Are the NFL Rules (and Those Who Enforce Them) Getting as Unpredictable as the Tax Code?

Coming off the heels of Monday night’s interesting finish  to the Packers-Seahawks game, I have started to wonder if the NFL rules have become so complicated, and the turnover of officials so frequent, that tracking the outcome of a football game is starting to get as difficult as tracking the changes to the tax laws. We are looking, once again, at potentially significant changes to our tax laws after 2012, what with an upcoming election that could change those who shape and enforce those tax laws.

I have spent the last two years discussing pending changes to the tax laws with clients and with my colleagues. We talk about what provisions are going to sunset, what provisions we are supposed to pretend never existed, what rates might fluctuate, what techniques still work, etc.  We try to guess at what might change next. I have in-depth discussions about proposed bills in committees and obscure Senate races as we try to picture what the tax rules may look like next year. I have clients waiting to sell their entire businesses until “after the election” just to see who will be creating and enforcing those tax rules next year.

Are we destined to have a 2013 that resembles the NFL games from this weekend? Will we be able to tell how many time-outs a team gets, or what a simultaneous catch really looks like?  Are the rules so complicated that we can’t add replacement enforcers without serious implications to the outcomes of the game?

I still have no idea what the tax laws will look like next year.  I also have no idea how the election will shake out.  But I do know that, like football, there will always be taxes and there will always be rules.   I might just have to learn the difference between a force-out and the new overtime rules, to accept the inconsistencies and unknowns of new officials, and try to continue to guide clients on the probable outcomes of the game.

American Innovation: Baby Bottom Art, Snake Walkers and Rounded Edges on iPhones

Pinch & zoom, bounceback, and the cool rectangular case with rounded edges of your iPhone were some of the innovations considered by the jury when they recently awarded $1.05 Billion to Apple in its patent infringement litigation against Samsung (see this prior entreVIEW post on the topic by Lori Wiese-Parks).

This well publicized case brought back memories of my front row seat on the hard benches of a federal courtroom in Richmond Virginia in 2010 as Judge Payne and a jury decided the fate of Lawson Software, where I served as in house legal counsel. In that case, the plaintiff alleged the infringement by Lawson of patent claims that covered basic supply chain management software—the ordering of supplies through the internet. What made the case even more interesting was that the patents at issue were in reexamination by the United States Patent Office (USPTO), a process specifically established to allow the USPTO another opportunity to reconsider the validity of certain patents and if necessary to correct its mistakes.

 
Early results of the reexamination indicated that the patents and relevant claims at issue were likely to be invalidated. However, Judge Payne denied a motion to stay (postpone) the litigation pending the outcome of the reexamination. He also prohibited the jury from even being informed of the USPTO reexamination. The jurors deliberated without knowing that the patents at issue were under further review and that some of the key claims had already been deemed invalid by the USPTO. Plaintiff’s lawyers were still able to wave in front of the jury the blue ribbon certificates of the patents previously issued by the USPTO.

No damages were awarded. The judge denied the plaintiff any damages (over $20 million was sought) because their expert witness had handpicked from earlier settlement agreements ignoring those with lower amounts.  

However, the jury found infringement and Lawson was enjoined from selling and servicing certain software products. The litigation cost Lawson large legal fees, resulted in enormous business disruption, including time and expense of key personnel involved as witnesses, in depositions, development of non-infringing alternatives, and extensive customer services including training and education related to the litigation.

I will let others debate the merits of the Apple patents and whether or not that jury verdict was a correct one. These cases do however make you wonder whether (i) judges and juries are appropriate for resolving these types of patent disputes and (ii) the patent system as it currently exists is effective at rewarding intellectual achievement and enhancing innovation.

Patents can be extremely valuable for large corporations and entrepreneurs. They can serve as an incentive to invest in innovation and result in breakthrough ideas. If, however, a mistake is made in the issuance of a patent (even the USPTO will admit to mistakes) the reexamination process should be expedited and utilized as necessary to mitigate and avoid litigation.

Now for some fun.

Can you pick the one patent below that was issued and later invalidated through a reexamination by the USPTO ? 

1.  Motorized Ice Cream Cone (#5,971,829).  A novelty amusement eating receptacle for supporting, rotating and sculpting a portion of ice cream or similarly malleable food while it is being consumed comprising: a hand-held housing, a cup rotatably supported by the hand-held housing and adapted to receive and contain a portion of ice cream or food product of similar consistency, and a drive mechanism in the hand-held housing for imparting rotation upon the cup and rotationally feeding its contents against a person's outstretched tongue.

