Update On The Dark Net Rising.

 Yesterday, we chronicled the plight of Silk Road 2, a dark web site whose proprietor was arrested recently.  Today, we find out that this was a part of a much larger bust, labeled "Operation Onymous" by the Feds, Interpol and other cooperating agencies.  The marketing geniuses at the FBI used "onymous" because it was coined as a word in 1775 to mean the opposite of "anonymous".

In any event, apparently 17 people have been arrested and 451 domains of the .onion variety (so called because they are accessed through The Onion Router 'TOR' browser [see paragraph below before clicking on this link]) have been seized including the aforementioned Silk Road 2 and others named Cloud 9, Hydra, Pandora, Blue Sky, Topix, Flugsvamp, Cannabis Road and Black Market.  Some of those that they didn't get are Agora, Evolution and Andromeda.

There have been rumblings that the authorities have found a flaw in TOR that allows them to circumvent its supposed anonymity and that anybody that had downloaded TOR was suspect.  So, now you can decide whether to click on the link above.

Silk Road Redux-The Dark Net Rises (And Falls).

 This little blog had previously discussed the very interesting tale of Silk Road, an e-Bay kind of market place for much stuff that is not sold (openly) in polite society.  As indicated in that post, the proprietor of that start up has been arrested and awaits trial.

Since nature abhors a vacuum, another site had arisen to take it place and was very creatively named "Silk Road 2.0".  There was even forum chatter indicating the hand off of the control from the "Dread Pirate Roberts" to "Defcon".  I say "was" because the 2.0 site has met the same fate as the original.  The FBI has arrested a gentleman named Blake Benthall in San Francisco and charged him with multiple nefarious deeds all connected with the transaction of business in illegal drugs, fake IDs and money laundering and all connected with Silk Road 2.0.  You can read the very detailed affidavit of the agent and the criminal complaint against Mr. Benthall here.  A gentleman named Blake Benthall has Facebook, Twitter and LinkedIn accounts that may or may not be the same gentleman.  There is little to indicate such a connection except the interest in Bitcoins, the medium of  exchange for Silk Road and the fact that his Twitter account puts him in the same place that the FBI physically observed him to be in several instances.  Once again, this is unfortunate because if this is the Mr. Benthall involved, he, like Ross Ulbricht before him, seems like a cool dude.

Following The "Silk Road". Where Exactly Was That Supposed To Go?

Originally, the Silk Road was a series of routes over which commerce traveled in Asia beginning over 2,000 years ago.  Silk, gold, technology, religion and diseases (e.g. bubonic plague) were carried and exchanged over the Silk Road.

Fast forward to the present day and the Silk Road was, until recently, a website accessible only in the deep web and only by TOR (The Onion Router), a network and browser designed to preserve your anonymity on the web.  Silk Road was the brainchild of fellow Austinite and former neighbor Ross Ulbricht.  Ross was a 2002 graduate of West Lake High, a school that I pass every day coming to work.  His Facebook page is still up and he seems like a pretty cool guy.  We even have a mutual Facebook friend.

However, when I visited Silk Road before the feds closed it in September and arrested Ross on Oct. 2nd of this year, I found that you could purchase most any kind of drug I had ever heard of and many that I hadn't.  Since I have a background in Pharmacy, that's a wide range of stuff.  Cocaine, Ecstasy, black tar heroin and 'shrooms were in abundance.  Apparently, you could also arrange for murder by hire and Ross is accused of that in regard to one of his clients on Silk Road supposedly threatening to expose everybody unless certain conditions were met.

The medium of exchange on Silk Road was Bitcoin, our favorite virtual currency.  When Ross was arrested, the FBI seized over $3,000,000 in Bitcoins belonging to Silk Road customers.  They were also trying to get an estimated 600,000 Bitcoins from Ross' personal Bitcoin wallet.  That's about five percent of all the Bitcoins presently in existence.

All in all, a very sordid story, including the allegation that Ross went by the pseudonym of the "Dread Pirate Roberts", which comes from my favorite movie "The Princess Bride".

So how does a 20s something, suburban, white bread guy go from wake boarding on Lake Austin to being one of the biggest drug dealers (or at least the facilitator) in the world ?

Apparently Ross is brilliant (degree in physics at the Univ. of Texas, graduate work at Penn State), a libertarian fan of Ron Paul and idealistic and naive.  On his Facebook page he wrote an essay on "Thoughts On Freedom".  On his LinkedIn page, he described an idealized version of Silk Road, when he wrote:   "Now, my goals have shifted. I want to use economic theory as a means to abolish the use of coercion and agression amongst mankind. Just as slavery has been abolished most everywhere, I believe violence, coercion and all forms of force by one person over another can come to an end. The most widespread and systemic use of force is amongst institutions and governments, so this is my current point of effort. The best way to change a government is to change the minds of the governed, however. To that end, I am creating an economic simulation to give people a first-hand experience of what it would be like to live in a world without the systemic use of force."

He apparently viewed Silk Road as beneficial because it was a place where people could obtain illegal drugs without the concomitant hazard of having to deal directly with a drug dealer.  Regardless of your view on drugs and their use, it would seem to be preferable if people didn't have to risk their life to obtain them.

In the end, despite his brilliance and perhaps because of his naivete, he got sloppy and used his real name and address in obtaining fake passports and made other mistakes that enabled his arrest.  This could have been a family member of any of us (assuming any of us has anybody that smart in our gene pool) and we would have been simultaneously amazed at  his drive, ambition and success and aghast at what he has wrought.

Hey, Bro! Can You Spare A Bitcoin? Digital Currency For The Homeless And Unemployed.

We have discussed bitcoins several times before, see here and here, for example.  We exulted in the fact that the Winklevoss twins of Facebook fame are starting a bitcoin investment vehicle.  We also talked about how the regulators were taking a bigger interest in how bitcoins were use or abused.

