Advanced Technology Seminar

Access to Technology: Corporations (cont.) Americans with Disabilities Act,

Computerized Voting, Open Source Licenses, Distributed Computing, and

Antitrust / Technology Tying.

Cyrus Daftary & Todd Krieger

February 24, 2014

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Agenda

Administrative Discussion Incorporating a Tech Company Initial Financing Insurance Americans with Disabilities Act Electronic Voting Open Source Licensing Questions & Answers

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Administrative Discussion

Questions relating to: Paper Presentation Website Business Plan Other Questions

Corporations (lite)

Sales at Eli’s Cases are going better than expected.

Their nostalgic app is heating up on the app store, resulting in revenue and publicity.

Eli and Jason want your help to incorporate the company so they can have an IPO and retire rich.

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Business Entity / Incorporation

Planning for the future: Succession planning – who will replace your

programmer? Partial dissolution – what if a partner wants to be

bought out. Future financing – can you plan on going from a

sole proprietorship to a publicly-held corporation and what happens in between?

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Forming an Entity – Issues to Consider:

Taxation Liability shield Likely source of financing Number of owners Types of owners Types of distributions Likely exit scenario

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C Corporation

Liability protection for owners Subject to double taxation – at entity level

and on distributions Distributions of property to owners are

taxable No limit on number or type of owners Appealing to venture financing sources Some exit transactions can be structured

in a tax advantageous way (tax free merger)

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S Corporation Liability protection for owners Subject to single level of taxation – no tax at entity

level but tax paid by shareholders Limit on number of owners (i.e. 100) Limit on type of owners (individuals only; no foreign

persons) Many financing sources cannot participate (i.e.

venture capital funds) Some exit transactions can be structured in a tax

advantageous way (tax free merger) Limited to one class of stock (other than non-voting

stock)

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LLC Liability protection for owners Subject to single level of taxation – no tax at entity

level but tax paid by owners (members) No limit on number of owners No limit on type of owners Unappealing to many financing sources – LLCs likely

to generate UBTI and be engaged in US trade or business

Generally, no ability for tax free exit transactions Distributions of property to owners are not taxable

transactions Not as well received by the institutional investing

community Not normally used for venture backed businesses

Documents may cost more to prepare as they tend to be ‘non-standard’

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Limited Partnership Liability protection for some, but not all, owners (limited

partners) No liability protection for general partner Subject to single level of taxation – no tax at entity level

but tax paid by owners (partners) No limit on number of owners No limit on type of owners Unappealing to many venture financing sources – likely

to generate UBTI and engaged in US trade or business Generally, no ability for tax free exit transactions Distributions of property to owners are not taxable

transactions Not used in many contexts, but common for private

equity funds

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General Partnership No liability protection for partners Subject to single level of taxation – no tax at entity

level but tax paid by owners (partners) No limit on number of owners No limit on type of owners Unappealing to many venture financing sources –

likely to generate UBTI and engaged in US trade or business

Generally, no ability for tax free exit transactions Distributions of property to owners are not taxable

transactions Public filings are generally not required Not widely registered, but common.

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Every Entity Type Has Different Implications

Type of Entity

Liability Protection Tax

Number of owners

Type of owners

Attractive to VCs?

Tax free exit?

Distribution of property

taxable?

C Corp Y X 2 Yes Yes Yes

S Corp Y X 1 <100 Limited No Yes Yes

LLC Y X 1 No No No

Limited Partnership

Y/N X 1 No No No

General Partnership

No X 1 No No No

Financing the Entity or “Can’t we just go to the bank?”

Eli and Jason used their profits to invest in the company’s infrastructure.

Now they need funds to invest in their next app.

What challenges do they face in raising funds.

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Initial Financing

Look out for securities laws.

Consider future financial needs and revenue streams.

What constraints will outside investors place on new ideas or product development?

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Debt Financing

Bank loans Unlikely to be obtained unless

company is already financed Avoid personal guarantees

Convertible Debt – Best early stage financing vehicle Promissory notes that convert into preferred

stock, once a financing event occurs Avoids valuation problems Can be used in angel or friends and family

financings Simple; low transaction costs; minimum

negotiation

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Friends & Family

Limit number of investors

Seek accredited investors only

Structure (stock vs. convertible debt)

Valuation issues

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Angel Investors

Structure (avoid preferred stock)

Avoid onerous terms that might prevent a venture capital financing

Try to avoid valuing the company

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Venture Capital

VC Requirements Strong management team Unique idea IP advantage Big market

Terms Preferred Stock (liquidation preference, dividends,

anti-dilution, etc.) Control (at board and stockholder levels; contractual

rights)

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Securities Law Considerations – Selling Unregistered Securities

General Rule

Number of Investors

Type of Investors (accredited vs. non-accredited)

No general solicitation or advertising

Consequences of violations Rescission rights Could prevent or delay future financings

New Funding Opportunities: JOBS act

Facilitates Crowd-funding

Broader exemptions to facilitate financing.