2.  Pet Display Clothing (#5,901,666).  A vest or belt is integrally formed with tubular, pet receiving passageways which extend around the wearer's body and terminate in pocket-like chambers for feeding and retrieval. Outer wall portions of the passageways are transparent so that a pet moving along the passageways can be seen by a spectator. Graphics or indicia depicting the pet's habitat or a pet story are marked on the vest and extend across portions of the passageways masking delineations or depicting the passageways as burrows.

  

3.  Sealed Crustless Sandwich (#6,004,596).  A sealed crustless sandwich for providing a convenient sandwich without an outer crust which can be stored for long periods of time without a central filling from leaking outwardly. The sandwich includes a lower bread portion, an upper bread portion, an upper filling and a lower filling between the lower and upper bread portions, a center filling sealed between the upper and lower fillings, and a crimped edge along an outer perimeter of the bread portions for sealing the fillings therebetween. The upper and lower fillings are preferably comprised of peanut butter and the center filling is comprised of at least jelly. The center filling is prevented from radiating outwardly into and through the bread portions from the surrounding peanut butter.

4.  Snake Walker (#6,490,999).  Collar apparatus enabling secure handling of a snake by tether [see drawing above].

5.  Painting Kit and Related Method (#6,213,778).  A unique painting process and an associated kit including the materials required for practicing the method. The method includes the acts of providing a background media providing a paint source, dipping the posterior of the infant in the paint, and stamping the posterior on the background media to create stamping prints. The kit of the present invention includes a flat, flexible backing piece, at least one paint bottle attached to the backing piece, at least one reservoir attached to the backing piece, at least one painting tool attached to the backing piece, and a plastic cover having a periphery, the plastic cover positioned over the protective cover, plurality of paint bottles, plurality of reservoirs, and plurality of paint brushes, and attached around its peripheral edge to the backing piece.

If you selected the Sealed Crustless Sandwich you are correct. The USPTO issued a reexamination certificate for this patent and cancelled all claims. Smuckers built a large manufacturing plant (prior to the invalidation of the patent) and continues to produce the unpatented sandwiches under the brand “Uncrustables®”.

What Do Entrepreneurs Have In Common With Their Fantasy Football Team

I’m sure it’s not just me, but I have been made acutely aware over the past few days that the 2012-2013 NFL season has officially begun. Not only is my husband in at least four Fantasy Football leagues (with buy-ins of $100 or more – where does this money come from?), but this is also the guy whose college DLP TV had the “ESPN” logo permanently burned into the bottom right-hand corner of the screen so that you could see it even when the TV was off. Oh, he’s also a die-hard Packers fan (sorry about the start to the season). Needless to say, I had my fair share of football over the weekend; and while I was dutifully contemplating this upcoming blog post (with Faith Hill warbling in the background), I started thinking: I wonder what connections there might be between professional football and entrepreneurship?

It turns out there are many more than I would have imagined. A simple Google search using the terms “NFL” and “entrepreneur” yields multiple “Top 10” lists of NFL players turned entrepreneurs – complete with information on how and why they ended up in their new professions and some even with specific financial information on just how successful these athletes have become off of the field (see “The NFL’s 10 Richest Entrepreneurs”). The endeavors include everything from car dealerships to restaurants and franchises, liquor stores and wineries, construction companies, technology products and services, non-profit organizations, sports and fitness-related businesses, and even an advertising and design firm (owned by Dhani Jones, an NFL linebacker, and coincidentally one of highest valued at $3 million).

I found it fascinating to read through the varied endeavors and motivations of the likes of Drew Brees, Donte Stallworth, and Daniel Wilcox, to name a few. Brees owns a Jimmy John’s franchise, and explains that it started with simply a true love for the product that began during his freshman year in college at Purdue. Wilcox owns a residential and commercial remodeling business, and notes that part of his entrepreneurial passion stemmed from the desire to be his own boss. Another noted the desire to prove that his was “more than just a football player.”

Competition was also an explanation by many of the athletes for their entrepreneurial pursuits. Rosevelt Colvin, a Super Bowl champion with the Patriots, is quoted as saying, “As an athlete, you’re always competitive. You look for another challenge to tackle, to be a part of.” Professional athletes are groomed to maintain a high level of discipline, perseverance, and focus on teamwork – all characteristics that serve entrepreneurs well (see also "The Best Entrepreneurs Are Hyper Competitive and Hate Losing" and this article on what playing sports can teach about entrepreneurship).

