Who’s In Charge? Addressing the US Supreme Court’s Decision in United States v. Arthrex Inc.

By Cecily Capo

In the recent case of United States v. Arthrex Inc., the US Supreme Court held in a 5-4 decision that the appointment of administrative patent judges as “principle officers” by the Secretary of Commerce violates the Appointments Clause of the United States Constitution.

Before this ruling, administrative patent judges, or APJs, sat on the Patent Trial and Appeals Board (PTAB) by appointment of the US Secretary of Commerce, and not by the President directly, to preside over adversarial proceedings, called an inter partes review.

Essentially challenges to the validity of a granted US patent, inter partes reviews are akin to trials and consist of the PTAB re-examining an issued US patent and rendering an opinion as to whether the patent is valid or not, in some cases stripping patent owners of their rights. A common misconception is that once a patent is obtained, the inventor or assignee is free from challenges, but as shown in Arthrex, patents are constantly under review and capable of being invalidated.

In 2015, Arthrex—a global medical device company—received a US patent for a device that reattached soft tissue, known as the ’907 patent. Arthrex later accused competitors—Smith & Nephew, Inc. and ArthroCare Corp.—of infringing the ’907 patent. In response, and as is their right, the accused infringers commenced an inter partes review of the ’907 patent. As a result, the APJs of the PTAB were called upon to decide whether Arthrex’s patent claims were invalid.

The PTAB ruled that the ’907 was invalid. Arthrex appealed that decision to the US Circuit Court for the Federal Circuit, arguing—among other issues—that the APJs were not appropriately appointed under the Appointments Clause in the US Constitution. The Appointments Clause gives the President the authority to “nominate and … appoint Officers of the United States,” including, for instance, Ambassadors and Justices of the Supreme Court.

It was Arthrex’s view that APJs must be appointed by the President, and that this exclusive authority could not be delegated to the Secretary of Commerce. The Federal Circuit held in favor of Arthrex, ruling that the appointment of APJs was indeed unconstitutional under the Appointments Clause of the Constitution.

The Federal Circuit reasoned that APJs are considered “principle officers” and, therefore, could only be appointed by the President. The portion of the Patent Act that restricted the removal of APJs was stricken by the court. The Supreme Court then granted certiorari and Chief Justice John Roberts issued the majority opinion for the Court. The majority held that the United States Patent and Trade Office’s Director has the “ultimate authority” to review the final outcome of an inter partes review of a patent, not the APJs. The Court relied on Edmond v. United States to justify their decision, which stated that inferior officers—i.e., the APJs—must be subject to some sort of supervision by an officer appointed by the President and confirmed by the Senate, i.e., the USPTO Director. It is a violation of the US Constitution to impose restrictions on the Director and allow the APJs to issue decisions without the Director’s supervision.

Additionally, since Congress has given the power and duties of the Patent and Trade Office to the Director in §3(a)(1), it follows that the Director has the authority to review PTAB decisions. The majority reiterated that the Director does not have to review every PTAB decision, but the Director must have the ability to as needed. Justice Breyer issued a concurring opinion, joined by justices Sotomayor and Kagan, approving of the remedy but disagreeing with the overall holding.

In short, this ruling implements an additional step for patentability disputes requiring that the APJ’s decisions are reviewed by the USPTO Director before the decision can then be appealed to the Federal Circuit.

Since the Arthrex ruling, various commentators and scholars have argued that this ruling could either have a chilling effect or further incentivize parties to file for an inter partes review of a granted US patent. Some posit that it may become part of an anti-competitive strategy to simply challenge the validity of the patent because of the amount of time it will take to receive a final decision, which may thereby reduce the overall lifespan of the challenged patent.[1]

On the other hand, this additional step in the appellate review process may benefit patentees because it will significantly increase the amount of time and costs associated with challenging a patent, and these factors may force challengers to reconsider whether such a strategy is prudent.   

[1] IP Watchdog, “Industry Reacts to the Supreme Court’s Arthrex Ruling: Chaos Averted – or Just Delayed?” (June 21, 2021).

AI v. IP: If You’re Here and I’m Here, Then Who’s Flying the Plane?

By Kant Nguyen

Companies use artificial intelligence (AI) for conducting business and invest billions into the technology. In fact, research reveals a greater than 300% increase in investment in AI in 2017 compared to the previous year, and another study estimated the AI market will grow from $8 billion in 2016 to more than $47 billion in 2020.[1] Moreover, a recent report predicted the global AI market to be 228 billion by 2026.[2]

This explosion in AI investment prompts questions: Why are businesses so interested in AI? And, how is AI understood in an intellectual property context?

