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What Start-Ups, Tech Companies and Marketers Need to Know About the New Overtime Rules

You may have heard about new overtime rules from the Department of Labor. It’s not all about bathroom laws. Michael Kelsheimer, author of the Employer Handbook, broke down the new rules in Federal Changes to Overtime Exemptions Alert.

In a gross over-simplification, employees that oversee others, i.e, manager, were exempt from overtime if they earned more than $23,660 year. Come December 1, that amount is increased to $47,476 per year.

So that means anyone earning less than that can no longer be exempt no matter how many employees they oversee and will be entitled to overtime pay if they work more than 40 hours per week.

Does your account lead that oversees a team make less than that? Do they work more than 40 hours per week? What about the lead developer?  Or customer service team leader?

We know many of you use independent contractors as opposed to employees and these rules would not apply if the person is truly an independent contractor.  But, classifying someone as an independent contractor is harder than you think.  Luckily, Michael has written about that, too in Are you an Employee or an Independent Contractor?





What You Need to Know About the Federal Defend Trade Secrets Act of 2016

My colleagues Michael Kelsheimer (author of the monthly Employer Handbook blog), intellectual property lawyer David Lisch and I put together a client alert on the new Federal Defend Trade Secrets Act of 2016 law. You can download the DTSA 2016 Client Alert or keep reading.


President Obama is expected to sign the Defend Trade Secrets Act of 2016 (DTSA), which was passed by Congress at the end of April 2016. This law could impact your property protection, litigation and employment law strategies.

Background on the Law

The DTSA allows parties to bring lawsuits in federal court when another party steals or misappropriates trade secrets. Before the DTSA, most litigants were forced to sue in state court under the Uniform Trade Secrets Act (UTSA), which was approved by 48 of the 50 states including Texas, unless there was another unrelated avenue to appear in federal court. The DTSA is similar to the existing state trade secret laws, but with a few important distinctions discussed below.

What is a trade secret?

Trade secrets touch almost every business in America because they are broadly defined and implicated almost every time you hire or terminate an employee. The DTSA, like the UTSA, defines a trade secret as:

All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and regardless of whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:

(a) the owner has taken reasonable measures to keep such information secret; and

(b) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.

What intellectual property protections do I need?

Trade secrets can protect more of your business assets than copyrights, trademarks or patents.  The latter are limited in availability and the protections granted. A trade secret does not have to rise to the level of a patentable invention and you do not have to disclose it to the world in order to protect it, as you would a trademark, copyright or patent. Textbook examples of trade secrets are the allegedly secret formula to Coca-Cola and Kentucky Fried Chicken’s secret recipe.

Because trade secrets are secrets, they must be kept secret. Restricting employee disclosure of trade secrets is only helpful if the secret is not leaked or shown to prospective customers. The key is to implement company-wide measures to keep the secrets, secret. Counsel can help review what company assets or information may be trade secrets (as opposed to utilizing other intellectual property protections) and whether you have the right processes in place to prevent disclosure.

Ask yourself, how hard is it for an employee to walk out with your information? How damaging would that be?

How does the law impact my litigation strategy?

When signed into law, the DTSA will not preempt state law. If you believe your trade secrets have been misappropriated, you will have the option to sue in federal court under the new law or the existing UTSA under state law.

So, why use the DTSA instead of the UTSA? The DTSA allows a federal court to seize property and prohibit the dissemination of the trade secret “ex parte” (without advance notice to the former employee) in “extraordinary circumstances”.

Obtaining a seizure will not be easy. You must show that the more traditional preliminary injunction, currently available under the UTSA, will not provide adequate protections. To prevent abuses, you are not allowed to make copies of any seized property. Finally, all ex parte orders must include specific instructions regarding when the seizure can take place and whether force may be used to access locked areas.

This remedy is in addition to whatever damages you recover. Under the DTSA, you can recover actual damages, restitution, injunctive relief, exemplary relief (up to two times the award of actual damages) and attorney’s fees.