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Insurance for Technology Start-ups

How do Eli and Jason protect their new entity from a business ending claim?

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Insurance for Online Activities

You do not have to be an expert on insurance law to counsel a client doing business online - just know the potential risks.

Understand the basic elements of the policy and look for potential exclusions that might hurt your client.

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Insurance can Protect a Client against Bankrupting Claims

Limelight Productions, Inc. v. Limelite Studios, Inc. (60 F. 3d 767 11th Cir. 1995) Successful TM claim and profits were awarded

to P. Insurance company was required to indemnify D

for all profits awarded to P. Justification: insurer knew terms of Lanham Act

when the policy was drafted.

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What Might not be Covered?

Computer network liability

Breach of security

Crime and the Internet

Errors and Omissions

Intellectual property infringement

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Suggested Minimum for an e-Commerce Site

Libel Unauthorized access (security) Viruses Intellectual property infringement Web site failure - loss of data Product liability (if applicable) General liability (contractor is injured at

client site)

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Other Key Requirements Negligent Acts

Errors and Omissions

Breach of duty

Geographic scope: where is business conducted, including internationally? What could go wrong and how much could it

cost?

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Internet Insurance is not Standardized

There is no boilerplate for online insurance - attorneys must be vigilant.

Every online business have different needs: Content provider Product reseller Service provider

Is the policy appropriate?

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General Liability Policies & I.P.

Commercial general liability (CGL) coverage policy (the most common): Advertising injury. “injury arising out of misappropriation of

advertising ideas or style of doing business,” or “infringement of copyright, title or slogan.”

Does this include online activities?

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General Liability (cont’d)

Few cases address the limits of advertising injury: P.J. Noyes v. American Motorists Ins. Co (855 F.

Supp. 492 D. N.H. 1994). Insured used P’s TM in its own advertising. Insurer had a duty to defend and provide coverage for

claim of: Common law TM and unfair competition. False designation of origin and misrepresentation.

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Not all I.P. Claims are Covered

American Economy Ins. Co. v. Reboans, Inc. (852 F. Supp. 875 N.D. Cal. 1994; a minority opinion!)

Insured was sued for selling counterfeit products. Fed TM infringement, Fed counterfeiting, false

representations and designations of origin. Court said misappropriation was not covered: a

TM is not an advertising idea or style of doing business - copied products, not ads.

No reasonable expectation of coverage.

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Business Owner’s Liability Coverage

Advertising injury: “infringement of trademark, service mark, or trade name … in connection with goods, products, or services sold, offered for sale, or advertised by the insured.”

Parameter Drive Software Inc. v. Mass. Bay Ins. Co (25 F. 3d 336 6th Cir 1994): false designation of origin and unfair competition

are included in advertising injury.

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Reorganization/Bankruptcy

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Reorganizations

Important to recognize when things are bad IRC 368

October 18, 2000

In Stable Condition

The latest earnings reports carry more weight for the Internet Economy than any that have come before. The markets are in disarray, and deep currents of uncertainty run through once-confident companies.

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Introduction to Bankruptcy

Federal law (11 USC 101) designed to give debtors a ‘fresh start.’ Article 1 (section 8 clause 4) of the constitution

gives Congress the authority to establish bankruptcy law.

Designed to fairly balance the interests of the overwhelmed debtor and the creditor(s).

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Key Forms of Bankruptcy

Chapter 7: complete liquidation of assets and discharge of (almost) all debts.

Chapter 11: reorganization to extend and/or reduce debt.

Chapter 13: provides 36-60 months for repayment of secured debts (and a percentage of unsecured debts). Not available for corporations. Must have a regular income.

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Most Failing e-Business Don’t Have Many Creditors

40 dot-coms went out of business in 12/00.

Total cost to investors: >$1,500,000,000.

Only ten filed for bankruptcy.

The rest paid their bills and closed their doors. No bank loans. Few assets.

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After the Funding is Gone, What Remains?

Intellectual property: Trademarks; Domain names; Software; Patented processes; or Trade secrets.

Customer lists (be careful about privacy issues).

Net Operating Loss.

Lease & Equipment.

Liquidity if shares are public.

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Risks to 3rd Parties

No payment for products or services.

Cancelled executory contracts Scramble for alternative suppliers.

No more product support or updates.

Projects may be left incomplete.

Assets or obligations tied up in bankruptcy proceedings.

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Practical Hints

Ensure the company’s cash burn rate is monitored and understood.

Use independent accounting/auditing services. Do a D&B or other search to assess the viability

of a third party before starting a business relationship.