Defined as “the capability of a machine to imitate intelligent human behavior,”[3] AI is a field of computer science that includes machine learning, deep learning, natural language processing, speech processing, and machine vision.[4] AI tools automate decision making using programming rules and training data sets.[5] In businesses, this involves the use of intelligent computer software with human-like capabilities to boost revenue, improve customer experience, increase productivity and efficiency, and drive business growth and transformation.[6]

A simple example of AI utilized in businesses is automated customer service chat bots, used by many major retail companies, such as Amazon, Target, and Wal-Mart. Instead of companies hiring customer support specialists, data used by AI can analyze sets of questions to redirect a prospective customer to an answer.[7] Even if a human agent needs to intervene and provide customer support, these “chatbots” cut the workload and allow agents to focus on more critical steps to finding solutions to customers’ problems.[8] Current studies show that in 2020, 85% of customer interactions were managed without a human.[9] On a global scale, AI researchers predict that there is a 50% chance of AI outperforming humans in all tasks in 45 years and of automating all human jobs in 120 years.[10]

One issue with the relationship between IP and AI is inventorship. Computer implemented inventions (CII) have yet to be recognized as an “inventor”. In the United States, under 35 U.S.C § 100(f), an “inventor” is defined as an individual—or if there is a joint invention, the individuals—who invented or discovered the subject matter of the invention.[11] As AI becomes more and more complex, there may be a situation in which potentially patentable subject matter is invented without human intervention. For example, what if an AI algorithm – without any human intervention – develops a new drug, a method of recognizing diseases in medical images, or a new blade shape for a turbine?[12]

However, the US Patent and Trademark Office (USPTO) rejected an attempt by a team of researchers from the University of Surrey to name an AI system as the inventor in two patent applications. USPTO concluded that the statutory provisions governing patents precluded a finding that the term “inventor” can refer to an AI system. The researchers argued that the AI system named “Device for the Autonomous Bootstrapping of Unified Sentience” (“DABUS”) had “identified the novelty of its own idea before a natural person did” and the AI system should be recognized as the inventor.[13]

The USPTO rejected this argument by analyzing the plain language of 35 U.S.C. § 101, which states that, “Whoever invents or discovers and new useful process, machine, manufacture, or composition of matter …” USPTO concluded that this language indicates that “whoever” must refer to a natural person.[14] Additionally, 35 USC § 115 refers to individual pronouns such as “himself” or “herself” when identifying possible inventors. Still, the USPTO left open the question of the extent of protections available to owners of inventions created with the assistance of AI.[15] This has also been the case in the European Union [16] It remains to be seen what the international system will do.

AI has completely revolutionized nearly every aspect of our lives. Today, marketing algorithms detect our interests and provide the targeted advertisements that we see when scrolling on social media. Produce we buy at the supermarket might be harvested from farms utilizing AI drones that can detect ideal growing conditions from weather and soil nutrients.

Whether AI will ever be recognized as a legitimate sole inventor of a patent may change over time, but right now it appears highly unlikely. USPTO has issued a request for comment on IP issues, and responses from the public included 56 individual responses and 43 from organizations, with near unanimity that AI is merely a tool, like any other tool used by humans, albeit one that is currently of philosophical interest to IP experts.[17]

[1] Gil Press, Top 10 Hot Artificial Intelligence (AI) Technologies,Forbes, (last visited July 27, 2021).

[2] Global Artificial Intelligence (AI) Market to Reach $228.3 Billion by 2026,–301293951.html, 2021 (last visited 7/27/21)

[3] Get Ready for AI with MATLAB,, (last visited 7/27/21)

[4] Maya Medeiros, Jordana Sanft, Artificial Intelligence and Intellectual Property Considerations, Financier Worldwide, (last visited 7/21/2021).

[5] Id.

[6] Business World, What Is Artificial Intelligence (AI) in Business?,,drive%20business%20growth%20and%20transformation. (last visited 7/21/2021).

[7] Abhishek Shanbhag, 10 Powerful Benefits of Chatbots in Customer Service, BotCore, (last visited 7/21/2021).

[8] Id.

[9] Supra, note 2.  

[10] Grace Katja, Salvatier John, Dafoe Allan, Zhang Baobao, Evans Owain, When Will AI Exceed Human Performance? Evidence from AI Experts, Future of Humanity Institute, Yale University Department of Political Science, (2018).

[11] 35 U.S.C § 100(f)

[12] Frank A. Decosta, III, Ph.D, Aliza G. Carrano, Intellectual Property Protection for Artificial Intelligence, Westlaw Journal Intellectual Property, (last visited July 29, 2021).