Courts will not, however, enter an injunction under the DTSA if doing so would keep the defendant, such as a former employee, from entering into a new employment relationship. The DTSA would allow for conditions to be put on that employment, but only if you can show threatened misappropriation and not just argue that misappropriation is likely because of information the defendant knows. The DTSA will not, in other words, support an “inevitable disclosure” claim.

The DTSA also bolsters possible criminal penalties for stealing trade secrets by increasing the penalties for a criminal violation from $5 million to the greater of $5 million or three times the value of the stolen trade secrets, including the costs of reproducing the trade secrets.

Using the DTSA may also clarify what law is applicable. While most states have adopted the UTSA, there are still minor variances. If you invoke the DTSA, you will know exactly what law applies regardless of where the parties are located within the United States.

As an employer, do I need to take action?

The DTSA offers some unique benefits for employers. If you have employees throughout the country, the DTSA will allow a uniform mechanism to protect your secrets. If you need to seize property from a former employee, the DTSA is probably your best option.

If these provisions are valuable, update your employment contracts to include the immunity notice required under the DTSA. This will allow you to recover punitive damages and attorney’s fees. Without the notice “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information,” these added benefits are unavailable.

Of course, the immunity language might give some employers pause, as it warns employees that they are protected in providing trade secret and other confidential information to the government for the purpose of reporting a company’s violation of the law. For employers in good standing, this should not be a problem.

The Bottom Line

The DTSA presents an interesting weapon to protect your trade secrets. If you take action in your employment agreements and protect your trade secrets now, you may be able to file lawsuits in federal court. There are a number of factors that go into deciding whether to pursue a claim in state or federal court, but, with the passage of the DTSA, companies seeking to protect trade secrets will have that option and additional remedies available to them.

Laremy Tunsil’s Draft Slide May Result in Criminal or Civil Liability

If you watched the first round of the NFL Draft, the big story was the sliding of Ole Miss offensive tackle Laremy Tunsil out of the top five to number 13. As the draft was unfolding, someone released a video of him smoking marijuana through a gas mask.  You can read the story here.  You can watch this interview right after he was picked.

To make matters worse, after he was picked, someone released text messages between Tunsil and one of the assistant coaches at Ole Miss where it looks like Ole Miss was paying Tunsil’s rent or his mother’s electric bill.  Read about it and see the texts here. Here is another interview where Tunsil admits the texts were his.

So, can Tunsil sue or is there a possible crime?

Yes and yes.

Assuming someone “hacked” his Twitter or Instagram account, even if Tunsil was somewhat lackadaisical about protecting it, and that this person did not have “authority” to access the account, then there is likely a violation of the Stored Communications Act.

The SCA makes it illegal for anyone to “intentionally access[] without authorization a facility through which an electronic communication service is provided or . . . intentionally exceeds an authorization to access that facility; and thereby obtains, alters, or prevents authorize access to a wire or electronic communication while it is in electronic storage in such system.” Accessing his Twitter or Instagram accounts without his permission would likely be a violation.

In addition to these statutes, there could be additional claims like RICO, breaches of contracts, fiduciary duty, wire fraud, trespassing, theft, extortion if there was money demanded in advance, and a number of other state law claims.

So, what are the criminal penalties?

Pursuant to 18 U.S.C. § 2701, “if the offense is committed for purposes of commercial advantage, malicious destruction or damage, or private commercial gain,” the criminal penalty for a first offense is a fine or imprisonment for not more than five years or both.

What about a civil lawsuit?

Tunsil could also sue the perpetrator.  Assuming he can establish there was no authority to access his accounts, the SCA provides that a plaintiff can recover:

damages in a civil action under this section the sum of the actual damages suffered by the plaintiff and any profits made by the violator as a result of the violation, but in no case shall a person entitled to recover receive less than the sum of $1,000. If the violation is willful or intentional, the court may assess punitive damages. In the case of a successful action to enforce liability under this section, the court may assess the costs of the action, together with reasonable attorney fees determined by the court.

