409 Valuations

June 29, 2012

By: Paul A. Jones

A few months ago, I wrote a blog on the good old days of sweat equity pricing. The option exercise price was supposed to be set at the fair market value of the common stock on the date the option was granted. The “technical” problem of figuring out fair market value was as much ritual as science: the process typically culminated in a boilerplate board resolution that implied a timely, exhaustive, good faith effort by the board – that in reality was mostly driven by rules of thumb. Among those rules, the “common is worth 1/10th the preferred at the time of a first round venture financing” was one of the most popular. Life was more or less good for founders, employees and investors alike.  If you stuck to the rules of thumb and backed it up with the appropriate boilerplate, the IRS generally looked the other way.

And then came 2004, and Internal Revenue Code Section 409A, and the game was up.

Recently, Alex Klingelberger of Whitehawk Advisory passed on a valuable presentation to me that covers 409A‐related frequently asked questions, the nature and effect of limitations placed on valuations by valuation specialist review groups, and an empirical study of results for valuations conducted during the past five years.  I am, in turn, passing it along to our Venture Best blog readers, as I have found the presentation to be quite informative and useful to entrepreneurs and several of our clients.

Click here to view Klingelberger’s presentation on 409 Valuations.

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Posted by pajones1

Entrepreneur’s Guide to Intellectual Property – Blog Series: America Invents Act

June 4, 2012

By: Alan C. Cheslock

The America Invents Act (the Act) was signed into law in September of 2011. The Act has already brought significant changes to the U.S. patent laws and rules. However, some of the most significant provisions of the Act, including First-to-File and Post Grant Review, have not yet become effective. Below is a brief summary outlining the substance and effective dates of some of the key provisions of the Act.

First-to-File – Effective March 16, 2013
The Act moves the U.S. from a First-to-Invent system to a First-to-File system. Under the current First-to-Invent system, a first inventor could be awarded a patent for an invention even if the invention was disclosed in a patent application filed by a second inventor before the first inventor filed a patent application if the first inventor can prove, among other things, that their date of invention is before the filing of the patent application by the second inventor. Under the First-to-File system this will no longer be the case and patents will be awarded on a First-to-File basis, and any third-party prior art available before the patent application fling date could be used to reject the application. An applicant will still be given a one year grace period for any disclosures made by the application. Generally, patent applications first filed on or after March 16, 2013 will be examined under the First-to-File system.

While March 16, 2013 is still several months away, the impending changes will impact decision-making for provisional applications filed on or after March 16, 2012. Although there is still a one-year window for formalizing the provisional application, it may be desirable to formalize by March 15, 2013 in order to remain under the current First-to-Invent regime.

Once First-to-File takes effect, it will be beneficial to have all internal processes streamlined for quick and efficient disclosure of inventions to patent attorneys. Now is a good time to evaluate and improve those processes.

Prioritized Examination – Currently in effect
For an additional $4,800 fee ($2,400 for small entities), applicants can file a request to have their application examined out of turn, and the U.S. Patent Office is striving for a final disposition of the application within one year of the request. In the initial five months of this program, nearly 60 applications have been allowed and over 900 applications have received first Office actions.

Post Grant Review
A new post grant review system will be created that will expand the ability to challenge the validity of granted patents at the U.S. Patent Office. The Act provides several options, outlined briefly below, to challenge patents, with each option having various timeframes and limitations as to the grounds for the challenge. The U.S. Patent Office has issued proposed rules for these proceedings, including the proposed Patent Office fees, which are perhaps the most noteworthy aspect of the proposed rules. The rules and fees should be finalized before September 16, 2012.

Post Grant Review - Applies to patents issued from applications having an effective filing date of March 16, 2013 and later – available during the first nine months after patent grant for challenges on nearly any ground. The proposed fee starts at $35,800 and increases based on the number of claims for which post grant review is sought.

Inter Partes Review - Effective September 16, 2012 and applies to all patents regardless of the application filing date– available more than nine months after patent grant for adversarial challenges based on prior art patents and printed publications. The proposed fee starts at $27,200 and increases based on the number of claims for which inter partes review is sought. This proposed fee is significantly higher than the current fee of $8,800 for inter partes reexamination.