[13] Imogen Ireland, Jason Lohr, ‘DABUS’: The AI Topic that Patent Lawyers Should be Monitoring, (last visited July 27, 2021).

[14] Jones Day, Reboot Required: Artificial Intelligence System Cannot Be Named As An Inventor Under U.S. Patent Law, USPTO Says, Jones Day, (last visited July 27, 2021).

[15] Id.

[16] AA Thornton, An interview with Mike Jennings of AA Thornton—Patenting AI and computer simulation,, (last visited 7/21/2021)

[17] Christopher King, Inventorship, Patenting and AI: The Public Comments on Patenting Artificial Intelligence Inventions, JD Supra, (last visited 7/28/2021).

Graduate Profile: How ILC Has Helped Nikkia Knudsen L’21 Launch Her Health Care Practice Career

By Meredith Wallen

When the Innovation Law Center (ILC) program was established in 1990, it was the first law program of its kind in the country to combine science and technology development with practical legal analysis, research on intellectual property law, and hands-on, applied learning experiences for students.

Today, the program continues to offer the opportunity for students to focus on intellectual property assessment, patent protection, market landscaping, and other commercialization matters for companies of all types and industries. ILC students are supervised by experienced technology commercialization professionals, which allows them an opportunity to learn and grow while creating regulatory and market landscapes that help get innovations from the lab and workshop to market.

As the spring 2021 semester comes to an end, we spotlight one recent graduate. In her time at Syracuse Law, Nikkia Knudsen L’21 took full advantage of the practical experiences ILC offers, as well as the New York State Science and Technology Law Center (NYSSTLC), part of the New York State Innovation Ecosystem which is housed in the ILC.

We take a look back at Knudsen’s time with the ILC and NYSSTLC and a look forward to her post-graduation plans.

ILC: What attracted you to ILC?

NK: It was an opportunity to combine my previous skill set with something in the legal field.

ILC: How has working for ILC and NYSSTLC added to your skill set?

NK: It has developed my client skills, helping me to quickly identify what the client is really asking for as well as steer them in the right direction.

ILC: Where are you planning to work post-graduation?

NK: I am joining Vorys, Sater, Seymour and Pease LLP, in Columbus, OH. I will be joining their health care practice group.

ILC: Did you find that having the ILC experience on your resume helped you find employment?

NK: It did! I think it helped differentiate me in the health care space because I can complete IP work, life sciences work, and regulatory work.

ILC: What ended up being your favorite part of working with the program?

NK: The friends that I have made. I really loved getting to work with the faculty and I loved working with my SRA partner, Sohela Suri L’21. It was also really fun to watch the students learn and build their skills.

ILC: What is one of the most recent projects you worked on and what did you do for that project?

NK: I worked with biotech firm TritonBio. This client was iterating the technology that they were developing and our research helped them determine their best options moving forward. We also helped them narrow down what their technology could look like and then created a report based on potential technological iterations rather than a specific iteration. 

This process helped me learn how to guide a client and help them figure out exactly what research could be helpful to them in addition to what they are asking for and explain why. It also helped me determine what is really important to focus on and what is not.

ILC: Do you have any advice that you would give to a law student interesting in joining the ILC team?

NK: My only advice would be to go for it! Even if you feel like you don’t know what you are doing, we are all here to help and you will get the hang of it.

General Wellness v. Medical Device Considerations

By 3L Kaitlyn Crobar

The development of any health, medical, or medicinal product  involves a decision about whether the FDA has a role in regulating it. However, there are certain products that the FDA recognizes as “wellness products”—these are exempt from FDA regulation. For innovators in the health field, determining whether to proceed to market by defining an innovation as a “wellness product” requires careful consideration. The following article reviews considerations for determining whether an invention is a medical device, or a general wellness product.

What is the difference between a medical device and a general wellness product?

A medical device is defined by section 201(h) of the Federal Food Drug & Cosmetic Act, as any “instrument, apparatus, implement, machine … or other similar or related article, including any component, part, or accessory … intended for use in the diagnosis of disease or other [health] conditions.” If a product meets the definition of a medical device, it is subject to some level of FDA regulation based upon the specific classification and required process for that class.

The overriding purpose of regulation is to assure that regulated products are safe for use and effective for the intended use. As outlined in FDA guidance document—“General Wellness: Policy for Low Risk Devicesgeneral wellness products are those that pose a low risk to the safety of users and other persons in terms of function and are intended only for “general wellness use.” General wellness products are not subject to FDA regulation.