18 U.S.C. § 2707.

To prove damages, I would have a composite of the mock drafts immediately prior to the release of the video to determine where Tunsil would have likely been drafted had the video not come out. Then, you take the difference between the guaranteed money that pick would have received and the money the 13th pick receives as your actual damages. Those damages could easily exceed $10 million.

Assuming the defendant wanted to purposefully hurt Tunsil, punitive damages would also be available.

What about Tunsil’s conduct?

Yes, Tunsil is shown smoking marijuana.  Yes, it appears he took benefits from Ole Miss in violation of the NCAA rules. If you are making a negligence claim, the plaintiff’s own negligence comes into play.

But, under the Stored Communications Act, his alleged bad acts don’t really come into play as far as liability.  A jury might consider his actions when deciding the causation. What really caused his damages? Was it the hacking by the defendant or Tunsil’s own bad acts?

Causation is usually a fact question in a civil trial, but would anyone really be surprised that an NFL prospect smoked marijuana at some point in his life? Tunsil says the video is old and his pre-draft drug tests all came up clean.

The video came out 13 minutes before the draft started. The argument is the slide in the draft only happened when the video came out. After all, even after he did these things (although no one knew), he was still considered a top five pick.

If there was a civil case, there could be a huge verdict, but then there is always the matter of collecting.

No Crying Wolf: Retailer’s Website Held Not In Compliance With ADA

ADAAt the beginning of this year, we warned that there would be an uptick in American with Disabilities Act litigation related to website accessibility this year in a post entitled Does My Website Need to be ADA Compliant?  The answer then was “most likely yes.” Now, the adverse litigation results are start to come in.

According to this post from Syefarth Shaw’s Kristina Launey: “A First: California Court Rules Retailer’s Inaccessible Website Violates ADA“, a California court held recently that a retailer violated the act because it lacked access for the vision-impaired. This was a first in the nation determination regarding ADA applicability to a retail site.

The court granted a summary judgment in favor of the plaintiff on the application of the ADA because (1) there was “sufficient evidence that he was denied full and equal enjoyment of the goods, services, privileges, and accommodations offered by defendant [via its website] because of his disability”; and (2) there was a sufficient nexus to defendant’s physical retail store and the website.

The statutory penalty was only $4,000 and there is an injunction in place to force the store to become compliant. The real pain to the defendant is coming because the store is liable for the plaintiff’s attorneys’ fee in an amount to be determined.


This should motivate you to look into whether you need to be compliant and whether you are. Go back and read ADA our post from January or fin additional information here.


The Law Behind the Hulk Hogan $140 Million Verdict Against Gawker

GawkerA few days ago, a jury in Florida awarded Hulk Hogan (real name Terry Bollea)  $140 million because Gawker posted a leaked sex video of the former wrestler. Rather than focus on the lurid details (which you can Google), let’s look at the law that led to the two-week trial.

To recap, Gawker allegedly received the video from an anonymous source. Other news outlets reported the existence of the tape. Gawker decided to publish the video in 2012 and had it on its site for six months.

What Issues Went to the Jury

The lengthy jury instructions indicate Bollea sued for (1) invasion of privacy; (2) violation of his right of publicity; (3) intentional infliction of emotional distress; and (4) a violation of Florida’s Security of Communications Act.  Gawker denied the allegations and contend their actions were protected by the First Amendment.

Florida law on invasion of privacy

A number of acts can constitute an invasion of privacy. The first claim was for invasion of privacy based upon the publication of private facts which requires: (1) the publication of truthful private information; (2) that a reasonable person would find highly offensive; and (3) that does not relate to a matter of legitimate public concern. The final element is why there was a lot of discussion about the “newsworthiness” of the video and the effort by Bollea to distinguish between his real self and the character that he plays as Hulk Hogan.

