito (R-West VA) offered a bill last year (the Farmers Privacy Act, H.R. 5961) that aims to prevent the US Environmental Protection Agency from using drones to hunt for regulatory violations, particularly on farms.

The debate is just getting started, but none too soon. You can now purchase a drone for several hundred dollars and control it with your iPhone. Recently, at CES, the Parrot AR Drone was showcased and can be purchased on Amazon here. Soon everyone will have a drone.

Tuesday, January 15, 2013

Tips for Navigating the Exit of Long-time Entrepreneurs

In recent months, I have had the pleasure of working with two lifelong entrepreneurs on the sales of their businesses.  Each of the entrepreneurs had decades of deep business experience, but that experience did not include buying or selling other companies.  Counseling them through the sale process, it was evident to me that we, as deal professionals (including attorneys as well as investment bankers, accountants, etc.), sometimes forget that M&A is not something that many business owners experience on a routine basis.  That being the case, I offer these five basic tips for entrepreneurs preparing to start down this path:

1. Get your legal and financial advisors involved in your potential transaction as soon as you either decide you want to sell or receive an offer or inquiry from a party interested in purchasing your business. Many key deal points are raised by buyers early on, and while you may not be technically committing to completing a transaction on those terms, it can be difficult, time-consuming and expensive to try to change those terms later.

2. If you have not bought or sold a business recently, ask your attorneys, accountants, or other advisors for a roadmap of the process. It will help you feel more comfortable if you have a better idea of what issues and questions to anticipate from the buyer and have realistic expectations regarding timing and transaction costs.

3. You will feel frustrated, angry, impatient, thrilled, and excited at various stages in the process.  Decide whether or not getting your deal done is worth enduring those stages and, if so, know and accept ahead of time that these things are going to happen.  Keep in mind that the deal process is a means to an end that is profitable for you.

4. Share your concerns and questions about the transaction with your attorneys.  Remember that they are on your team and they can only help address issues that they are aware of.  An experienced M&A attorney I know routinely asks sellers before a deal is signed or closed, “Is there anything that keeps you awake at night?”  That is a good way to gauge your comfort level with the transaction and whether or not you have raised every issue you should raise with your advisors.

5. Once you’re in serious discussions with a potential buyer, do not try to hide your business’s weak points.  Buyers understand that every business has “warts” and the earlier in the negotiations that these are discussed and understood by both parties, the smoother the process is likely to go, and the more trust that will develop between buyer and seller.

A Post by Alyssa Hirschfeld, Guest Blogger

Wednesday, January 9, 2013

TEN THINGS TO LOOK FORWARD TO IN 2013

As we start the New Year, I offer some personal predictions and questions to ponder in the areas of intellectual property, social media, and privacy law. Not as exciting as what will happen in Season 3 of Downton Abbey, but I do expect lots of surprises and interesting developments in the months ahead.

1. Trade Secret Litigation

On December 28, President Obama signed into law the Theft of Trade Secrets Clarification Act of 2012. This new law expands the scope and protection of trade secrets to cover products or services “intended for use” in interstate or foreign commerce. The number of trade secret cases and related litigation is likely to increase as a result.

2. Patent Applications Overwhelm Patent office

The America Invents Act (AIA) will result in an unprecedented number of patent applications, including a large number of provisional applications that are filed to take advantage of the change from first to invent to first to file. Stay tuned to find out if the United States Patent and Trademark Office can handle the demand.

3. Patent Trolls Punished

Defendants in patent cases will take advantage of new administrative procedures made available under the AIA to challenge patents outside of the courts. Hope to see more targeted legislation forthcoming to put a damper on non-practicing entities or so-called  "Patent Trolls".

4. We Should Find Out if Human Genes and Abstract Ideas are Patentable

The United States Supreme Court will answer the question of whether human genes are patentable. It will also clarify when a computer implemented “abstract idea” is eligible for patent protection.

5. New Federal Privacy and Security Laws

Will cyber-attacks or significant data breaches cause major damage and disruption resulting in new federal legislation or other government actions to prevent such activity?