Ex-Parte Reexamination - Current ex parte reexamination provisions remain effective – available anytime after patent grant for non-adversarial challenges based on prior art patents and printed publications. The proposed fee is $17,760, which is significantly increased from the current fee of $2,520.

Supplemental Examination – Effective September 16, 2012 and applies to all patents regardless of issue date
This provision allows a patent owner to ask the Patent Office to correct, consider, or reconsider information for an issued patent. For example, a request for supplemental examination might be used to have a piece of prior art that was not considered during prosecution of the patent considered and made of record. The patent owner need not assert that the new information raises a substantial new question of patentability. Information in the request is not limited to patents and printed publications. A fee of $7,000 is proposed for requesting supplemental examination. If the Patent Office determines there to be a substantial new question of patentability, an additional $20,000 fee will be charged for the ensuing reexamination. The patent cannot later be held unenforceable on the basis of information submitted in the request. 

Transitional Post Grant Review for Business Method Patents – Effective September 16, 2012 and applies to any business method patent regardless of issue date
This provision requires the U.S. Patent Office to issue regulations that establish a transitional post grant review proceeding for the review of the validity of business method patents. Petitions for post grant review under the transitional review proceeding can only be filed by persons who have been sued for infringement or have been charged with infringement of the patent for which review is requested. The currently proposed Patent Office fee for this review, which as not been finalized, starts at $35,800 and increases based on the number of claims for which this review is sought.

Pre-issuance Prior Art Submissions by Third Parties – Effective September 16, 2012 and applies to any patent application regardless of filing date
A third-party will be able to submit prior art publications for consideration during prosecution of an application if the prior art is submitted timely. These submissions can be made anonymously. The third-party will have until the later of (1) six months after the date of publication of the application; or (2) the date of the first rejection. If a notice of allowance is issued before either of the foregoing events, the third-party will no longer be able to submit prior art. Therefore, third parties should not delay in submitting relevant prior art. Consideration should be given to establishing regular patent publication monitoring of key competitors and technology areas. The proposed Patent Office fees for this procedure appear reasonable relative to other proposed fees, with no charge for a first submission of three or fewer prior art documents. The proposed fee for submitting every ten additional prior art documents is $180.

False Marking – Currently in effect
The Act no longer allows any person to bring a false marking lawsuit under 35 U.S.C. Section 292. Rather, false marking lawsuits will be limited to those filed by the United States or by a competitor who can prove a competitive injury. Also, marking a product with an expired patent that covered the product is not false marking. This change applies to any lawsuit pending on or after the date of enactment.

Virtual Marking – Currently in effect
A patent article can be marked with the word “patent” together with an address of a posting on the Internet that associates the patented article with the number of the patent.

Prior User Defense – Currently in effect and available to all patents issued on or after enactment
The Act provides a defense to infringement based on prior commercial use if the accused infringer can show a reduction to practice and commercial use at least one year before the effective filing date of the asserted patent.

Tax Avoidance Strategies – Currently in effect
Tax avoidance strategies are defined as within the prior art for both existing patents and pending applications upon enactment of the Act. In other words, tax avoidance strategies are not patentable and patents directed to tax avoidance strategies are not enforceable.

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Posted by accheslock

Entrepreneur’s Guide to Intellectual Property – Blog Series: Trade Secrets: What Are They and How Do I Protect Them? (Part 2)

June 1, 2012

By: Eric F. Severson

When is a Trade Secret the Right Protection?
When considering maintaining an innovation as a trade secret, an innovator must ask a number of questions regarding the new technology, such as:

  • Can the new technology be kept confidential and effectively used? For example, can the technology be effectively used in a closed and secure facility? If so, trade secret protection should be available and an appropriate form of IP protection.
  • Is the new technology truly innovative or is it an obvious application of existing technology?  If it’s a modification of existing technology, patent protection may not be available.
  • Will use of the new technology by others be easily detectable? If so, the technology may not be able to be kept as a trade secret and patent protection may be a better option, especially if infringement can be easily determined.

Innovators should work with their intellectual property counsel to address strategies for protection of their inventions to make sure the best form of intellectual property protection is implemented to protect the company’s most precious assets, their innovations.