Bollea also sued for invasion of privacy based on intrusion upon seclusion which requires: (1) the wrongful intrusion through physical or electronic means; (2)  into a place in which Bollea had a reasonable expectation of privacy; (3) in such a manner as to outrage or cause mental suffering, shame or humiliation to a person of ordinary sensibilities. Because of this claim, there was a lot of discussion about whether Bollea knew about videotaping.

Finally, there was a claim for invasion of privacy based on misappropriation of the right of publicity which requires: (1) the unauthorized use of the plaintiff’s name or likeness; (2) for a commercial or advertising gain.

Intentional Infliction of Emotional Distress

This claim consists of: (1) extreme and outrageous conduct by the defendant; (2) that causes severe emotional distress; and (3) was engaged in either with an intent to cause severe emotional distress or a reckless disregard of the high probability that it would cause severe emotional distress.  Extreme and outrageous conduct is behavior which, under the circumstances, goes well beyond all possible bounds of decency and is regarded as shocking, atrocious, and utterly intolerable in a civilized community.

Florida Security of Communications Act

This statutory claim requires: (1) the disclosure of oral communications; (2) in which the plaintiff had a reasonable expectation of privacy; (3) by one who knows or has reason to know that the communications were recorded without plaintiff’s knowledge or consent.

The First Amendment

The court instructed the jury that the newsworthiness of the video was a defense to Bollea’s claim for publication of private facts and a First Amendment defense to each claim. The court explained: “A matter of public concern is one that can be fairly considered as relating to any matter of political, social, or other concern to the community or that is subject to general interest and concern to the public. . . . The line between the right to privacy and the freedom of the press is drawn where the publication ceases to be the giving of information to which the public is entitled, and becomes a morbid and sensational prying into private lives for its own sake, with which a reasonable manner of the public, with decent standards, would say that he or she had no concern.”


As you know, the jury found in favor of Bollea.  The jury therefore had to assess damages. Bollea’s experts claimed the video raised the value of the website by $5 million to $15 million. Gawker retorted that it only added $11,000 in value because there were no advertisements next to the video.

The court instructed the jury to award “the amount of money that . . . will fairly and adequately compensate Plaintiff for the emotional distress he experienced as a consequence of the publication of the Video.”

On the misappropriation of the right of publicity, the court instructed the jury to award “an amount of money that . . . will fairly and adequately compensate Plaintiff for any economic damages relating to the publication of the Video.” 

The jury awarded compensatory damages in the amount of $55 million for economic damages and another $60 million in pain and suffering. The jury added another $25 million in punitive damages made up of $15 million against Gawker, $10 million against the founder of the site and $100,000 against one of the editors involved. Some media reports suggested Bollea only asked for $100 million in damages. There were reports that the jurors were disgusted by jokes made by Gawker employees at the time of publication and during depositions.

You can read another interesting take on the case here.

Gawker intends to appeal.

The Law Behind the Apple vs. FBI iPhone Unlocking Debate

By now, you have probably read about how the FBI is asking Apple to create software that would help the FBI unlock the iPhone of one of the deceased San Bernadino attackers. You have probably heard the talking heads scream about the privacy vs. security policy debate, but what law is at play?

The All Writs Act

You may have even heard the government is relying upon the All Writs of Act which was passed in 1789. Three years of law school and sixteen years of practice and I had not heard of the All Writs Act at 28 . § 165U.S.C.  Surprisingly, it is very short:

(a) The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.
(b) An alternative writ or rule nisi may be issued by a justice or judge of a court which has jurisdiction. 

The purpose of the law is to fill in the gaps to give courts the power to enforce their orders and subpoenas.  Obviously, the use of the All Writs Acts has to be “agreeable to the usages and principles of law.”

How We Got Here

On February 16, 2016, the government received an ex parte order (which means without having anyone from Apple or anyone else arguing against the request) requiring Apple to provide “reasonable technical assistance to assist law enforcement agents in obtaining access to the data.” The order then lists what the court considers “reasonable technical assistance” including the oft-discussed decryption key that needs to be created to help unlock the phone. A copy of the order is here:  SB-Shooter-Order-Compelling-Apple-Asst-iPhone.