How can status as a general wellness product be determined?

General wellness products have “(1) an intended use that relates to maintaining or encouraging a general state of health or a healthy activity, or (2) an intended use that relates the role of healthy lifestyle with helping to reduce the risk or impact of certain chronic diseases or conditions and where it is well understood and accepted that healthy lifestyle choices may play an important role in health outcomes for the disease or condition.”

Appropriate intended uses for the first category of general wellness products, which make no reference to any disease or conditions, might include maintaining weight, facilitating sleep, relaxation, stress management, physical fitness, or mental acuity exercises. Products may include exercise equipment, audio recordings, and video games. These products are distinct from those that claim to treat a disease or disorder and that are invasive, implanted, or involve technology that poses a risk to other persons if specific regulatory controls are not applied (such as risk of radiation exposure). These products are not “low risk” and do not qualify as a general wellness product.

The second category of general wellness products refers to diseases of conditions, and includes intended uses of promoting, tracking, managing, and encouraging choices that may help reduce the risk of or may help living well with a chronic disease or condition.

These products include certain software functions “intended for maintaining or encouraging a healthy lifestyle that are unrelated to the diagnosis, cure, mitigation, prevention, or treatment of a disease of condition.” An example of this type of general wellness product is software that monitors and records food consumption to “manage dietary activity for weight management and alert the user, healthcare provider, or family member of unhealthy dietary activity.”

The FDA maintains the webpage How to Determine if Your Product is a Medical Device to help determine the appropriate level of review for devices. This information includes how to contact the FDA if after going through the four methods suggested, the guidance is still not clear.

Why would a developer want to classify an invention as a general wellness product instead of a medical device?

General wellness products are FDA exempt, and therefore an invention can go to market without the 510(k) clearance necessary for Class II devices or pre-market approval required for Class III devices.

General wellness products do not have to comply with annual registration and fees required of all medical device manufacturers. They do not have to register the product in the Registration and Listing Database. These advantages may sound enticing, but before marketing an invention as a general wellness product, the following should be considered:

  • FDA approval or clearance may add value to an invention.

Marketing an invention as FDA approved, cleared, or even registered signals to consumers that it meets a minimum standard of safety and efficacy. FDA compliance is also relevant in designating the product as reimbursable by insurance.

  • If an invention is marketed erroneously as a general wellness device and the FDA believes the intended use does in fact make it a medical device—as defined by Section 201(h) of the FD&C Act (21 USC 321(h))—a company can be penalized, or even be shut down.

For example, the ancestry site 23andMe offers a product that utilizes genotyping to detect select clinically relevant variants in the genomic DNA of adults from saliva for the purpose of reporting and interpreting genetic health risks and reporting carrier status, such as a person’s chances of getting certain cancers or Alzheimer’s. This product was not intended to diagnose any disease. It was initially brought to market without FDA approval. In 2015, the FDA notified 23andMe of concerns about the genetic interpretations it was providing consumers, as several of these health factors can arise from environmental and lifestyle factors as opposed to mere genetics. The 23andMe assessments were therefore deemed misleading and 23andMe had to obtain FDA approval for its health data and “carrier status” reports.

  • FDA Regulatory compliance has an impact when defending tort claims.

Choosing the fastest path-to-market may be shortsighted given the difference FDA approval or clearance can make when defending a lawsuit. A device that is marketed after successfully navigating the FDA Premarket Approval (“PMA”) process has a better ability to defend against tort claims alleging products liability, negligence, or breach of warranty allegations. The 510(k) clearance process for Class II devices also offers a better ability to defend than if a product had not obtained clearance. Even though most Class I devices are exempt from 510(k) clearance, registration and compliance with other requirements—such as good manufacturing practice requirements set forth in the Quality System regulations—may assist in defending against tort claims.


Further Reading


Fill in the Blanks: ILC Research Reports Give Innovators an Edge

By Meredith Wallen

As of April 2021, faculty and students in the Innovation Law Center (ILC) are finalizing client presentations for the spring semester. Given current coronavirus pandemic restrictions, clients once again will meet virtually with research teams for presentations that will summarize the intellectual property, regulatory, and market landscape findings relevant to the respective technologies.

Spring 2021 ILC clients are developing innovations in green building systems, medical technology, biometrics, streaming media, and infrastructure logistics:

MicroEra Power

This Rochester, NY, team is exploring commercialization options for its inventive solutions for retrofitting existing HVAC systems in commercial buildings to make them more cost effective and energy efficient. ILC research seeks to identify other HVAC improvements in patent and public literature to help assess the improvements that are most likely to obtain patent protection.