6. gTLD’s Become Popular 

Forget the dot.coms. E-commerce will look a lot different as the new generic top level domains (gTLDs) come into use and bring with them new enforcement challenges for owners of brand names. It remains to be seen whether consumers will like and use them.

7. Pinterest Remains Pink

Pinterest's user base (currently around 80% female) will remain relatively testosterone-free. It won’t stop others, like Gray Plant Mooty client Thrill On, from finding cool ways to adapt the Pinterest idea for people who were born with a Y chromosome.

8. States Enact Privacy Laws

Mores states will follow the lead of California (and six others) to enact laws such as those prohibiting employers from requesting (or requiring) that employees or applicants provide log-in information for Facebook or other personal social media accounts.

9. Right of Publicity

A person may have the right to prevent others from commercially using their identity, voice, name or likeness without permission. More attention will be given to the Right of Publicity and how it might be violated on social media sites. One example is “twitter jacking,” a practice where people create twitter accounts posing as celebrities. Facebook users discovered to their surprise that when they “liked” certain products or services their profile pictures were used to promote those goods to their friends. A class-action suit was filed against Facebook that resulted in a settlement of $20 million. We will likely see more cases this year invoking the Right of Publicity.

10. The World Does Not End   While the newest claim by my close Mayan friends is that the world will now end on December 31 2013, I predict that the world will not end and we will still be here discussing most of the above issues for years to come—and looking forward to Season 4 of Downton Abbey.

Monday, January 7, 2013

Fiscal Cliff Doom and Gloom Averted (?)

Happy 2013 everyone!  I hope your New Year’s festivities were safe and enjoyable, and that you were able to spend a few moments thinking of something other than the imminent doom that might have been our fate after we headed over the “fiscal cliff.” I don’t know about you, but news coverage of the “fiscal cliff” negotiations, or lack of negotiations, and the ruin we were all about to experience, left me wishing that Santa had brought me a fallout shelter for Christmas.

No need for hysterics though, as apparently our government averted the total disaster that would have been the fiscal cliff crash by agreeing to a compromise earlier this week.  President Obama signed the compromise legislation into law—the American Taxpayer Relief Act of 2012—on January 2nd, which obviously was after midnight on December 31st.  I was under the mistaken impression that after midnight on the 31st we were headed off the cliff and there was no turning back.  I was wrong.  Our economy is more like  the coyote in the Looney Tunes cartoons, in that we were able to run off the cliff, but then stop and remain suspended in midair, turn around, and run back to safe land.

In the days ahead, there will be plenty written about how the Taxpayer Relief Act impacts Americans in general and, of interest to readers of this blog, small businesses and entrepreneurs in particular.  I haven’t had a chance to go through the legislation in any detail, but did notice one provision that might be of interest to entrepreneurs and owners of small businesses.  The Taxpayer Relief Act shortens the time period to five years during which the Built in Gains Tax, or BIG Tax, will be applicable for years 2012 and 2013.

As many of you probably already know, the BIG Tax applies to S corporations that were formerly C corporations.  At the time the former C Corporation elects S corporation status, the corporation must calculate the amount of unrecognized appreciation in its assets (measured by fair market value less tax basis).  The asset most likely to experience significant appreciation is good will.  If the S corporation subsequently sells its assets within a certain period of time after the S election is made, the BIG Tax will be applied against the previously unrecognized appreciation on the assets that existed prior to making the S election.

Prior to the Taxpayer Relief Act, the BIG Tax applied to a ten-year period, so that any asset sale made within 10 years after the conversion from a C corporation to an S corporation would potentially be subject to an additional BIG Tax.  The Taxpayer Relief Act changed that waiting period to 5 years for years 2012 and 2013.  So any asset sales consummated by S corporations during 2012 and 2013 should not be subject to BIG Tax so long as the corporation made its “S” election more than 5 years ago. 

The retroactive change for 2012 won’t help you with planning any of last year’s transactions (at least for those of you who don’t have a time machine), but the change for 2013 may be useful for S corporations planning to sell this year.  Knowing that the change would have been applied to 2012 could have been helpful for at least one transaction I worked on that didn’t close at the end of last year, although it may be helpful in facilitating a closing in 2013.