Now a Wired article shows how the unemployed and homeless are using sites such as Bitcoin Get, Bitcoin Tapper and Coinbase to get paid bitcoins for watching videos and tapping an icon, each a technique for driving traffic on the internet.  The Wired article then quotes some of the homeless as preferring bitcoins because it is much harder to steal (at least from them) and they can convert it to money or prepaid cards using their computers or smart phones.  Now, I can hear conservative heads exploding all over at the thought of homeless, unemployed people with computers and smart phones particularly if they are getting food stamps or other assistance.  Be that as it may, engaging in this activity provides them some small bit of assistance to help feed them.  That can't be all that evil.

Some day, you may be approached (or approach somebody) on the street and asked for a handout.  They then offer the internet address for their bitcoin wallet and you send them some from your smartphone.  Panhandling in the digital age.

Texas Uniform Trade Secrets Act ("TUTSA") Becomes Effective September 1, 2013.

Texas has become the 48th state to adopt a uniform trade secrets act.  This legislation was signed by Governor Perry and will become effective September 1, 2013.  A text of the act as passed may be found here.

Notable provisions of TUTSA include the following:

  • The Act permits "reverse engineering" unless "prohibited", which prohibition presumably can be accomplished by contractual prohibitions.
  • "Reasonable" efforts must be made to keep the information secret in order that it may be treated as a trade secret.  See our immediately preceding post.  Yeah, the one with the monkey and the assault rifle.
  • An injunction may be ordered in the event of actual or threatened misappropriation.  In addition, "affirmative acts" may be ordered to protect a trade secret.  This codifies a court's authority to compel both the prohibition of an act or the commission of an act to protect a trade secret.
  • In addition to injunctive or affirmative relief, damages can be awarded, which can be based on actual loss, unjust enrichment or a reasonable royalty.
  • If "wilful and malicious" actions are proven by "clear and convincing" evidence, punitive damages may be awarded up to two time direct damages.
  • Attorney's fees may be awarded to the prevailing party if a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith or wilful and malicious misappropriation exists.
  • Lists of actual or potential customers or suppliers are explicitly mentioned as possible trade secrets. 

This Act codifies what was covered under case law before and should help in the preservation of the trade secrets of Texas businesses.

 

Are Confidentiality Provisions and I.P. Assignment Clauses In Employee Agreements To Be Treated Like Non-Compete Provisions? South Carolina Supreme Court Says No.

Almost every technology company of any variety has a couple of standard provisions in the documents that their employees sign as part of the employment on-boarding process.  Those are, of course, provisions that require the employee not to divulge certain information that they learn as a result of their employment and that provide that any intellectual property developed by the employee during the employment (and often for a period thereafter) and based on information provided by the employer, belongs to the employer.  Some agreements also contain non-compete provisions, which purport to prohibit the employee from engaging in certain kinds of employment activity after the present gig ends.

Mr. Morin went to work for Milliken & Company in South Carolina as a research physicist and worked for Milliken for nine years developing fibers.  Apparently, Mr. Morin began to make plans for his own company prior to leaving the employee of Milliken and filed for a patent on a new fiber within a few months after resigning from Milliken.  Milliken thought such behavior was untoward and filed a suit against Mr. Morin for breach of the confidentiality provisions and the breach of invention assignment provisions in his employee contract, among other things.

The appeal of this case recently found its way to the Supreme Court of South Carolina.  One of Mr. Morin's principal arguments was that the confidentiality provisions and the assignment of inventions provision were restraints of trade and as such, should be reviewed under the same standard as a non-compete provision, i.e. not favored by the courts and construed against the employer unless certain very stringent requirement were met.

The South Carolina Supreme Court disagreed with Mr. Morin and found that such provisions (confidentiality and invention assignment) were not restraints of trade and as such, were to be reviewed under the reasonableness standard, i.e. to be enforced as an ordinary contract provision unless the provisions exceeded what was necessary to protect the legitimate interests of the employer.  The court held: "We therefore hold confidentiality and invention assignment clauses are not in restraint of trade and should not be strictly construed in favor of the employee."

This confirms what most of us in this industry believed to be the law and should make it easier for well crafted provisions of this nature to be enforced in the future.

Congress Agrees On Acronyms for JOBS and CROWDFUND. Astonishment Is Rampant.

Given the present state of partisan hostilities in Washington these days, it is big news when the Senate and Congress can agree on anything.  However, that is exactly what they did on March 27, when Congress agreed with a Senate amendment to an act that established once and for all, the acronyms JOBS and CROWDFUND.  Oh yeah, they also passed an act to go along with the acronyms, which is the most astonishing of all and which is designed to stimulate the market for initial public offerings ("IPOs") and, inter alia, contains provisions allowing for "crowdsourcing" or "crowdfunding".  President Obama has expressed his support for this bill and is likely to sign it in the near future.

The "JumpStart Our Business Startups" Act or the JOBS Act changed in a very significant manner, the rules relating to funding for small business startups.  It even changed the definition of a small business to an "emerging growth company" that had less than $1,000,000,000 (yes, that's a billion) of revenue in the last 12 months.  According to some sources, this would have covered more than 91% of the IPOs in 2011.  The JOBS Act eased many of the rules for IPOs and instructed the Securities and Exchange Commission to revise and adopt other rules pertaining to these types of equities, including determining whether it makes sense to allow trading in one cent increments.

The most notable effort in acronyming, however, goes to the drafters in coming up with the "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012".  Rolls off the tongue, right?  Or you can just call it the "CROWDFUND" Act.  This allows the collection of investments from large numbers of people in small amounts through brokers or registered websites.  It restricts the amount that can be raised to $1,000,000 annually and restricts the amount that can be raised from any one individual to the greater of $2,000 or 5 percent of their net worth or annual income if less than $100,000 or the lesser of 10% or $100,000 if annual income or net worth is greater than $100,000. 

The JOBS act also exempts most of the crowdfunding activities from state securities act registration requirements but still provides oversight by such state commissions for fraud and misrepresentation.