Apple’s Legal Argument

download (2)Apple primarily argues that Congress has already decided tech companies like Apple cannot be forced to provide access to encrypted devices. Apple’s brief is here. Specifically, Apple cites to the 1994 Communications Assistance for Law Enforcement Act at 47 U.S.C. § 1001, et seq.  CALEA, Apple argues,  specifically states that electronic communication service providers and mobile phone manufacturers cannot be forced to “implement any specific design of its equipment, facilities, services or system configuration” to unlock or decrypt phones.

Apple then argues that Congress has considered amendments to CALEA, but decided not to amend the 1994 law to require so-called back doors to encrypted devices or programs. According to the brief, “Congress, keenly aware of and focusing on the specific area of dispute here, thus opted not to provide authority to compel companies like Apple to assist law enforcement with respect to data stored on a smartphone the designed and manufactured.”

Case Law on the All Writs Act

The U.S. Supreme Court spelled out the test for whether the All Writs Act could be used in U.S. v. New York Telephone, 435 U.S. 159 (1977). In that case, the Court required the phone company to install a pin register device on two telephone lines.

The Court provided a three-part test:

(1) is the company so far removed from the controversey that its assistance could not be reasonably compelled?

(2) What is the burden on the company whose assistance is sought?

(3) Are there other alternatives?

In light of those factors, Apple argues:

(1) the company does not own or control or the phone or the data the government is seeking;

(2) It would be difficult for Apple to build the requested unlocking key and Apple does not want to for marketing and concerns about additional requests in the future.  Apple says it would take six to ten employees two to four weeks to develop it.

(3) The government made it more difficult when they changed the iCloud password and did not prove that the government exhausted all of the available digital forensics resources available to them.

Finally, Apple contends forcing them to create software would force them into compelled speech in violation of the First Amendment and would constitute an unlawful arbitrary action against Apple without due process in violation of the Fifth Amendment.

The Department of Justice’s Response

FBI-1In its response, the Government tried to shift the focus back to the specific facts of this case and this one phone in light of the three-part test and away from a greater policy argument.

The government says that just because Congress did not make any changes to CALEA does not mean the All Writs Act does not apply to fill in the gap as it has been used a number of times to require companies to unlock phones and other devices.

Regarding the three factors from the New York Telephone case,

(1) Apple purposefully licensed the operating system in the phone that allowed for encryption, so Apple’s involvement is sufficient.  Involvement does not mean a company participated or even specifically knew there was criminal conduct. It only requires that Apple be “closely connected” to the crime.

(2) While the burden to create the software might be burdensome on a small company, the Government says it would not be unreasonable for Apple which encrypted the software in the first place.  The Government would compensate Apple and work to minimize the burden.

(3) The FBI says it cannot unlock the phone without Apple because Apple built the code to prevent any access. They claim the fact that Apple cannot access it without building something new proves Apple is necessary.

Apple can file a response on March 15 and the hearing is scheduled for March 22.

Presentations This Week on Online Influencers, Start-Up Grind Houston and Social Media Law

You can attend any one of this events this week.

Legal Issues Related to Online Marketing Influencers

First is the Houston Bar Association Sports & Entertainment Law Section CLE Luncheon.  It is later today (March 8) at 11:45:00-1:00 at McCormick & Schmick’s in Uptown Park.  The public is welcome to attend, but it would be helpful to rsvp here. The cost to non-members for the lunch is $30.

Although the topic is the Legal Issues Related to Online Marketing Influencers, I am more interested in learning from my co-presenters, the founders Blurbiz who will talk about the business side and demonstrate how they are helping connect brands to online influencers on SnapChat.

