Innovation Review

January marks the return of the law students, and for the 3L’s this semester represents the final push before the bar exam and the real world. Emphasizing real experience from lab to market has been the goal of the Technology Commercialization Law Program for many years, and partners beautifully with the START-UP NY goals. The semester is well-underway with patent &/or market landscapes, and legal and regulatory analyses being conducted for real companies, individuals and researchers. 

The law students in the TCLP put together some amazing research that provides early stage technology champions some much needed insight into that which they “know they don’t yet know”. It is a “win-win” for students and clients that semester after semester, doesn’t get old. 

This month’s issue brings you some interesting articles on some of the issues that have been occupying the TCLP talent this month. 

Launch NY is a Venture Development Organization. A business-driven, nonprofit that promotes regional growth by providing a flexible portfolio of services, including: assisting in the creation of high-growth companies; providing expert business assistance to those companies; facilitating or making direct financial investments; and, speeding the commercialization of technology.Launch NY, established in 2011, began with the preparation of a Regional Economic Action Plan (REAP), a project funded in 2010 by an Economic Development Administration grant to the Erie County Industrial Development Agency, and focused on JumpStart’s nationally recognized model for accelerating the success of diverse entrepreneurs, their high growth companies and the ecosystems supporting them. 

The demographic profile of Upstate New York aligns well with the overall profile of JumpStart in Northeast Ohio, and offers some potential advantages when comparing the education of the workforce and the amount of research spending at the colleges and universities across the region. While we have a large amount of university research, a legacy of innovation, and a well-educated workforce, there exists a lack of sufficient entrepreneurial talent, related expertise, and investment capital to take advantage of these strengths. The region lacks enough well-established sources of venture capital and has been unable to consistently attract capital from private investors located outside the region. Currently, the region produces a sizeable number of new high potential startup opportunities but only some of these qualify for professional investment. The region has the potential to increase this number substantially, but deal flow is perceived to be suppressed by a shortage of entrepreneurial assistance, experienced management leadership, and investment capital. 

Launch NY provides support for the 27 counties of Upstate New York with 4 Regional Entrepreneurs in Residence (EIR) based in Buffalo, Rochester, Syracuse and Ithaca. In recent months Launch NY has engaged in extensive networking activities to support the Upstate NY entrepreneurial ecosystem at 22 separate events, six were provided various levels of sponsorships. These events were attended by 1,391 entrepreneurs, 293 investors, and 1,571 resource providers, over 3,200 attendees total. Since January 2013, Launch NY EIR’s have provided 2240 hours of direct support to 126 regional start ups, with 338 employees, and assisted 20 of these companies secure over $8.7M of investments.

This review is drawn from a 2013 article entitled “Hunting Stag with FLY Paper: A Hybrid Financial Instrument for Social Enterprise” by Professors Dana Brakman Reiser and Steven A. Dean of Brooklyn Law School, published in the Boston College Law Review volume 54 issue 4, pages 1495-1544.

When a socially-minded entrepreneur has traditionally raised capital they are faced with two concerns. First and foremost, there is the concern of legitimizing the venture. If the entrepreneur forms as a charitable organization, they are ensuring the social goal of the venture as a legacy but will not attract profit-minded investors. Conversely, if the entrepreneur organizes as a for-profit entity, they run into the second concern: investors may not share their same passion for the social cause that is the heart of the venture. The for-profit status may ultimately frustrate the venture’s ability to “do good”; as majority shareholders, the investors can jettison the social cause in favor of a more robust bottom line. For-profit formation could ruin the entrepreneur’s hopes for the venture’s socially conscious legacy. Further, the case law is replete with reminders that the purpose of for-profit entities is to promote their value for the benefit of the shareholders.