The Act provides for much registration and restrictions on advertising and generally has most securities lawyers in a state of moderate arousal.  A thorough summary of the act has been done by the firm of Andrews Kurth and can be found here.

Time will tell if this has the desired effect on increasing capital markets for "small" companies.  Some of the provisions may actually encourage the delay of IPOs but it is an ambitious effort if for nothing else than the advancement of acronym art.

StartUp America Launches In Austin

StartUp America is an initiative started in the White House in early 2011 to provide for the creation of resources around the country to facilitate in the creation and fostering of small companies.  The Austin version of that launched yesterday as the seventh one of this variety in the U.S.  Its website is here and it promises to provide much good information and valuable resources.

Give it a look.

Winklevoss Twins Not Particularly Enamored With Legal System, Lawyers nor Results.

We have chronicled the saga of the Winklevoss twins in these pages before (see here, here, here and here) and frankly, we're a little embarrassed we have spent so much time on this.  As you will remember, the twins succeeded beyond most mere mortals wildest expectations when they settled their claim against mighty Mark for a portion of Facebook now estimated to be worth more than 9 figures.  That definitely made them a member of the one percent.  They then decided that they had been scammed and tried a number of times to set the settlement aside.  As indicated in the posts described above, they have been singularly unsuccessful in that endeavor.

They engaged the firm of Quinn Emanuel to pursue the initial law suit against Facebook.  The arrangement with Quinn Emanuel provided for a contingency fee based on the amount ultimately recovered through suit or settlement.  They signed an engagement letter that they had reviewed by independent counsel.  After the settlement with Facebook, the twins decided not to pay Quinn Emanuel the $13 million in legal fees that Quinn Emanuel claimed under the engagement letter.  Quinn Emanuel instituted arbitration in accordance with the engagement letter.  The twins sought a court order enjoining the arbitration proceeding.  That was denied.  An arbitration panel awarded Quinn Emanuel the $13 million dollars.  The twins appealed again to the New York Supreme Court seeking to set aside the award because of the law firm's alleged malpractice.  Denied again.

The Winklevoss twins entered into a settlement that made them even wealthier than they already were.  They then decided that they didn't like what they had agreed to and have set out to avoid anything relating to that settlement.  They are zero for career in that category.  I wonder if the law firm representing them in the matter against Quinn Emanuel asked for up front payment.  They would be guilty of malpractice on their own behalf if they didn't.

Update: The Acquisition That Keeps On Giving. SAP Agrees To Pay Criminal Fine of $20 million For TomorrowNow's Transgressions.

 In 2005, SAP acquired TomorrowNow, a company designed to provide third party maintenance for Oracle software.  Unfortunately, TomorrowNow chose to reduce its operating costs by pirating a bunch of Oracle software and then using it in its business.  

Oracle found that to be somewhat offensive and sued TomorrowNow and SAP and originally obtained a judgment against them for $1.3 billion dollars.  We recently noted that a judge had reduced this amount to a mere $272 million.

During the civil trial, federal prosecutors listened and then filed criminal charges against TomorrowNow.  TomorrowNow is basically defunct and has fewer than ten employees and no individuals were named in the indictment.  This was done as part of a plea bargain and SAP worked out a deal where they would pay a $20 million dollar fine for TomorrowNow, even though SAP was not named in the indictment either.  One would have to assume that some individual actually performed the criminal act of stealing the software, although in this case, it appears that Mitt Romney is correct in that: "Corporations are people, my friend."  At least for plea bargains.

Austin Start Up Week - Sept. 6-10. Good Times and Learning Together: What A Concept!

The first Austin Start Up Week will be held September 6 through 10.  The website and more information may be found here.  The organizers have as their stated goals: "...learn, mix and mingle with your peers, meet some new people and make awesome things happen". 

Included in the agenda are kayak rides, pub crawls, Office Space quote-a-longs ("So I was sitting in my cubicle today, and I realized, ever since I started working, every single day of my life has been worse than the day before it. So that means that every single day that you see me, that's on the worst day of my life") and some educational stuff also.

This sounds like a whole lot more fun than working (even if you have a job), so you should check it out.  We hope to see you there.

Zediva's Cord Is Too Long. Court Considerably Shortens It.

You know our friends at Zediva, the entrepreneurs that used DVD players in a data center and DVDs they had bought to rent the DVDs and the players to individuals and stream movies over the internet to subscribers.  We chronicled their launch and subsequent encounter with the legal system here and here.  Zediva had thought their arrangement would be legally equivalent to renting a DVD and player to an individual in their home, a situation that is legally acceptable.  They reasoned that the only difference was a little longer cord, i.e. the distance through the cloud from Santa Ana, California to the respective user.

The Federal District Court, Central Division, of California recently disagreed.  In a decision that has been roundly criticized by some and lauded by others (no surprise there), the Court granted a preliminary injunction, which effectively shut down the Zediva enterprise.  Their website now shows the following:

The Court reasoned that the Zediva service constituted a public performance and that the method of providing the movies constituted a transmission, both violations of the exclusive rights of a copyright holder.  Consequently, the Court found that the plaintiff had shown a likelihood of success on the merits, a requisite of the granting of an injunction.  Another requisite is the showing of irreparable injury.  The Court solved this by reasoning that the provision of the movies by the unlicensed provider deprived plaintiff of its ability to control the use and transmission of their copyrighted works and deprived the plaintiff of revenue (the crux of the matter).  The Court also decided in a rather conclusory manner that the balance of hardships weighs sharply in favor of the plaintiffs and the public interest is best served by the issuance of the injunction.

The Court seemed to think that some kind of physical act on the part of the user, such as recording on a DVR or physically inserting the DVD in a player owned by the user on the user's premises, was required to remove the transaction from the "public performance" and transmission arenas.  Zediva maintained that this was a distinction without a difference.

This area of the law continues to evolve, although more slowly than the technology driving it.  Although it looks like it probably will not happen, it would be helpful if Zediva were to proceed to trial on this so that we could get a more complete consideration of all the issues and some judicial instruction in this cloudy area (pun intended).