The NFL itself even recognizes the synergy between players of its beloved sport and entrepreneurialism. In 2005, it founded the NFL Business Management and Entrepreneurial Program, which provides both current and former footballers week-long intensive courses at prestigious business schools like Harvard and Northwestern’s Kellogg School of Management. Course topics range from business plan assessment and human resource management, to property management and personal investments. According to one article, since the program’s inception, close to 700 players have undergone the program, and testimonials on the program’s website indicate that players have found it truly valuable. An article from 2008 stated that 48% of participants in the program become interested in starting a business, and since completing the program, 25% of the players have started their own businesses.

Unfortunately, I can’t say that this newfound knowledge of the NFL’s entrepreneurial spirit will make watching endless hours of football over the coming months that much more enjoyable. However, I do have a renewed sense of appreciation for the players, and their aspirations both on and off of the field. I also have an inkling that, the next time I’m watching Drew Brees throw a touchdown pass for the Saints, I may get a craving for Jimmy John’s.

I wonder if anyone in our Entrepreneurial Services Group is up for a fantasy league where we draft former and current NFL players and get points for their successes as entrepreneurs?

A Post by Karen Wenzel, Guest Blogger

Sequestration Looms

Go ahead and Google “Sequestration.”  As of the completion of this post, the hits for “sequestration” are around 7.2 million hits, a very modest number by Google standards (for a cross reference, Google hot dog eating contest and consider the incomprehensible 35 million hits).  My first thoughts about sequestration take me to a trial setting where a court can order isolation of a jury during a high profile criminal trial (John Grisham’s Runaway Jury anyone?). 

The contrast to sequestration as portrayed in a Grisham novel and the reality of sequestration as it will occur on January 2, 2013, couldn’t be more stark and, frankly, alarming.

Many of us have tried desperately to repress the memories of the partisan debate regarding the debt ceiling and the fallout resulting in the passage of the Budget Control Act of 2011 (“BCA”).  The BCA is slated to take effect on January 1, 2013, when through a measure called “sequestration” discretionary spending caps will kick in and be effective for the ensuing 10 years, all in an effort by Congress to reduce the deficit by over $1 trillion (US) dollars.  The net effect of sequestration on the Department of Defense would be immediate budget cuts of nearly $500 billion and much, much more to come in ensuing years—this in addition to the already recommended $500 billion in recommended cuts.  For those of you who may be wondering, the US Defense budget is about 19% of the overall US budget and the Department of Defense will take about 50% of the sequestration hit.

Under sequestration, the amount of funds otherwise appropriated to a branch of government is "sequestered" by the US Treasury and not delivered to the agencies to which Congress originally appropriated the funds.  Up until now, certain categories of government spending were exempt from sequestration, including defense.  Not anymore.  According to the Foundry, if implemented, the impact of sequestration in accordance with the BCA “would be devastating, with a significant disruption of ongoing programs and initiatives, facility closures and substantial additional personnel reductions that would severely impact advanced manufacturing operations, erode engineering expertise, and accelerate the loss of skills and knowledge….”

Even more ominously, in a November 2011 letter, Secretary of Defense Leon Panetta warned lawmakers that sequestration [enacted over the next 10-year period] will be “devastating,” yielding “[t]he smallest ground forces since 1940,” “a fleet of fewer than 230 ships, the smallest level since 1915.”  According to most defense analysts, sequestration in accordance with the BCA will quietly eliminate the long-standing US defense policy of being able to engage in a two-front war.

The “fiscal cliff” (which you will hear a lot about in the months leading up to the election) is a perfect storm which includes (1) sequestration (immediate cuts on January 2, 2013), (2) Bush-era tax rates expiring (December 31, 2012), and (3) the absence of a budget (the reason why we have the BCA is due to the inability of Congress to pass a budget for consecutive years).  The American public sector and private sector will get a preview of the significant effect this fiscal cliff—and, more specifically, sequestration—will have on October 1 of this year.  The reason why can be summed up by taking a quick look at the Worker Adjustment and Retraining Notification Act.

The Worker Adjustment and Retraining Notification Act (“WARN”) was passed to protect workers, their families, and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs.  Employees entitled to notice under WARN include managers and supervisors as well as hourly and salaried workers.  WARN requires that notice also be given to employees' representatives, the local chief elected official, and the state dislocated worker unit.  Advance notice gives workers and their families some transition time to adjust to the prospective loss of employment, to seek and obtain other jobs, and, if necessary, to enter skill training or retraining that will allow these workers to compete successfully in the job market.  Several states require an additional thirty 30 calendar days’ notice in addition to 60-day notice required by WARN.