In addition, the research facilitates awareness of existing new technology in the market insuring MicroEra does not inadvertently subject itself to liability for infringing on other patents. By understanding what investors and potential licensees might identify in similar searches, ILC clients such as MicroEra increase the likelihood of choosing the best commercialization pathway for new technology.

Organic Robotics

Developed in Ithaca, NY, from Cornell University technology, this platform technology invention utilizes networks of sensors to read body movements. ILC research is helping to explore one of the technology’s applications that will be of interest to big league sports teams. Organic Robotics has developed variations of its technology for a number of applications, and ILC research also will help differentiate where the best opportunities are in light of existing technology developments in their innovation space.

NSION Technologies

NSC3 is a media broadcasting and management solution to provide situational awareness during events and disasters. The NSC3 platform provides integrated media streaming from multiple sources to multiple devices in real-time while optimizing video speeds and allowing live data transfer using secure connections and data encryption.

This technology originated in Finland, and it is being introduced to the US market through a startup located in New York State. ILC research will provide NSION with an analysis of the potential for patentability and infringement based on other developments in the space. Market research is also being conducted to assess industries beyond public safety that the NSC3 technology could be marketed in.


Skip-Line provides real time information on fleet location, material usage, and application performance for contractors completing road work. This technology is meant to create and utilize navigation trajectories, also known as drive vectors. ILC research provides an analysis of competing intellectual property and its potential effect on patent protection and infringement on other technologies, as well as market information on automotive-related industries and regulatory and liability information. Additionally, regulatory analysis is identifying relevant state and federal level regulations and liability issues.


Commercializing University of Buffalo technology, Optimed is working to promote the clinical transaction of fundamental lab research into human clinical treatments to reduce pain and suffering, enhance quality of life, and improve oral health. Specifically, ILC faculty and students have been working on identifying prior art relevant to the assessment of patentability of 3D-printing dentures, as well as performing regulatory and market research.

Triton Bio

Triton Bio creates devices that isolate microbes from biological samples, and it is looking into entering the point of care diagnostics market. ILC research includes the identification of  patents within the clinical diagnostics setting that are considered point-of-care devices and that currently isolate bacteria for diagnostics. In addition, a market analysis on all relevant diagnostics competitors within the current market is being performed.

The research and analysis outlined for the spring 2021 clients is typical of the sort of assistance provided by ILC during the summer and fall sessions. Summer research requests currently are lining up, so now is the time to get in touch if you are interested in increasing your chances of success with an ILC research report.


NYS Start-Up Resources Help Vita Innovations Develop a “Smart” Face Mask

By Meredith Wallen

With help from New York State’s “innovation ecosystem,” Vita Innovations CEO Longsha Liu—along with co-founders Ray Wei, Jason Chen, Julia Isakov, Rishi Singhal, and Kristen Ong—have moved at lightspeed in startup terms toward their goal of developing a vital signs monitoring mask for COVID-19-challenged health care facilities.

The impetus for the “smart” mask came one day when a young daycare teacher from Milwaukee went to her local emergency room describing chest pain and tightness of breath, one of dozens of patients Liu had witnessed waiting for hours in the ER where he was volunteering.

However, for this patient an inconvenient ER wait turned to tragedy. Initially, she was deemed a nonsignificant health risk and triaged to the lobby. After waiting two and a half hours in the ER, the patient left without being seen and instead went to an urgent care clinic. The patient collapsed less than an hour later due to a heart attack, dying en route to the same hospital she had left earlier that day.

One objective of Vita Innovations’ new technology—the VitalMask—is to avoid such tragedies by giving medical care workers a simple and convenient way to monitor triaged patients’ vital signs, while keeping them masked against COVID-19 and other airborne infections.

The objective of  VitalMask’s embedded technology is to monitor blood oxygen level (SpO2), pulse, body temperature, breath rate, and the continuous placement of mask. This data will then be sent via Bluetooth to a central monitoring station.

Vita’s multi-faceted smart mask concept won at the NYC Health Hackathon in February of 2020. Urged on by the Hackathon mentors and judges, Liu said he and his team decided to “accelerate our development and potential, and Vita Innovations was established to create the VitalMask.”

Although all four of Vita’s co-founding team had medical device design and development experiences necessary for getting VitalMask off the ground, Liu describes the Vita’s business strategy in terms of the challenge of being full-time students at Cornell University without nuanced knowledge of medical device development. Acknowledging these two facts, the team of four has expanded to eight. By recruiting external talent, Vita has compensated for its specific deficits in knowledge and perspectives while ensuring continual growth and development.