Negotiation 101 - Part 3. Always Be Prepared To Walk Away.

In this series of negotiating tips, this one may be the most obvious.  

A very basic fact in deal-doing is that, if you are unprepared to completely walk away from the deal at any time, you face a distinct disadvantage.  We discussed the desirability of establishing a BATNA in the last post: the Best Alternative To a Negotiated Agreement.  If you don't have a BATNA, i.e. if you have to have the deal, you are left with a Scarlett O'Hara solution: Depending on the kindness of strangers. The other side will know if you are desperate and your effectiveness in negotiating will be impacted negatively.  The knowledge that you are in a financial bind and the deal will bail you out or it's the last week of the quarter and you need the deal to make your numbers are all information the other party is likely to have. 

Sometimes the best deals are the ones that you don't make.  This could be due to the possibility that the relationship that you are signing up for will turn out to be problematic over the long haul.  If you are unsure about whether the deal is a good one and the other party is a real problem to deal with in the negotiations, then it is pretty certain that their style will be the same through out the term of the deal. 

Sometimes you have to look outside your own goals and needs to determine whether you can walk away.  This is the case in the debt limit negotiations that are going on as I write this.  The majority of people involved on both sides seemed to share the view that the U.S. should not be allowed to reach its debt limit.  Therefore, failure to reach a negotiated agreement could redound to the detriment of an entire financial system.  So, the pressure was great to reach a compromise, even if it didn't feel good to either side.  Time will tell whether either side got what the public really needed out of this deal.

Time for another war story from an old guy.  During one deal for some real estate and mineral interests, I represented a buyer who planned to buy up coal residue, refine it into large briquette-like lumps and ship it abroad for home heating purposes.  We had arrived earlier at a price for these interests and I arrived at the closing with a cashier's check for the amount.  At the closing, the seller reneged on its earlier price and stated that they knew they had agreed on a price, but now the price had gone up (this was in spite of a signed agreement).  Although the seller probably didn't know it, the raised price was well within the price that my client had said they were willing to pay.  However, I proceeded to pound the table, call off the closing and storm out.  A couple of days later, the sellers capitulated to the price they had agreed to before (yes, obviously a very principled bunch).  We closed, my client failed to start the mining recover process on time and forfeited all they had paid up to that point and then proceeded to stiff me on my fees.  This was one that I should have walked away from and never gone back.

Winklevosses Lose Again. Massachusetts Court Dismisses New Lawsuit Against Facebook.

We have covered the Winklevoss twins versus Zuckerberg/Facebook legal struggle on way too many occasions (see here, here, here and here).  We rejoiced when we found out that the Winklevosses would not go away as we felt it would make for easy blog posting.  Well, this is one.  About a month after the Winklevosses decided not to take their appeal to the U.S. Supreme Court and instead pursued a suit in District Court in Massachusetts, that court has dismissed their claim on the grounds that other courts had already considered and rejected their substantive claims (res judicata).  The twins' attorney will file a motion for post judgment relief and we can only hope that this continues until we need another easy post.

 

Negotiations 101: Part 2 - Don't Get Personal And Don't Take Things Personally.

The next  point in our on-going trip through negotiations land may sound pretty basic and not particularly profound and if that's what you think, you're right. 

An admonition not to take anything in a negotiation personally and not get personal could sound unnecessary, however, I have seen plenty of negotiations that otherwise had a good chance to result in a mutually beneficial deal go off the tracks solely because of a violation of this tenet.  Remember, most of these suggestions are directed toward the reaching of agreement on a business transaction with several moving parts and which should not have much emotion involved.  Unlike a discussion about the settlement of a lawsuit, which often has much emotion involved because of the adversarial nature of the beast, a business transaction works better when approached rationally.

However, some approach negotiations as a zero-sum game and as a contest and measure success not by the attainment of a mutually beneficial goal but by the amount of scorched earth left behind them.  While such an approach (and result) may bring some short term benefit, it has been my view (both as the scorcher and the scorchee) that this gives one of the parties an incentive to find ways during the relationship to claw back real or perceived slights and generally poisons the situation such that a long term deal is difficult.  The same is true for ad hominem attacks. 

Permit an old man a war story. I had negotiated a long term deal with termination rights for the other side but with a eight figure termination fee, which was designed to pay for the unamortized costs still in the deal.  The other side was acquired and the acquiror seriously wanted to terminate and not pay the termination fee.  We agreed to discuss some renegotiation but the first two days of the meetings were highlighted by a multi-volume PowerPoint presentation attempting to tell us how much we had breached the agreement, how bad we were as a vendor and generally, how bad we were as people.  Now, I have to say I took some of that personally and that made me harder to deal with.  We negotiated off and on for over 6 months, in three states and two countries and the deal never got any better for us.  We failed to reach a renegotiation, the blustering about breach was just that and nothing came of that and several years later, the other side terminated pursuant to the agreement and paid the large termination fee.  I say that only to illustrate that I violated this principle in that deal but the other side did to a much greater extent.  And we neither one got a longer term relationship, which would probably have been much more beneficial to each.

Hallelujah! We Spoke Too Soon. Winklevosses Strike Back. More Easy Blog Posts Ahead.

Yesterday we announced prematurely the cessation of combat operations in the Winklevoss v. Zuckerberg saga/soap opera/high grossing movie plot.  It seems that even though the twins had decided to forgo their appeal to the U.S. Supreme Court, they are pressing the attack in an existing suit in Boston.  Thank you, whatever deity is responsible for providing material for blog posts.  Our faith in you is renewed.

 

Our Long National Nightmare Is Over. Facebook/Winklevoss Lawsuit Comes To An End.

This blog has been in sort of a TMZish mode regarding the unfolding drama of the Winklevoss twins vs. Zuckerberg.  See here, here and here.  Apparently the era of easy blog posts is coming to an end as the twins have announced through a filing that they will not pursue an appeal to the U.S. Supreme Court.