Start-Up Grind Houston

Start-Up GrindGray Reed & McGraw, P.C. is hosting Wednesday night’s Start-Up Grind Houston event with Brittany Bly, the founder of Pop Shop America. Brittany is one of Houston’s successful female startup entrepreneurs. As the creator of Pop Shop America, she organizes 600+ designers, artists, and craft entrepreneurs at events with 20,000+ attendees annually.  Drinks start at 6:00 at our office and the fireside chat begins at 7:00.  You can register and find out more information here.

Mastering Cyber Law, Social Media & Data Security CLE

On Thursday, March 10, 2016, I will be presenting with two others at a 90-minute Rossdale telephone CLE beginning at 11:00 a.m. Central.  From Rossdale, “The rapid proliferation of the internet, social media, data privacy & protection has quickly increased the demand for attorneys proficient in the latest tools in this rapidly developing area of law. Today, more than ever, cyber & data law require a mastering of the skills, techniques, and insights needed to successfully counsel clients in this hot, expanding practice. The nationally respected faculty on this Rossdale seminar will describe the current developments in information and network privacy, regulatory compliance, cyber risks, & latest court decisions. Our expert faculty will also cover online defamation, consumer reviews, indentifying sources of posted information and the most current legal developments involving social media. Registration includes course and reference materials that serve as a helpful guide to the numerous topics and techniques discussed in this convenient, telephonic seminar.”

You can find out more here.

Does My Website Need to Be ADA Compliant?

Your website looks good, is functional and provides a great user experience. But, can a disabled person use it? Can a visually-impaired person understand what your photos and other non-text aspects of your website are and do? If not, you may need to make some changes or you may receive a letter from lawyers threatening Americans with Disability Act, or ADA, claims.ADA

When most people think of the ADA, they think of wheelchair ramps and braille on signs to enhance access by impaired individuals. The law may also apply to your website. And, even if it does not apply under current law, the Department of Justice is looking to interpret the law so it applies to commercial websites in the near future.

Existing Basic ADA Law

To state a private claim under the ADA, a plaintiff must allege (1) that she is disabled within the meaning of the ADA, (2) that the defendant owns, leases, or operates a place of public accommodation, and (3) that the defendant discriminated against her by denying her a full and equal opportunity to enjoy the services the defendant provides.

The legal issue for websites is whether website operators are operating “a place of public accommodation.” The statute lists 12 different types of public accommodations including somewhat of a catchall that includes “other sales or rental establishment.” The list, created when the law was passed in 1988, conceivably covers most commercial establishments, but does not expressly include websites.

Courts have essentially taken three positions when approached with this issue. Some courts take the position that the ADA applies to all commercial sites because the law was meant to protect disabled individuals from having a more difficult time than able-bodied individuals from doing business. That is why the website Scribd was unable to get a case summarily dismissed and ended up settling.

The second approach holds that if website has a “nexus” or connection to a physical location (such as a store website), then the ADA applies. Facebook escaped liability in a 2011 California case on these grounds. Target and Home Depot did not.

The third approach simply holds that the ADA only applies to physical places.

What happens if you get a demand letter or are sued?

So right now, the law is somewhat murky on whether the ADA applies to your site and may depend on where you are sued. As explained below, that may change in the future. But, what do you do now?

The good news for potential defendants is that the only remedies available in private ADA suits are injunctions that force you to come into compliance and attorneys’ fees. If the Department of Justice gets involved, they can seek civil fines and penalties. Hence, you need to do the risk/benefit analysis as to whether it is worth challenging the claim or not. This report says the lawsuits are on the rise.

In the meantime, up your compliance game

Getting dragged through a lawsuit is never a pleasant experience, so you may want to come into compliance before you become a target. The Department of Justice, the agency in charge of enforcing the ADA, is working to interpret the ADA to include commercial websites. The DOJ has delayed its anticipated new rules until fiscal year 2018.

Every indication is that they are going to interpret the ADA to apply to commercial websites. They are already moving that way with regard to government websites (Title II as opposed to Title III of the ADA) and they are going to monitor that interpretation while they consider applying the same rules to private commercial sites.

So what is compliance?

