A company’s custom software is an increasingly important part of growing profitability, shrinking expenses, and reaching new markets. It is critical to corporate success or failure. Software deals and licensing models are evolving as quickly as the technology, becoming more complicated and costly. Companies that do not understand the current trends and common pitfalls when negotiating software contracts may find themselves facing unexpected and unnecessary expenses and litigation. In this webinar, Carlton Fields Shareholders Eleanor Yost and Jack Clabby sit down with Michael Ritchie to discuss best practices for scoping and negotiating custom software and IT agreements.
Patents have long been a method of protecting business innovation. However, before any patent is obtained, confidential innovation that has economic value and is not generally known may already be a trade secret, if it is the subject of reasonable efforts to protect its secrecy. Procedures to protect trade secrets, including computer and physical security; limiting information access to those who “need to know”; and non-compete, non-solicitation, or non-disclosure agreements, should all be considered carefully and employed before deciding whether to seek a patent.
Patents are governed by federal law. After repeated, recent high profile hacking thefts of business’ computer-stored data, Congress is poised to increase protection of businesses’ confidential and proprietary information including trade secrets. Until now, trade secrets were governed by each individual state’s adoption of the Uniform Trade Secret Act. All but two states have adopted some version of the Act. The remaining two rely on common law. Although standards differ slightly from state to state, a trade secret can be any information that is not generally known that has independent economic value and has been subject to reasonable efforts to be kept secret. Trade secrets can include a formula, pattern, device, methodology, or compilation of information including business methods and confidential customer information or lists.
In 2015, for the first time, Congress is likely to pass a law incorporating a federal civil cause of action for trade secret misappropriation. Much valuable, confidential, and proprietary business information, such as customer lists and marketing plans, is incapable of patent protection. However, this “business” information is often a candidate for trade secret status.
Many inventions are potentially trade secrets before a patent application is published. In those cases where the sale of the product allows reverse engineering to determine the secret innovation, patent protection is the only viable option. In the United States, a patent application is usually published 18 months after filing and until publication, the application is secret. If the application is denied after publication, the information is public and fair game for use by all. Thus, before publication, a decision must be made regarding whether to continue with the patent application and lose trade secret status, or to withdraw the application and avoid publication, to maintain trade secret status.
As with the application for a patent, an attempt to protect intellectual property through trade secret law has risks. If there is independent development of the same or similar idea by another, that other could apply for a patent or use the information. The ability to reverse engineer a trade secret invalidates it. If the information is publicized, either intentionally or accidentally, it can lose its status as a proprietary trade secret. Trade secrets are regularly lost through theft by employees or third parties. This risk is heightened with increased work force mobility and the ease with which large amounts of data may be copied onto a hard drive, or photographed with a cell phone and taken for use by others.
The executive branch of the federal government is putting considerable effort into addressing the theft of corporate trade secrets by foreign and domestic hackers. However, despite large investment in computer security and government efforts it seems breaches are increasing. Trade secret misappropriation, whether by insiders or third parties, is often hard to detect. Trade secret status is not confirmed until done so by a court in a dispute over misappropriation. The litigation is often expensive. Most states provide for criminal liability for trade secret misappropriation and in some cases trade secret theft is also the subject of federal criminal liability. There are certain benefits to the trade secret owner in pursuing enforcement of rights through civil or criminal channels that should be reviewed with counsel.
Trade secrets have for some time been viewed as having two advantages over patents: the low cost of obtaining the rights, and an infinite duration. In the current legal environment, they may have become more attractive. A recent California court noted, in Altavion, Inc. v. Konica Minolta Systems Laboratory, “…because a substantial number of patents are invalidated by courts, resulting in disclosure of an invention to competitors with no benefit, many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection.” To establish trade secret misappropriation it is not necessary to prove that all the elements of the secret have been used. Instead, establishment of a cause of action can rest on access and substantial similarity. The level of novelty required to establish a trade secret is less than that required for a patent. The fact that there is some knowledge of the invention in the public domain may be enough to invalidate a patent but may be insufficient to void a trade secret. Additional advantages for trade secret enforcement include the availability of damages for unjust enrichment and a lower bar for recovering excess damages for willful and deliberate misappropriation. Also, injunctions are generally easier to obtain in trade secret misappropriation cases. Reliance upon trade secret law as a substitute for patent protection, while inappropriate in many circumstances, offers an increasingly attractive alternative, especially where proprietary innovation is easily kept secret, is not likely to be duplicated, and cannot be reverse engineered.
Central Florida is home to a thriving entrepreneurial community that increasingly benefits from crowdfunding. This trend, and crowdfunding’s evolving forms, including equity crowdfunding, will be among the topics discussed during the September 2 GrowFL event, “Innovation, Entrepreneurship and Crowdfunding Today.” GrowFL, an economic development program focused on Florida’s second-stage companies, has gathered some of the state’s crowdfunding leaders for the discussion, which will be moderated by Carlton Fields shareholder Seth Joseph.
Mr. Joseph noted that equity crowdfunding is a relatively recent phenomenon made possible by the SEC’s October 2013 reversal of a regulation that barred companies from soliciting funds absent a pre-existing relationship with the prospective investor. He said the change made “more than $1 trillion of sidelined investment capital accessible to earlier stage companies that weren’t ready to go public and trade on a securities exchange.” Companies able to “tap the power of social media have had great success, fueling crowdfunding’s growth,” he added.
In a recent conversation that has been edited and condensed, Mr. Joseph got a preview of the upcoming discussion from event panelists Heather Schwarz Lopes, chief strategy officer and co-founder of EarlyShares, a crowdfunding platform; and Elton Rivas, co-founder, One Spark, The World’s Crowdfunding Festival, based in Jacksonville, Fla.
Why has crowdfunding become so popular?
It represents a huge step forward for the private finance market. Now that the ban on public advertising of private investment opportunities has been lifted, entrepreneurs have access to a previously inaccessible source of capital: individual accredited investors. [Ms. Lopes]
How many projects/businesses presented at this year’s One Spark event in Jacksonville, and how many received funding?
At and immediately following One Spark 2014, 11 of the 609 showcased projects received funding of over $10,000, and 320 projects received a portion of funding from the $200,000 crowdfund that was distributed by popular vote. Showcased projects were in one of our five major categories: art, innovation, music, science, and technology and in multiple stages of development, including an idea written on a napkin, early-stage startups seeking venture capital, and even established small businesses launching new products. [Mr. Rivas]
EarlyShares is an equity crowdfunding platform. What exactly does that mean, and does it differ from Kickstarter-style rewards-based crowdfunding?
With equity crowdfunding, private companies and other entities raise funds online from accredited investors. Unlike rewards-based crowdfunding, equity crowdfunding enables investors to receive ownership and an economic interest in the ventures raising funds. The stipulation is that investors must be verified as accredited investors – they have to meet certain income or net worth thresholds set by the SEC. [Ms. Lopes]
What kinds of companies are raising funds this way?
The three main types of private ventures raising capital through equity crowdfunding are growth companies, real estate projects, and investment funds. [Ms. Lopes]
Do companies that successfully crowdfund have anything in common?
At EarlyShares, we’ve found that investors are most attracted to companies with experienced management teams, prior rounds of capital raised, existing customers and partners, and other evidence of traction. We screen companies to ensure that they possess these elements before we post their offerings to our platform. [Ms. Lopes]
There are a few elements found in projects and teams that successfully obtained funding at One Spark in Jacksonville over the past two years. These include a market-tested idea/business, a team of multiple founders with complimentary skill sets, a simple but effective business plan, and a concise, quality pitch. [Mr. Rivas]