 

The Rapture or World IPv6 Day, Which One Is Likely To Cause More People To Disappear?

Well, the Rapture came and went and apparently everyone I know is a dirty, rotten sinner.  Now, we get another chance to be elevated into something greater than ourselves.  You will recall that we warned you that the Internet ran out of numbers a month or so ago and it had about as much impact as last Saturday's event.

Now, the Internet Society is tempting fate by calling for a World IPv6 day on June 8, 2011.  We are less likely to see billboards and covered cars extolling this day than we did for the Rapture and we certainly will see less media coverage although this touches far more people than 144,000.

On June 8, several hundred websites and a few large companies will provide their content in IPv6 compatible mode to remind people of the coming apocalypse when all websites and devices with IPv4 numbers try to switch over.  Talk about your Armageddons!  Just wait until the internet and cell phones don't work.  At that point, not even one of the major deities could save us.

To determine your browser's ability to be screwed up by this change over, you can go here to check now.  To prepare for IPv6 day and the return of Y2K, please fasten your seat belt and return your browser to its full uptight and locked position.  Your pilot has been advised of some choppy air ahead.

(To be clear, this is this Blog's lame attempt at sarcasm.  We believe the IPv6 changeover is beneficial and necessary.  Really, we do.)

Ninth Circuit Denies Winklevoss v. Facebook Motion For Rehearing. Winklevosses Change Status To: "It's Complicated".

You will remember that the Winklevoss twins had tried to get their settlement with Facebook overturned.  The Ninth Circuit had decided that the settlement should stand and that litigation should end at some point.  The Winklevosses did not take the hint and asked for a rehearing en banc (i.e. that all the judges of the Ninth Circuit hear it as a panel rather than the three judge panel that originally sat on the case).  That motion was denied without comment.  The only option left for the twins is to appeal to the U.S. Supreme Court.  In order to decide to grant certiorari (i.e. the decision to put the case on the Supreme Court docket), the Supremes will have to believe there is some constitutional issue to be decided.  That will not be easy in this case as the issues deal primarily with contract law and the allegations of fraud.

We had mentioned before that we hope the Ninth Circuit granted a rehearing for no other reason than it gave us fodder for further posts.  We now wish the same for the Supreme Court.

Who Owns The Clients Of A Professional LLC? Hint: It's Probably Not The LLC.

While not strictly technology related, this matter has some interest among professionals and could certainly have some impact on consulting firms in the technology arena.

Doctors, lawyers, accountants and others form limited liability companies (LLCs) under various state laws to conduct their practices.  In New Jersey, the Superior Court was called upon to determine whether the clients of a LLC belong to the LLC or to the individual members.  Gaines v. Luongo,  Superior Court of New Jersey, Docket No. A-3600-09T3, Unpublished Opinion, March 25, 2011.   

An accounting firm was organized as an LLC and one member was given a 70% ownership but the two members equally shared income and losses.  Shortly after the formation of the LLC, the fun went out of the relationship and the minority member sued under the oppressed minority shareholder rules of the New Jersey corporate code.  Part of the complaint alleged that the value of the clients of the firm should be considered when determining the pay out under the dissolution.  The Court held that the the "...Partnership's clients were never carried on [the] books as an asset; no value was ever assigned to them on the Company's balance sheets; and they were free to stay in business with either partner or neither."  Therefore, the value of the goodwill ascribed to each client belonged to the individual members and would not be considered in the dissolution.

So, unless otherwise stated in the Operating Agreement or otherwise on the books of the LLC, a client's value is not the property of the LLC.

Winklevosses Ignore Part of Ruling That Says: "...litigation must come to an end..." and Ask For En Banc Rehearing.

Last week we talked about the Ninth Circuit refusing to set aside the Winklevoss/Zuckerberg/Facebook/ConnectU settlement agreement.  Yesterday, the famous twins decided to ignore the part of the opinion that said that now is the time for the litigation to come to an end and filed a Petition For Rehearing En Banc.  This means that they are asking all the judges of the Ninth Circuit to rehear the case rather than the panel that originally heard it. 

From the language of the Petition, the twins seem to take umbrage at some of the snarkier language in the original opinion.  They find issue with: "bested by a competitor", "backing out", "quite favorable", "enough" and allege that "sophistication is no defense".

We can only hope that a rehearing will be granted, if for no other reason than it will give us fodder for several more posts.  Stay tuned.

 

The Social Network II - The Facebook Legal Saga Continues.

We've all seen the movie.  Mark Zuckerberg versus the Winklevoss twins.  Uber-nerd versus uber-jocks.  Outsider versus the privileged and connected.  In the balance rests the right to violate the privacy of virtually everybody in the "civilized" world.

The movie shows some of the discovery proceedings in the lawsuit filed by the Winklevosses in Massachusetts alleging that Zuckerberg stole the Facebook idea.  Zuckerberg filed a countersuit in California (typical Facebook ploy, see here) against the twins and ConnectU, alleging that ConnectU had hacked into Facebook and stolen information and attempted to steal Facebook users by spamming them.  The California dismissed the action against the Winkelvosses, finding that there was no personal jurisdiction over them. The Court then ordered the parties to mediate to attempt to find a settlement to all their issues.

Then things start to get stranger.  With billions of dollars at stake, the parties mediate for one day, reach a settlement and document it with a one and a third pages of hand written notes with the title: "Term Sheet and Settlement Agreement".  This Agreement envisions the transfer of ConnectU to Facebook in exchange for cash and an interest in Facebook.  Facebook lawyers then present 130 pages of documents to flesh out the Agreement (merely 100 times the volume of the Agreement).  The deal then comes off the tracks for a number of reasons including the Winklevosses asserting that the value of the Facebook stock is less that they were lead to believe.  Facebook files a motion to enforce the Agreement.  The twins alleged that the Agreement is not enforceable because it lacks material terms and was procured by fraud.  The Court finds the Agreement enforceable and the Winklevosses appeal.