There is not sure-fire checklist to ensure 100% compliance. The DOJ has hinted that websites should aim to conform to the Website Content Accessibility Guidelines (WCAG) 2.0, Levels A and AA. Most advocacy groups also encourage websites to satisfy those standards.

As these claims become more prevalent, the WCAG 2.0 or similar standards will become  just as familiar as including SEO elements into new sites. These standards include the use of “alt-text” features which allows screen reader technology to convert text to audio for the visually impaired.

If you are a website developer, you should start building sites following these WCAG 2.0 standards. If you operate a commercial website, you may want to give your web developer a call.

GUEST POST: David Lisch on the Basics of Intellectual Property Law for Start-Ups (Part 2-Patents)

Guest Post: Gray Reed intellectual property attorney David Lisch provides this two part Lisch_111x105series on Basics of Intellectual Property Law for Start-Ups. Part one focused on trademarks and entity formation. This part focuses on patent law.

Patent Protection

A patent protects “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof” 35 U.S.C. § 101. Unlike trademarks, which protect a brand name and recognition, a patent protects an invention, including functionality or design thereof. A patent gives the owner the exclusive right to manufacture products or employ processes covered by the patent for 20 years from the earliest priority date.

1. Do a Prior Art Search

Prior to filing a patent application, a business may elect to perform a prior art search to become informed of possible prior art which may be cited against the invention and/or preclude patentability. Moreover, it may assist the drafting attorney to craft claims which capture the invention but avoid overlapping with potential prior art, thus (hopefully) reducing the likelihood of the application being issued one or more office actions which will incur additional costs for the attorney to draft a response to.

2. Know your deadlines

The urgency of filing for a patent application wholly depends on when the first public disclosure, public use, or sale occurred. See 35 U.S.C. § 102. In the United States, there is a one-year grace period after such occurrence to file either a provisional or nonprovisional patent application. A provisional patent application may be filed to establish a “filing date,” and usually costs significantly less than a nonprovisional due to requiring less time to draft. Filing a provisional application will give the business one year to test the market and explore if filling a nonprovisional patent application is worthwhile. However, the follow-on nonprovisional patent application must be filed within that one year timeframe of filing the provisional application and claim benefit thereto, or the provisional application will become prior art to any future patent applications for the same invention.

3. Know what is not patentable

There are a few judicially created exceptions which preclude patentability, including if a claim is directed to a law of nature, a natural phenomenon, or an abstract idea. This last exception of being an abstract idea is particularly relevant to web based companies due to the likely desire of patenting search or coding algorithms and other software and/or business method related inventions. More specifically, these areas have received significant attention since June 19, 2014, when the Supreme Court decided Alice Corp. v. CLS Bank Int’l, 134 S. Ct. 1247 (2014). This article (Wave Of USPTO Alice Rejections Has Cos. Tweaking Strategies) succinctly explains the current state of the U.S. Patent and Trademark Office, and the likelihood of obtaining a software or business method patent. A few quotable comments include:

“In recent months, USPTO patent examiners who handle applications in the area of e-commerce have been rejecting more than 90 percent of applications under Alice”

“It has become clear from the statistics that applications for patents on ways of performing business methods more efficiently using a computer face a difficult or nearly impossible path at the USPTO.”

While keeping this article to the fundamentals, it is worth noting some exceptions to the above may apply depending on the timeline of development of the part or invention being claimed, along with if any public uses were “experimental,” however that is beyond the scope of this article. Moreover, it is a best practice to not have to rely on these exceptions in the first place. Additionally, while the one-year grace period applies to the United States, such first disclosures may bar protection in other jurisdictions, such as Europe, Japan, and China, which employ a worldwide “absolute novelty” rule (any disclosure worldwide prior to filing the patent application, even a disclosure by the applicant, may be cited as prior art, thus possibly barring patentability).