There have recently been several attempts to bridge the gap between a for-profit organizational structure and the benefits of a non-profit’s social mission protection. The Low-profit Limited Liability Company (L3C) came out of Vermont’s legislature in 2008. The L3C is essentially an LLC with the contractual framework tweaked to allow for a social mission in addition to member profits. As long as the for-profit business has a social mission, it will remain an L3C. The instant the statutory requirements are no longer met, the L3C automatically converts back to an LLC, affording minimal protection to the underlying social mission. In 2010, Maryland adopted legislation allowing for the formation of benefit corporations. The benefit corporation is based on the traditional framework but is required to define the corporation’s public benefit and is held accountable to third party standards. While the monitoring is aimed at ensuring the social mission of the benefit corporation is met, there is no guidance explicitly announced regarding the third party’s standards. Further, the benefit corporation is allowed to select its third party standards, making the monitoring an entirely self-serving process. While L3Cs have no protection to ensure a social mission, benefit corporations need a proposal from the board and a supermajority vote by shareholders. Lastly, there is the flexible purpose corporation (FPC). FPCs arose under 2012 California legislation that, like benefit corporations, relies on a standard corporation framework. Unlike benefit corporations, FPCs have no third party monitoring of their adherence to their stated social mission; the social mission is selected from a statutorily defined list and incorporated into the FPC’s charter. To revoke an FPC’s social mission, a two-thirds vote of the shareholders must be obtained. 

The recent attempts at protecting a social entrepreneur’s legacy, the L3C, benefit corporation, and FPC, all focus on the organization’s form. Further, none of the for-profit options can guarantee the legacy of the social mission. Brakman Reiser and Dean propose shielding the financial instrument creating the relationship between the investor and entrepreneur rather than protecting the organizational form itself. Instead of relying on legislation for the solution, Flexible Low Yield (FLY) paper gives investors debt with specific terms attached to it rather than equity through the form of a hybrid financial instrument. Similar hybrid financial instruments, such as convertible bonds, have previously been used for funding efforts tailored to meet the needs of both investors and entrepreneurs/issuers. Social entrepreneurs can use FLY paper tailored to serve their specific goal of preserving their social enterprise’s legacy. In so doing, it ties the investors to the ultimate success or failure of the underlying social cause. In turn, investor protection is afforded through giving them the power to convert their debt into equity on favorable terms should the entrepreneur attempt to cash out their own shares. If the entrepreneur sold their shares, the investor would have an equity stake in the venture and could focus solely on maximizing return. This allays an investor’s concerns that the entrepreneur is going to take the investor’s money and run; the investors would be able to cash out as well. As an added protection, the investor would hold a note senior to common stock but junior to traditional debt. With the investors acting essentially as lenders committed to the goal of the company, the entrepreneurs are free to pursue the goals of the social enterprise. As such, FLY paper guarantees protection of the social mission- so long as the entrepreneur holds his stock they have full control of their venture. 

Another advantage of FLY paper is that it can be issued by any organizational form that can borrow money; it is not nearly as restrictive as the legislative solutions that offer protection through choice of entity. The certainty of repayment that comes with FLY paper would likely mean treatment as debt for tax purposes. As such, the enterprise could count the future interest as a deduction before it is paid. The benefit to the investor is that due to its low yield, FLY paper would incur relatively low taxes, or none at all if the investor had tax exempt status. The tax drawback is that if the venture is too early stage, the note exchange would not likely count as a loan but would more likely be seen as a purely equity investment. 

A final benefit of FLY paper over alternatives is the low return rate and fixed terms buffer the potential risk associated with investing in an early stage social enterprise. The investor is afforded a modest return in addition to repayment of the initial investment. With both sides showing a strong commitment to the social mission, it is easier to focus on maximizing shareholder wealth, a secondary consideration which is still important for both the entrepreneur and investor. If both parties remain steadfast in their obligation to both the social mission of the venture and realizing profit, both can advance their financial and social missions without much sacrifice. 

The entire article is available here.

As with other types of inventions, protecting software intellectual property is an important business consideration. Traditionally, intellectual property protection for software has been acquired through copyright protection, patent protection, or a combination of the two. Each strategy has its own benefits and drawbacks.

Patent protection is the intellectual property protection coveted by most inventors and has been gaining popularity amongst software developers because it provides the right to exclude others from making, using, selling, offering to sell, and importing the invention. Patent laws also protect against reverse engineering and independent creation.