Keeping Trade Secrets Secret – 12 Protective Measures
The following checklist summarizes the key protective measures which a trade secret owner should take to ensure that the security of its trade secrets is maintained.

  1. Only Disclose the Secret on a “Need to Know” Basis. Only those parties that have a need to know the trade secret information in order to perform their jobs should be given access to the trade secret information.
  2. Maintain a Written Statement of a Business’s Trade Secret Policy. A business’s trade secret policy should be set forth in writing and provided to employees. The trade secret policy should describe the type of information that the company safeguards as a trade secret. The absence of a written trade secret policy may be persuasive evidence that information was not in fact treated as a trade secret. A business should be certain that all employees with access to trade secrets are instructed in the actions they are to take to ensure the secrecy of the confidential information to which they have access.
  3. Treat Trade Secret Information Differently from Other Information. If possible, trade secret information should be separated physically from other information and employees requiring access to the secret information should be prohibited from discussing the secret information outside the separate and secure areas.
  4. Institute Physical Security Measures. A business should, if it has not done so already, implement security measures including passwords and locks to physically deter access to trade secrets. Such actions may provide critical demonstrative evidence to show a court that affirmative actions have been undertaken to safeguard confidential information. Computers containing proprietary information should be accessible only by means of a password. These passwords should be changed regularly and stored in a secure place. Additionally, information which is transmitted electronically should be transmitted in an encrypted or scrambled form to prevent its interception.
  5. Trade Secret Documents Should Be Labeled. To help deter the improper dissemination of trade secret documents, all such documents should be labeled with a proprietary notice and employees should be instructed as to the meaning of such designation.
  6. Written Documents Containing Trade Secrets Should Be Destroyed When They Are No Longer Needed. This measure will eliminate the need to physically safeguard items which no longer need to be maintained in written form. The destruction of these materials should be in a manner which eliminates their usefulness and prevents competitors from being able to reassemble the documents.
  7. Remind Employees of Their Confidentiality Obligations. Employees should be reminded on a regular basis of the business’s security procedures and their individual obligations to maintain the secrecy of trade secret information.
  8. Employees Should Be Required to Sign a Written Pledge of Confidentiality. This pledge should acknowledge that the business has granted the employee access to trade secret information, that the business is protecting the information, that the employee agrees not to disclose or misappropriate the information, and that the employee will report to the business all unauthorized disclosures or uses of the trade secret information. This written pledge should define the trade secret information to which the employee is or will be granted access so that the employee cannot later claim that she was unaware of the scope of the information that the business sought to protect via trade secret law.
  9. Hold Exit Interviews with Departing Employees Who Have Had Access to Confidential Information. An exit interview provides a business with an opportunity to remind a departing employee of his or her written pledge to refrain from misappropriating or disclosing trade secret information. This interview also provides an opportunity for the business to collect all documents, security passes, notes and other items that pertain to the trade secret information. Immediately following the exit interview, the business should send the former employee a written summary memorializing the issues discussed at the exit interview and instructing her to call the business if she has any questions regarding her continuing obligations of confidentiality.
  10. Restrict Access to the Business Property. To help restrict trade secret dissemination, the business can limit the public’s access to areas containing its trade secrets. A business should not allow visitors to meander through its facility unescorted. Rather, if it has not done so already, a business should institute a formal procedure regarding visitors which may include requiring visitors to sign a confidentiality pledge. Any tours of a business’s facilities should be careful to avoid the disclosure of proprietary information.
  11. Screen Speeches to Eliminate Confidential Information. Publications, press releases, speeches, seminars, and trade show displays should be screened to ensure that competitors are not provided an opportunity to discover trade secrets.
  12. Disclose Trade Secrets to Others Only After the Other Party Has Signed a Confidentiality Agreement. On occasion a trade secret owner must disclose a trade secret to a third-party such as in connection with entering into a license, joint enterprise, or sale of a business. The confidentiality agreement should clearly establish the responsibility of the third-party to keep the trade secret information confidential as well as the implications of a breach of the agreement.

To view the next blog in this series, click here.

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Posted by efseverson

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