In addition to forming an effective team, Vita has been able to access several New York State innovation ecosystem resources. For instance, the company was selected as a participant in the Medical Device Innovation Challenge (MDIC) at the CNY Biotech Accelerator. MDIC offers an intensive mentorship where experts are assigned to each team based on the participant’s specific goals. In addition, MDIC provides networking opportunities and designs special events for innovators tailored to support its program.

Another benefit the MDIC offers is legal and commercialization research for each team provided by the Innovation Law Center (ILC) at Syracuse University College of Law. Vita worked with ILC to obtain research on relevant markets, information on prior art in the technological space, and regulatory requirements. ILC students—working under supervision—provided a written research report, meeting with the Vita team via Zoom to present the findings.

“It was a great help to us to get free and thorough research done into the extent our intellectual property was protectable, and it has informed our company strategy,” says Liu. “ILC also provided us with market research into the medical device industry, as well as a SWOT and Five Forces analysis.” Liu noted the students working on this project were extremely passionate, diligent, and excited to learn about the subject matter.

Liu and his team described their experience with MDIC and Executive Director Kathi Durdon as “incredibly valuable and eye-opening. Each mentor meeting was well-organized, thorough, and specifically tailored to the needs of our team at all costs.”

Liu adds, “The mentors with whom our team worked, in particular, made the experience exceptionally rewarding because they offered assistance, ingenious ideas, and exceptional feedback at every discussion, showing a genuine interest in our company’s product.”

Liu notes that although not all roadblocks brought to the attention of MDIC mentors were able to be immediately resolved, they offered an abundance of connections and resources. “Our team has been able to achieve many important milestones thanks to MDIC’s help, including the completion of our desktop software application, securing funding for short-term operations, and further securing our IP through a second provisional patent application.”

As Vita has gone through the design and prototyping process, they have worked with potential users both potential VitalMask wearers, and health care providers. Liu admits that obtaining materials to best suit the comfort and wearability of the mask has presented some challenges, but they have been assisted by yet more New York State innovation ecosystem resources, such as the Center for Advanced Microelectronics Manufacturing (CAMM)/Integrated Electronics Engineering Center (IEEC) at Binghamton University. Additionally, their team has sought design assistance from Manufacturing & Technology Enterprise Center (MTEC) and has worked with Hudson Valley Advanced Manufacturing Center for 3D printing needs.

The Vita experience is typical of the relationships being forged among MDIC and ILC participants. Vita was one of five medical device-related technologies that the ILC researched in the most recent round of awards. The other technologies include a wireless fetal monitor, a device to assist developmentally delayed children self-direct early stage exploration, a means to reduce surgeries stemming from problems with prolonged catheter use, and a means for post-concussion monitoring.

Most recently, Vita Innovations has been accepted into the Blackstone & Techstars Launchpad Fellowship, which comes with $5,000 non-dilutive funding. Additionally, two members of the Vita Innovations team, Julia Isakov and Kristen Ong, have joined Liu in being accepted among individuals selected globally to be part of the 2021 Clinton Global Initiative University Social Impact cohort.

Furthermore, Vita Innovations has been accepted for Phase 2 of the Values and Ventures Competition, and the company has officially contracted the professional manufacturing expertise of the Manufacturing and Technology Enterprise Center in New York to help refine a professional version of its hardware.

Applications for MDIC mentorship program are being accepted through April 30, 2021. Selected MDIC teams will again have the opportunity to work with the ILC and receive critical legal and market research to help get important innovations from lab to market.

Has Crowdfunding Become the Best Way for Start-Ups to Raise Funds? Not So Fast!

By Nikkia Knudsen

As founders embark on starting a company or launching a business venture around a new technology, perhaps the biggest consideration is funding. As entrepreneurs’ search for funding resources, many consider crowdfunding. Crowdfunding platforms include Kickstarter, Indigogo, and GoFundMe. Authorized by the Jumpstart Our Business Staratups Act (JOBS)—which became effective in 2016—crowdfunding has grown over the past few years. Sources such as Fundly report that $34 billion were raised through crowdfunding worldwide in 2020 and CrowdCrux reports crowdfunding is projected to be at $300 billion by 2030.

Crowdfunding is a method by which many people—i.e., a crowd—pool money for a specific project, cause, or investment they are interested in. The pooling of small amounts of money result in a large overall funding resource.