Then Ninth Circuit, in a decision released yesterday, upheld the enforcement of the Settlement Agreement.  The Winklevosses had alleged that the Agreement violated Rule 10b-5 of the Securities Act and as such was void.  The Ninth Circuit rejected this argument and found: "The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world's fastest-growing companies. They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss—father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation—also participated."

The Court also held: "The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion —3.33 times the value the Winklevosses claim they thought Facebook's shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached." (Emphasis added)

So, the poor Winklevoss twins are stuck with a deal that is only worth millions and not billions.  In the lessons learned department, we are struck by the fact that you probably couldn't turn around in the mediation room without tripping on a lawyer or a financial advisor and yet, they ended up with slightly over a page long, hand written document.  That either means you don't need lawyers at all or you really need them to do their job. 

Maybe we'll find the answer in the next sequel, "Social Network III, The Legal Grievance Phase".

 

LinkedIn Reaches 100 Million Users. First Million Get Thanked Personally.

Sometimes referred to as the Facebook for the business set, LinkedIn provides a multitude of information and contacts to its members.  Last week, LinkedIn notched its 100 millionth user.  According to the metrics on my LinkedIn page, I'm connected to about 4 percent of them.  That's a lot.  I hope they don't all decide to come over to the house at once.

In a nice touch, the founder of LinkedIn sent a personal letter of thanks to the first 1 million adopters, specifically citing their order of signing up.  I didn't get a letter as I missed being in the first million by a mere 16,915,876.  If you are looking for your letter, you can determine if you are going to get one by looking at your full profile URL.  Your order in the LinkedIn hierarchy is listed after the "id=__" in the URL.

I'm probably not going to get a letter from Mark Zuckerberg either.

Stanfield Hiserodt To Present Discussion On Cloud Computing At RISE Tomorrow.

We will be leading a discussion on "Ten Things You Should Know About Cloud Computing Agreements" at Austin RISE Week 2011 tomorrow at 4:00 pm at the PeopleFund offices at 207 Chalmers Avenue in Austin.  If you need something to do during that awkward time between afternoon coffee break and happy hour, come on out and share it with us.

SXSWi Panel Picks: ATLB Selections (so far)

South by Southwest Interactive is just around the corner, coming March 11-15, 2011, and now it's time for the selection process to begin. For those of you who aren't familiar with the process check this out to get up to speed. There are three groups that vote on what panels will participate in the 2011 SXSWi: public (30%), SXSWi staff (30%), and advisory board (40%). There is a feeling here at ATLB that it's our duty to assist in crafting this year's event. I mean it's for the public, so why shouldn't we have a loud voice. This bog goes out to several different groups that have interest in a variety of things, so in order to provide a broad range of issues here are a couple that seem relevant to our readers: Bootstrapping, Entrepreneurism and Monetization, Funding, Web Apps, and our personal favorite Licensing, Fair Use and Copyright. Please check out these categories and see if a subject of interest pops up.

Additionally, there are a few individual panels this year that we'd like to suggest:

 

Apps vs. Mobile Web: Which to reach consumers?

Copyright Criminals

Download Illegally, It's the Right Thing to Do

Social Network Users' Bill of Rights: You Decide

Legal Frontiers In Social Networks, Blogs and Beyond

I.P. Fearlessly: Copyright, Contracts, and Clients

 

I'm sure there are many more that would do a great job of bring value to next year's event, but these were the ones that caught our eye on first go around. It would be a good idea to get on twitter and find some other good Austin Tech Sources to get a feel for some other good panels.

Enjoy the weekend!

Startup Week - Part 4: The Texas Employment Agreement

Startup Week here at AustinTechLawBlog continues with part 4 of our 5 part series on common startup issues – Employment agreements. Every company that has employees will need to make sure they properly set out an agreement between the company and the employee. There are many different types of provisions that can play a major part in your employment agreement, but we’re only going to cover a few today that seem to cause quite a bit of confusion. Non-competes, non-solicitation, and confidentiality are three areas of employment contracts that most employers and employees need to pay close attention to.

Confidentiality

A confidentiality (aka, non-disclosure) provision in an employment contract should protect the company’s sensitive information from being revealed to a third party. Many reasons exist why a company would want to accomplish this goal of confidentiality. For instance, the enforceability of some intellectual property relies solely on the confidentiality of certain information. Trade secrets are almost completely reliant on a company’s non-disclosure protection. If a company does not take the appropriate actions in maintaining secrecy, they cannot rely on the protection afforded in Texas (based on common law). The depth of confidentiality in trade secrets is beyond the scope of this post, but this Citizen’s Media Law Project article, does a great job outlining the basics of trade secret law in Texas. Patents also rely heavily on non-disclosure to ensure their protection, and if not appropriately handled the invention can actually lose its patentability if an application is not filed after a year of certain disclosures.

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START UP WEEK: Withdrawal, Financing, and Acquisition

Unfortunately not all businesses work out and must come to an end, or there is some even that requires the business to terminate.  How this occurs and how the business owner should handle it depend on whether it is a partnership (including limited partnerships and LLCs) or whether it is a corporation.  On the other end of the spectrum, a business may become so successful that it is in a position to receive substantial financing (venture capital or private equity) or even outright acquisition.  This post will discuss some issues presented in each of these circumstances.

Partnerships and LLCs:  Withdrawal and Winding Up

Certain events can bring about the withdrawal from a partnership under the Texas Business Organization Code (TBOC).  The most common are voluntary withdrawal, expulsion, the partner dies or ceases to exist, the partner enters into bankruptcy.  The partner's withdrawal must abide by the operating agreement to avoid breach.  If the partnership will continue after withdrawal, the exiting partner has a right to have his interest redeemed for the fair value on the date of withdrawal plus interest.  The partnership and withdrawing partner must come to an agreement on the redemption price.  If no agreement can be reached within 120 days after written demand for redemption.  The partnership must pay the withdrawn partner within 30 days its estimate of the redemption price. 