Because the sequestration contemplated by the BCA takes effect on January 2, 2013, contractors and subcontractors who know that their funding will be at best tied up due to sequestration (and at worst that there may be no funding at all) will have to make a decision to notify employees of the pending layoff.  The 60-day notice deadline will conveniently occur right on November 1, only days before the November 6 federal and state elections. 

Mackenzie Eaglen makes a compelling case that such cuts are devastating to the Department of Defense and provides a comprehensive listing of what the cuts mean to the military.  Projects that are in process will likely be discontinued, the cancellation of contracts that are not deemed to be exempt will lead to personnel layoffs, and there will likely be a massive influx of early retirement of servicemen and servicewomen looking for new careers in an already suffering employment sector.  Even worse, a logical place for veterans to serve is on the civil side of the defense industry, precisely where the greatest concentration of retraction of jobs and other opportunities will be felt.

What’s more, direct cuts to the military will magnify the effect that sequestration will likely have on the thousands of government contractors and subcontractors in the private sector.  According to the Governmental Accounting Office, in 2009 there were approximately 766,000 service contractors, which number (according to my reading) does not include the chain of subcontractors that manufacture components or provide one-off services to government contractors.  Most of the companies affected are not the companies that produce billion dollar planes and things that explode.  On the contrary, many of those companies are small companies started by entrepreneurs that have never set foot on a military base but are integral partners in keeping America safe.

To say that sequestration will have a major impact on the economy is an understatement.  Many changes loom large for the defense-related industry and they are quickly approaching.  Stay tuned.

SEC Proposes General Solicitation Rules Under the JOBS Act

Just yesterday, the SEC published its proposed rules to eliminate the prohibition on general solicitation of investors required by the JOBS Act. As I mentioned all the way back in last November (and in several posts since), this part of the JOBS Act may be most significant to many of the entrepreneurial clients I represent who are trying to raise early stage capital.

As is almost always the case, the proposed Rules are only a small part of the chore, with much of the rest being left to the reasoning and background contained in the Release.

The Rules address modifications regarding general solicitations in both Rule 506 and Rule 144A  offerings. My educated guess is that most readers of entreVIEW aren’t particularly interested in Rule 144A offerings (made to “Qualified Institutional Buyers”), but many are probably interested in what happens to Rule 506 offerings, by far the most widely used exemption from registration of securities offerings under Regulation D.

I won’t bore you with all the detail in the release, which is 69 pages long (yes, I wasted a hot summer evening digesting it instead of taking a slalom run out on the lake).  The detailed summaries (some of which will be as long as the proposed rules themselves) will be forthcoming from dozens of law firms in the days and weeks to come. Given that they are only proposed rules, I don’t recommend taking the time to even read these summaries because the final rules will, inevitably, be different.

As we knew it would be, the key proposal relates to what “reasonable steps” an issuer selling securities in a 506 offering to all accredited investors must take to “verify” that the investors are accredited.  The SEC release states that “whether the steps taken are ‘reasonable’ would be an objective determination, based on the particular facts and circumstances of each transaction.”  Essentially, the issuer would need to consider a number of factors in determining how to verify accredited status, including:

·        The nature of the purchaser and the type of accredited investor they claim to be;

·        The amount and type of information that the issuer has about the purchaser; and

·        The nature of the offering (manner, terms, minimum investment, etc.)

I had been joking with colleagues that, as securities lawyers, the removal of the prohibition on general solicitation under the JOBS Act may have eliminated about 50% of what we discussed with clients relative to their private offerings. If the proposed rules are ultimately adopted, it looks like we’ll have plenty to talk to clients about regarding verification of accredited status (cynics might claim that lawyers working at the SEC are trying to make sure their brethren in the securities bar stay fully employed).  This is because each set of circumstances will need to be reviewed independently and, likely, with advice of competent securities counsel.

Of course, these are only proposed rules. Given the large volume of comments on the subject already received by the SEC prior to their proposal and the specific litany of questions upon which the SEC is requesting advice, a flood of commentary is likely to ensue during the 30-day comment period.