There are two general types of crowdfunding. In the first—“exchange-based crowdfunding”—people contribute without receiving an ownership stake in the company, or any expectation for a return on the contribution other than the potential completion of an artistic work, or the advancement of a cause. In the second type of crowdfunding—“equity crowdfunding”—people provide money in exchange for equity, or an ownership stake within the company.

Regardless of the crowdfunding type, the Securities and Exchange Commission requires intermediaries or crowdfunding platforms, to “register with the Securities and Exchange Commission (SEC) as a broker or as a funding portal. The intermediary must become a member of a national securities association (FINRA). The FINRA website provides the names of crowdfunding intermediaries that are registered with the SEC as funding portals.”

Crowdfunding may seem like an easy method for fundraising, but not so fast. Crowdfunding represents a relatively new mechanism for raising funds and should be carefully considered before proceeding. Before launching a crowdfunding campaign, the various requirements for each as well as the advantages and disadvantages of each crowdfunding type should be understood. The regulations are summarized on the SEC website: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers.

Pros and Cons of Exchange Based Crowdfunding

In the first type of crowdfunding people contribute without expectation or return or for a product sample upon completion. There is no obligation or expectation of financial return or equity share to the contributors.

Advantages of Exchange Based Crowdfunding

The benefits to crowdfunding as a funding source include the following:

  • Crowdfunding is easy and allows entrepreneurs to raise money quickly.
  • Crowdfunding allows entrepreneurs to control messaging that will reach potential contributors and customers. The entrepreneurs are also able to directly communicate with the contributors.
  • As some contributors are likely to become future customers, crowdfunding allows entrepreneurs to build their customer base and receive feedback on the product or business launch.
  • Those that provide money are not traditional “investors” because they will not receive an ownership stake in the company. Rather, contributors can expect a gift in exchange for the contribution, which could be the product they are helping launch, or the advancement of a cause they support. This provides flexibility to entrepreneurs because the contributor does not have an ownership stake and is not involved in the business decisions.
  • Crowdfunding tends to be low risk as entrepreneurs are often not required to pay back contributors if the venture fails.

Disadvantages Exchange Based Crowdfunding

The disadvantages of utilizing non-equity crowdfunding include the following:

  • Crowdfunding, although fairly easy, can be time consuming. There are many ventures participating in crowdfunding, and it can be difficult to develop a campaign that differentiates one business from those of competitors. Thus, it is important for the entrepreneur to strategically market the “ask” of the business venture.
  • Crowdfunds are often, but not always, hosted by various platforms, which have stipulations that entrepreneurs must meet. If not using a crowdfunding platform, a company can establish its own website that seeks investments for special product releases and discounts, or in the example of equity crowdfunding, investors receive dividends or investment appreciation. If using a platform, it is important to consider what the stipulations are and how they impact the ability to fundraise. For example, what are the requirements for an entrepreneur to launch a crowdfund on the selected platform? Are there any compliance issues with the requirements? What does the agreement with the platform stipulate? For example, Investopedia reports that Indiegogo has an additional third-party payment processing fee and Patreon has fees that increase as the crowdfunding campaign is created. Conversely, SeedInvest has a strict vetting process, and not all crowdfunding campaigns are accepted by the company to engage in crowdfunding.
  • It is extremely important to understand the platform fees. Some platforms will not allow campaigns to utilize earned funds until the specified fundraising goal is met. Thus, it is important to consider whether the platform will withhold access to money raised if the financial goal is not met. It is also important to determine how much of the funding will go to pay for platform fees.
  • The information about a venture must be easily accessible and available to potential contributors. This is in part to minimize the risk of scammers taking advantage of crowdfunding. Careful contributors are likely to extensively vet a potential business. Thus, it is important that entrepreneurs take the time to make information on the business readily available to potential contributors and/or be willing to provide requested information. This information includes how the funds will be used, where one is in the development of the business or product, the timeline of the product or business launch, what the product or business aims to accomplish, and what contributors can expect in return for their involvement.

Pros and Cons of Equity Crowdfunding

Equity crowdfunding represents an exception to the previous law that prohibited nonpublic/ non-SEC reporting companies from selling securities unless they met all of the stringent financial disclosure and reporting guidelines applicable to traditional public companies. It creates an exemption under the federal securities laws so that crowdfunding can be used to offer and sell securities to the general public rather than just qualified investors. There are limits on the amount of money companies can raise and investors can invest through this method. If a company would like to offer and sell securities through crowdfunding, they must still comply with federal securities laws.