One issue to be aware of is the withdrawing partner's ability to bind the partnership.  For one year after withdrawal, a partner can bind the partnership to any agreement that would have bound the partnership before withdrawal if there was apparent authority to enter into the agreement, and the third party did not have notice of the withdrawal and reasonably believed that withdrawn partner was still a partner.  Additionally, the withdrawn partner remains liable for any partnership obligations that were in existence before withdrawal. 

When the partnership decides or is forced to "wind up" its operations, certain requirements under the TBOC must be followed.  A solvent business that is dissolved with liquidated assets must pay cash first to creditors and then to the partners' capital accounts.  Where a partner pays more than his share of the debt, he is entitled to a contribution from the others for that amount.

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START UP WEEK: What Is This Operating Agreement Of Which You Speak?

In this, the third installment of “Start Up Week”, we will discuss some aspects of the fundamental document governing the internal operation and rules of a limited liability company (“LLC”). This is referred to in various state statutes as a “Company Agreement” (Texas) or an “Operating Agreement”. Regardless of what you call it, it contains the rules to live by in a LLC. Because of the blurring of the lines between various kinds of legal entities in the past few decades, the Operating Agreement is similar in many ways to the by-laws of a corporation and the partnership agreements in general partnerships, limited partnerships and limited liability partnerships, but the discussion in this post relates only to Operating Agreements.
“Why do I need one?” you might ask. You might tell me that you went on the Secretary of State’s web site and for $300 and 15 minutes of your time, you formed your own LLC and have not done anything else, so what’s the big deal?
Technically, you don’t even need a written Operating Agreement. An Operating Agreement can be written or oral, although I’m sure you recognize the problem of proof if you try to rely on an oral Operating Agreement. Therefore, you should have a written Operating Agreement even if you are the only member (owner) of a LLC. The Texas statutes recognize and provide for that situation, even if you are essentially agreeing with yourself. One of the best reasons for forming a LLC is the limited liability feature of such an entity and availing yourself of such limited liability requires that you treat the LLC as an entity separate from yourself in regard to contracting, bank accounts, leases, etc. The failure to make such separation can be that a court (in a situation you don’t want to be in) might say that since you disregarded the separate nature of your LLC, the court will do the same and therefore, you don’t have the limited liability protection. The existence of a written Operating Agreement, while not dispositive of the issue in and of itself, is evidence of your recognition of the separate entity and aids in the defense of any attempt to “pierce the veil” of the LLC.
Even if you don’t have a written Operating Agreement, the state has provided one for you. For example, in Texas the statute says, “To the extent that the company agreement of a limited liability company does not otherwise provide, (these statutes) govern the internal affairs of the company.”
So, if the state is going to write one for you, why not do one that might better suit your needs?
While not exhaustive, the following is a discussion of issues that should be considered in your Operating Agreement. These should be carefully considered and discussed with an attorney and an accountant to determine if they actually achieve the goals that the members have for the LLC and their investment in it. Also, since we have treated the posts during this “Start Up Week” as alpha and omega and “Cradle to Grave”, you can consider the Operating Agreement as a giant pre-nuptial agreement relating to the very real relationship you will be entering into in a multi-member LLC. Therefore, you should provide for how you get into the relationship, how you act during the relationship and how you are going to end the relationship. Good advice in life, good advice in LLCs.
Issues:

1. What happens when you or another member want to sell your interests?

Interests in small LLCs tend to be closely held and not particularly marketable, so this tends to be self-limiting. However, absent some contractual restriction, LLC interests are freely assignable, and you don’t want to wake up one morning and find that you are in business with someone that you didn’t anticipate, so you should consider restricting the sale in some way. Some methods of doing this are: (i) right of first refusal in favor of the LLC and the other members on the same price and terms as offered by a third party; (ii) exercise of a “stare-down” agreement (also called “push-pull”) where a party desiring to sell names a price and the other member(s) can either purchase the interest at that price or sell their interest at that price but one or the other has to occur; and (iii) declaration of intent to sell where a party who desires to sell declares that intent and the terms upon which the party would sell (this is similar to the right of first refusal but there is not a ready buyer at the time).
Other situations that you would possibly want to consider are purchase of a member’s interest in the event of divorce, death, disability, bankruptcy, retirement, breach of the Operating Agreement or termination of employment for good cause. The situations in this paragraph would require the establishment of a value for the interest that can either be done in the Operating Agreement (generally forgotten and rarely updated) or by a method established in the Operating Agreement (e.g. third party appraisal).

2. How capital is to be contributed and gains and losses are to be allocated?

In the event that not every member contributes the same amount to the enterprise (e.g. some contribute money, some contribute intellectual property or labor, etc.) the dynamics and results of that non-symmetry needs to be considered. The maintenance of each member’s capital account and how that will be affected if different capital contributions are made but gains and losses are passed through in equal amounts should be discussed in depth with a financial adviser. Also, if future capital contributions are to be made, what happens if there is default? Is the defaulting party’s interest subject to being bought out at some pre-determined price or is the defaulting party’s interest terminated? Other consequences can be set out. One of the values of a LLC is its flexibility. As long as it is not illegal, you can agree to do it in an Operating Agreement.

3. What are other considerations?

Aside from how to capitalize and distribute gains and losses and how to manage a termination of the relationship, other issues to be considered are how to form and manage the enterprise, whether to have the LLC indemnify the members for certain actions and whether to distribute money to pay for tax liabilities in certain situations.

Obviously, any lawyer worth his salt can work one of these agreements into a multi-volume set. However, the time, effort, expense and thought put into this on the front end when people are much more agreeable can avert a number of issues down the road when they might not be so congenial.
Avoiding future problems, that’s a good thing.
 