GUEST POST: David Lisch on the Basics of Intellectual Property Law for Start-Ups (Part 1)

Lisch_111x105Guest Post: Gray Reed intellectual property attorney David Lisch provides this two part series on Basics of Intellectual Property Law for Start-Ups. Part one focuses on trademarks and entity formation


At one point or another, all companies will be faced with the decision if, and how much, to invest in intellectual property protection. Let’s start with trademarks.

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A “service” mark distinguishes the source of a service, rather than a good, but the two are typically simply referred to as a “trademark” or “mark”.

There are two typical methods of filing a trademark: 1) when the mark is in use, filing a “use-based” or “Section 1(a)” application; and 2) when the mark is not in use yet (e.g., prior to forming the company or selling finished product), filing an “intent-to-use” or “Section 1(b)” application. For the latter, an “extension of time” must be filed every 6 months (for up to a cumulative time of 3 years) until the trademark is in use, otherwise the application will expire and a new application must be filed. The policy behind this is to avoid people “squatting” on a trademark for extended periods of time. Once the trademark is in use, a “statement of use” is filed with a specimen (example) showing the mark as used in connection with the described goods or services.

One should file a trademark prior to, or near the conception of a business. A trademark is relatively inexpensive, typically costing $225 in USPTO fees plus some time for an attorney to do brief search for potentially conflicting marks, search for which “classes” the mark should be filed in, and actually filing the mark. It is advantageous for a business to file a trademark early in the business cycle to assure (to the extent possible) that their mark is not conflicting with another’s mark. If such a conflict does occur, it is substantially cheaper to change the company name and perform rebranding early on. Moreover, if there are no conflicting marks, the company assures others will be precluded from filing “confusingly similar” marks.

While possible to file a pro-se trademark application, it is highly recommended to hire an attorney due to inflexibility of the rules regarding trademarks. For example, importantly, in general, the trademark should be filed under the entity name, not an individual’s name. This is because, while an individual may be the sole owner, CEO, President, etc. of a company, it is the company which has an intent-to-use, or is currently using the trademark. Should the later occur, where the mark is filed in the name of an individual, the trademark may later be deemed void. 37 C.F.R. § 2.71(d); TMEP §§ 803.06, 1201.02(b) (“An application is void if it was filed in the name of a party who did not own, or was not entitled to use, the applied-for mark on the application filing date.”). Moreover, unfortunately, such an error cannot be cured by amendment or assignment. TMEP §§ 803.06, 1201.02(b). There are also rules limiting recourse and future actions after filing the above-mentioned statement of use and specimen which an attorney will be integrally familiar with.

In sum, it is highly advantageous to register for a trademark soon after formation of an entity or early in the business cycle to assure both availability and protection of the business name, logo, slogan or services.

P.S. We would be remiss by not mentioning that there are some common law and/or state law remedies available without filing a federal trademark, however those will be saved for another discussion.

Form an Entity First

As discussed above, but worth reiterating, it is advisable to form an entity prior to filing any intellectual property. With trademarks, the mark should be filed with the entity as the owner due to the law essentially prohibiting assignment or correction of an intent-to-use application. If filed incorrectly, the application may be deemed void, and all money and efforts are lost and a new trademark must be filed which can only claim a newer filing date, thus allowing a greater possibility of other preceding marks being conflicted.

A patent (further discussed in the next segment of this series) is slightly different in that the initial owner of the patent are the (joint) inventor(s). While a proper employment agreement will require the employee to assign rights to the company, such is not always the case, especially with startups who are likely focused on tackling other initial challenges when just opening shop. Even if this isn’t the case, assuming the inventors are still cordial and willing, the patent application (or granted patent) can be assigned to an entity at any point in time. It is advantageous to have this assignment executed earlier rather than later to assure the inventors are still on good-terms with each other and the company and will easily comply.

Lastly, having all intellectual property held by the entity enables a cleaner presentation to current and potential investors. The entity, or anyone representative thereof, can state there are no hurdles to owning the IP, and the IP can be easily transferred in a merger or acquisition of the entity.

In the next segment, David will provide the basics of patent law and its importance for a start-up.