I guess, as with prior posts on the subject, all I can say with certainty is this—stay tuned for future updates…

Apple's Big Win

The big news last week was the verdict in the “tech trial of the century,” the lawsuit brought by Apple against Samsung for infringement of various patents related to Apple’s iPhone and iPad designs and technology.

Apple was the big winner in this jury trial that lasted nearly four weeks, and involved complex evidence, allegations of evidence tampering, media leaks, infringement counterclaims by Samsung, a 20-page verdict form and 100 pages of jury instructions.  While I’m not sure that it has the drama to be made into a movie (or even a television movie-of-the week), the $1 billion plus damage award to Apple is certainly attention-getting.  But that’s not the half of it.

Apple sued Samsung claiming, among other things, infringement of several utility and design patents.  The jury found that Samsung infringed all but one of the design patents - willfully in some cases - so the damage award could still go up.

The key here is that in finding infringement, the jury determined that the Apple patents were valid.  This is a big deal.  Many in the industry, as well as general techies, have suggested that at least some of the Apple patents should never have been granted.  In some cases, these beliefs are based on reasonable arguments that certain of the technology is not “useful”, “new” and/or “nonobvious” under the standards required to qualify for patent protection.  In other cases, it is out of concern for the potential market limitations that could, and are likely to occur from Apple’s favored position.   In still others, it is just envy or dislike of Apple.  Whatever the reason, most agree that validation of  Apple’s exclusive right to technologies such as the “pinch and zoom” and “bounce-back” features, as well as some relatively trivial “design” features,  is sure to severely limit competition – at least in the short term. 

Samsung has been the largest seller of smartphones in the U.S. for the past couple of years, and the single biggest user of Google’s Android operating system.  There is little doubt in the industry that Google is Apple’s ultimate target, but it’s still anyone’s guess whether Apple will take on Google directly or bring Samsung-type suits against other manufactures of smartphones and tablet computers using the Android system.   For the present, Apple is expected to use the verdict to seek an immediate injunction against the further sale in the U.S. of Samsung products (of which there are several) that were found to be infringing one or more of the Apple patents.   That hearing is set for late September so that a number of Samsung products could be off the market for the lucrative holiday season.

While there is still much to come, (e.g., pending cases in other countries, patent re-examinations, appeal of this decision), and considerable speculation about the fall-out from this decision, it seems likely that innovation and competition may be stifled for a while.  Frankly, that’s a price we must be willing to pay for a fair and just application of the law.  But did that happen here?

With all due respect to our current legal system, I have a hard time believing that this is the kind of case we should be sending to a jury.  This is not a case involving rules that we all live with every day and that apply to ordinary human events.  This is a case involving complex laws, complex issues and complex facts.  Is it even fair to expect that persons untrained in the field should be expected to make these decisions after only a few short weeks?  I admit that I don’t know enough to say that this decision is bad law – but I do believe that cases such as this make bad law more likely.

An Upate on Lot18: Too Much of a Good Thing?

Some of you may have read my post about Lot18 back in November, wherein I extolled its virtues and hypothesized as to why the New York startup was so phenomenally successful at raising money from venture capitalists.  Since that post, tech news outlets have reported two rounds of layoffs at the company and the closing of its short-lived UK operations.  Lot18 also stopped offering food and travel products for sale, which it had recently been doing in addition to its primary business of selling wine.

When I was reading about the company to write my previous post, Lot18 reportedly had about 500,000 members; now there are almost 1,000,000, according to online reports!  Things seemed to be going so well!  As it turns out, the wealth of cash the company was able to raise might have also made it easier to lose sight of its core business.  As founder Philip James told Betabeat, “One of the perils of having a lot of money is, it’s easy to launch a lot of things.”  We can all understand how a company flush with cash might be more apt to take risks on premature expansion than one that needs to watch every dollar just to keep the lights on.  

While the decision to wind down the company’s short-lived food and travel businesses is unfortunate for the employees who lost their jobs, it should help Lot18 refocus on building its wine business for long-term sustainability.  Luckily for Lot18, the nature of its business is such that its investment in those complementary businesses probably was “just” those people and maybe a few other ancillary services, marketing expenses, etc.  One can imagine many other types of businesses where expansion into ancillary businesses would require huge capital outlays at the beginning for things like equipment and regulatory approvals, which are not easily recouped.  This reminds us of the important life lessons we can take from Lot18 so far:

1. Drink good wine.
2. Do not expand so quickly into new businesses that doing so jeopardizes the long-term success of your core business.

A Post by Alyssa Hirschfeld, Guest Blogger