STARTUP WEEK: Intellectual Property and Your Company

So now you've chosen your entity, it's been incorporated, you have startup capital and are up and running, you've spent thousands of dollars in creating a logo, branding, and marketing.  Things are going great, and then one day you are hit with a cease and desist letter stating that you are infringing on another company's trademark because the name you are using is confusingly similar to the other company's name.  Now you are not only in danger of being sued, but you've just wasted thousands of dollars and many months of hard work on a name and brand you can't even use.  This is just one illustration of how important it is to assess as early as possible the intellectual property (IP) landscape of your company.  Three questions every new business owner should ask: "What IP does my company have?", "How do I protect that IP?" "Am I in danger of infringing the IP rights of another?"  This post will give a summary of the main types of intellectual property, how to protect IP, and how to avoid infringement.  This is just a summary and is no means comprehensive.  Every new business owner should consult with an attorney about their IP issues.

The four main types of IP: 1)Trademarks 2)Copyrights 3) Patents and 4)Trade Secrets. 

TRADEMARK LAW

Trademarks allow a company to easily distinguish itself in the marketplace in the minds of consumers.  A well known trademark is often one of a company's biggest assets.  Trademark law gives a company the exclusive right to use a distinctive mark used to identify its goods or services.  It allows for a company to develop a brand in the marketplace without fear that another company will cause a "likelihood of confusion" by using a similar mark.  Trademarks do have "common law" protection under federal law and the law of most states; meaning that you do not have to register to have protection.  But registering your distinctive mark at the federal and state level provides a number of benefits.  Registering serves as constructive notice that your mark is in use, it makes it easier to prove your case in court, and it gives you protection in a far greater area.  Prior to registration, the mark should be followed by "TM" for trademarks and "SM" for service marks.

Not all names are available for trademark protection.  The mark must be sufficiently distinctive.  The level of distinctiveness depends on the context it is used.  Generic or common terms are not protectable if they are used in the area they describe.  For example, "Apple" is protectable when used with computers, but would not be protected if the company sold fruit.  Marks can't be overly descriptive either.  For example, "Eye-Care Center" would not be protectable for an optometrist's office.  Suggestive marks have a better chance of obtaining protection, but are not perfect because they could be seen as too generic/descriptive.  For example, "America Online" is suggestive of the services it provides.  The best choice for a protectable mark would be an arbitrary or fanciful term.  (Think "Yahoo!" and "Google")  It should be noted generic or descriptive marks can become protectable through their use. A mark can obtain "secondary meaning" through its extensive and continuous use in commerce to such an extent that it has achieved the required level of distinctiveness. 

Picking a distinctive mark is just half the battle.  You must also ensure that you are not using a mark that infringes another company's rights.  The basic test the courts use when determining if a mark is infringing is "likelihood of confusion" in the minds of consumers.  There are thirteen factors courts consider when determining likelihood of confusion.  (Known as the "DuPont Factors")  You should search extensively for similar marks on the USPTO website  and consult with an attorney before deciding on your mark.

COPYRIGHT LAW

Copyright law protects original works of authorship fixed in a tangible medium of expression.  Obviously, this includes many areas: literary works, musical works, dramatic works, photos, paintings, sculptures, architectural works to name a few.    Business that don't produce these types of works should still consider whether they have copyrightable material.  Marketing materials, training materials, or other works that the business creates during its operations could potentially be copyrightable.

Anytime a business contracts to create something new it should consider the copyright involved.  Just because someone creates something for a business doesn't necessarily mean the business own it.  This is a common issue in "works for hire" cases, and every company should address ownership of the copyright when contracting for works made for hire. 

Similar to trademarks, copyrights can be registered, but they do not have to be.  Copyright protection exists from the moment of creation.  But like trademarks, there are a number of benefits from registration.  It is much easier to prove infringement if the copyright is registered, there are substantial statutory damages as well attorney fees available to the registered copyright holder.  Copyrights are relatively easy to register compared to patents and trademarks, but registration can be deceptive in its simplicity.  Consulting with an attorney is recommended. 

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STARTUP WEEK - Business Entities

This is the first installment of Startup Week here at AustinTechnologyLawBlog.com. We’ve talked with some small companies here in Austin and there was a request to focus our attention on some of the legal issues facing a local start-up. So we were happy to oblige. 

This first blog post focuses on business entity selection and will try and give a quick summary of the more popular Texas entities and give some advantages and disadvantages of each. It is important to notice that this information is meant to be educational and informative for the public, anyone attempting to form a business entity should consult an accountant and an attorney before forming an entity. This does not constitute legal advice in anyway. Personal wealth, investments, future investors, as well as a number of other issues can significantly change the outcome of the entity selection.

Sole Proprietor

A sole proprietorship is one of the most common and simplest forms of a business entity. When an individual begins work without formal registration with the state the individual/company is seen as a sole proprietor. The default entity for an individual, a sole proprietorship is the easiest to form and least expensive business entity out there (grand total of $0, unless you operate under a name other than your own surname then you would need to reserve an assumed name). The money from the business flows directly to the owner, and the owner can distribute the money as he/she sees fit. However, with such freedom comes much responsibility. The biggest trade off here is likely that a sole proprietor must assume all liability of the company. If the company defaults on a contract, an employee wrecks a car, someone slips and falls, etc. and damages are due from the company, not only would the company assets be subject to the judgment, but so would the owner’s personal assets.

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Startup Week: The Alpha and the Omega

After asking some of our clients and others in the Austin business community what issues they would like to see Austin Tech Law Blog cover, the most frequent response was startups and the legal issues they face.  Be careful what you wish for. 

This week, ATLB will be blogging a "Startup Week" where we'll cover issues from the inception (great movie!) of a company to dissolution, or more optimistically, acquisition/funding. 

  • Monday:  Entities:  Which entity should you form under?  The pros and cons of each.
  • Tuesday:  Intellectual Property:  If you have it, how do you protect it?
  • Wednesday:  The Operating Agreement:  What issues should you consider when creating it?
  • Thursday:  Employee Agreements:  Issues in employment agreements  including noncompetes, nonsolitication, and confidentiality agreements.  
  • Friday:  Dissolution, Acquisition, or Final Funding:  What issues should you consider for each?

So check in each day as we discuss the various legal issues you should consider when forming and operating a startup.

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