Advantages of Equity Crowdfunding

The benefits to equity crowdfunding include the following:

  • When raising money with equity crowdfunding, the funds do not have to be paid back to investors. However, because investors have an ownership stake in the company, if the company is sold, the investors would be paid out of the profits.
  • If the venture succeeds, the investor will own part of the successful business.
  • Equity crowdfunding allows average investors, including non-accredited investors, to invest in the company.
  • Regulation Crowdfunding provides an exemption from the registration requirements for securities-based crowdfunding. The exemption allows companies to offer and sell up to $1.07 million of their securities without having to register the offering with the SEC.

Disadvantages of Equity Crowdfunding

Despite the advantages, the potential disadvantages to equity crowdfunding should be considered. These include the following:

  • Equity crowdfunding gives investors an ownership stake in the company, which can result in less flexibility for entrepreneurs.
  • Companies raising money through crowdfunding are required to share some of the profits with the equity funders, unlike exchanged based crowdfunding where the investors receive a product or special discount.
  • Equity crowdfunding is risky for investors because if the business model fails, the investor loses all the money.
  • Equity, or regulation-based crowdfunding must comply with SEC disclosure requirements. These requirements include the reporting of company balance sheets as well as advertising requirements to potential investors.

Overall, the ease and flexibility of securing funding through crowdfunding has resulted in its adoption over the past few years. Although crowdfunding might be a great option for entrepreneurs, it is important to consider the disadvantages and risks before launching a campaign.

Implications of Van Buren v. United States and the Reach of the CFAA

By Sehseh Sanan

The United States Supreme Court recently heard arguments on the reach of the federal Computer Fraud and Abuse Act (CFAA). The case, Van Buren v. United States considers the CFAA’s definition of “exceeding authorized access.” It is the first time the Supreme Court has reviewed the CFAA, which was enacted in 1986 to address hacking but which has been amended a number of times since.

The Court’s decision may have implications for computer use policies in a variety of business situations involving employee and licensee access to computers and databases.

The CFAA aims to penalize anyone who intentionally accesses a computer without authorization or who exceeds authorized access and obtains information stored on that computer.

18 U.S. Code § 1030(a) states:

(a) Whoever—

(2) Intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains—

(A) information contained in a financial record of a financial institution, or of a card issuer as defined in section 1602(n) [1] of title 15, or contained in a file of a consumer reporting agency on a consumer, as such terms are defined in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.);

(B) information from any department or agency of the United States; or

(C) information from any protected computer;

(6) the term “exceeds authorized access” means to access a computer with authorization and to use such access to obtain or alter information in the computer that the access-er is not entitled so to obtain or alter…

With the text of the statute in mind, Van Buren addresses the CFAA by asking whether a person who is authorized to access information on a computer for certain purposes violates Section 1030(a)(2) of the Computer Fraud and Abuse Act if he/she accesses the same information for an improper purpose.

Nathan Van Buren was a police officer in Georgia who utilized a police database to search license plates in exchange for money, and not in the course of his employment.

Van Buren argued the federal CFAA statute is meant to prevent computer hacking and unauthorized use of electronic systems, and it applies only if the defendant obtains information that he was under no circumstances entitled to obtain. Under Van Buren’s argument, the CFAA was not intended to and should not penalize defendants under federal criminal law when they are authorized to access a computer or database but use it in an unauthorized way.

The government’s argument hinges on the inclusion of “so” in the clause “is not entitled so to obtain or alter” in the definition of “exceeds authorized access.” If the Court accepts the government’s argument, then investigations, prosecutions, and sanctions under the CFAA will broaden significantly.

What does this case mean for entrepreneurs? Businesses that depend on employee and licensee access to computer processes and databases may need to carefully review computer access policies and provide adequate guidance to employees and licensees.

Examples of potential areas of prosecution include:

  • Using a database of customer information to provide customer information to someone outside the company.
  • Accessing a licensed database and using the information for other unauthorized purposes.
  • Using a work computer to download personal programs.
  • An employee modifying system files that are not in the scope of their job.
  • Making files public that are supposed to be private.
  • An employee utilizing a password that does not belong to them.
  • An employee utilizing their own password to access information that is prohibited by computer use policies, confidentiality agreements, and employment contracts.
  • An employee using a work computer to download trade secrets in order to compete against their employer.

However the Court decides the decision is likely to influence computer-based businesses, including users such cybersecurity experts, journalists, and researchers who may have difficulty accessing information.

If the Court rules in favor of the government’s prosecution under CFAA, the scope of what is considered a computer crime will broaden, and the control exerted over users will increase. On the other hand, if the Court does not support the application of CFAA to unauthorized uses of information, there are concerns that privacy rights will decrease.