These added protections come at a price; inventions are subject to a much higher level of scrutiny before a patent is granted. Patent eligibility requires that inventions must be new (novel), useful, nonobvious, of eligible subject matter, and properly disclosed. To qualify as eligible subject matter, software patents have often been categorized as process patents, machine patents, or both. An advantage to patent protection is that its exclusive rights are effective from issuance of the patent until the date twenty years from the filing date.

A disadvantage to patent protection is that it can be extremely costly. The average cost of obtaining a U.S. patent is roughly $15,000-$25,000, due mostly to attorney’s fees. Another disadvantage is that a patent provides only the “right to exclude others” and does not afford the inventor the right to make, use, or sell his or her own invention. For example, if Tom patents a software improvement that uses a method patented by Joe, Tom would need to obtain a license from Joe before he makes, uses, or sells his own patented invention. If there is a “patent minefield,” numerous patents similar to what the inventor wants to patent, the cost of obtaining the patent, licensing, and cross-licensing could be more expensive than the profits from a very limited patent.

More and more software programmers are finding patents to be the protection of choice, but this might be changing soon.The Supreme Court recently announced that it will review Alice Corporation Pty. Ltd. v. CLS Bank International (read more here), directly addressing patentability of software. Although the Court could issue a narrow ruling limited to the facts of case, it could also take the chance to set bright right rules, and at the vary least, provide some structured guidance for handling software patent cases.

Copyright protection grants the software developer the exclusive right to reproduce, adapt, publicly distribute, perform, and display the work. Registration usually costs $35 or $65 depending on the method of registration, whether it be online or by mail. Aside from cost, advantages of copyright protection include the lengthy term of protection, duration of author’s life plus seventy years, the ease of gaining protection, and the international standardization of copyright protection, which allows easier enforcement internationally. One disadvantage to copyright protection is that the software is considered a “literary work” and thus is only protected if it is verbatim plagiarized. Non-literal infringement is judged by a “substantial similarity” standard comparing the two works. As can be imagined, it is sometimes difficult for judges to understand the highly technical program language similarities.

Michelle K. Lee began her role as Deputy Director of the U.S. Patent and Trademark Office (USPTO) on January 13th. Prior to her new appointment, Lee acted as Director of the USPTO’s Silicon Valley satellite office where she served as the primary liaison with the innovation community in Sillicon Valley and the West Coast. She also served two terms on the USPTO’s Patent Public Advisory Committee which serves to advise the USPTO on its policies, goals, performance, budget and user fees.

Lee has a background in engineering and served as Deputy General Counsel for Google, acting as the company’s first Head of Patents and Patent Strategy, before joining the USPTO. Her career also includes time as a partner at the law firm of Fenwick & West, based in Silicon Valley, where she specialized in advising high-technology clients that ranged from startups to Fortune 100 companies. Before working in law, Lee was a computer scientist at Hewlett-Packard Research Laboratories and at the Massachusetts Institute of Technology (MIT) Artificial Intelligence Laboratory. She earned her B.S. and M.S. degrees in electrical engineering and computer science at MIT and her J.D. from Stanford Law School.

As the role of USPTO Director is currently vacant, Lee will perform the functions and duties of that office. Once President Obama nominates a Director, she’ll assume the title of “Acting Director.”

For more information visit the USPTO’s website.

Syracuse University College of Law is sponsoring two moot court teams this year that are dealing with intellectual property problems. Gregg Dawson (’14) and Madi Syed (’14) will be competing in the 23rd Annual Saul Lefkowitz Moot Court Competition, held by the International Trademark Association (INTA) and dealing with an issue under trademark law. Justin Burgess (’14) and David Richart (’14) will be competing in the 41st Annual Giles Southerland Rich Moot Court Competition, held by the American Intellectual Property Law Association (AIPLA) and dealing with an issue on appeal under patent law. The regionals for Saul Lefkowitz will be February 8 in New York City, and the regionals for Giles Rich will be March 21-23 in Boston. Gregg, Justin, and David are all third year students involved with the Science & Technology Law Center.