Consider the possibility of bankruptcy in any contract.

Secure the assets in a transaction when appropriate (Article 9).

Establish an exit strategy when the business is first formed – not when it is failing.

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Access to Technology

New technological developments have helped many people with disabilities: Voice synthesizers to translate computer

screens for the visually impaired Braille printers and keyboards

http://chh.erlm.siemens.de/en/s_nav35.html Access to vast amounts of information Remote communications Computer based home diagnostic tools

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HTML Explanation: ‘alt’ tags

Alt tags can be used as HTML labels for images.

May not be noticed by web pages users.

Not technically needed and may contain information not helpful to the site visitor.

Examples: AOL.com, boston.com <img border="0 src="http://www.aolcdn.com/aolportaltool/45ca5864-00378-00b99-c7bcbccd.jpg" width="200" height="150" alt="Rudy Giuliani and John McCain"/></a>

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Introduction to America with Disabilities Act (ADA)

ADA prohibits “discrimination in the enjoyment of goods, services, facilities, or privileges…”

Defines 12 places of public accommodation that must be fully accessible to disabled people. Place of public accommodation means a facility,

operated by a private entity, whose operations affect commerce and fall within at least one of the following categories…

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Places of Public Accommodation

(1) An inn, hotel, motel, or other place of lodging…;

(2) A restaurant, bar, or other establishment serving food or drink;

(3) A motion picture house, theater, concert hall, stadium, or other place of exhibition or entertainment;

(4) An auditorium, convention center, lecture hall, or other place of public gathering;

(5) A bakery, grocery, clothing or hardware store, shopping ctr., or other sales or rental establishment;

(6) A laundromat, dry-cleaner, bank, barber shop, beauty shop, travel service, shoe repair service, funeral parlor, gas station, office of an accountant or lawyer, pharmacy, insurance office, professional office of a health care provider, hospital, or other service establishment;

(7) A terminal, depot, or other station used for specified public transportation;

(8) A museum, library, gallery, or other place of public display or collection;

(9) A park, zoo, amusement park, or other place of recreation;

(10) A nursery, elementary, secondary, undergrad, or post-grad school, or other place of education;

(11) A day care center, senior center, shelter, food bank, adoption agcy, or social service center; and

(12) A gymnasium, health spa, bowling alley, golf course, or other place of exercise or recreation.

http://www.ada.gov/reg3a.html

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How Far Do Companies Have to Go to Provide Access?

ADA, passed in 1990, did not anticipate Internet.

2009 update expands disability definition.

Justice department in 1996 issued legal opinion ADA applies to web (Congress has authority to update ADA).

Covered entities under the ADA are required to provide effective communication, regardless of whether they generally communicate through print media, audio media, or computerized media such as the Internet. Covered entities using the Internet for communications regarding their programs, goods, or services must be prepared to offer those communications through accessible means as well.

http://www.usdoj.gov/crt/foia/tal712.txt

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Some Companies Have Changed Their Sites When Faced With Legal Action

Ramada.com and Priceline.com settled with the NY Attorney General in 2004 http://www.oag.state.ny.us/press/2004/aug/aug19a_04.html

AOL made its site viewable through screen reading software. All images have .alt tags

http://findarticles.com/p/articles/mi_m0HDN/is_2000_Feb_9/ai_59478002

Other courts have disagreed on procedural grounds: Southwest Airlines http://writ.lp.findlaw.com/ramasastry/20021106.html

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Class Discussion: Target.com Website

Target complies with the ADA in its stores

Is the web site a related ‘service’ under the ADA?

Video: http://www.youtube.com/watch?v=wQT9yVeu_js

Target Settled in 2008

Using NFB recommendations to redesign site.

NFB will monitor site. By February 28, 2009, Target.com was fully

accessible. $6MM to class members ($3,500 each). $20k for lead plaintiffs’ non-profit. Target pays attorneys’ fees and costs.

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Access to Technology: Electronic Voting

Electronic voting machines can provide a reliable and cost effective alternative to traditional paper methods. Optical scanning devices automatically enter

ballot results Touch screen voting

Widely adopted since the 2000 U.S. presidential election. No ‘hanging chads’ such as punch card ballots.

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Federal Government Is Pushing Electronic Voting

Help America Vote Act (2002). http://www.fec.gov/hava/hava.htm

Designed to assist state migration from key punch and lever system to electronic systems. http://www.igs.berkeley.edu/library/htElectronicVoting2004.

html

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E-voting Machines are not Without Their Risks…

Individuals unfamiliar with touch screens may have difficulty voting.

National standards don’t exist yet. Certification can be bypassed.

Security: systems are vulnerable to hacking. Reliability: only as reliable as the underlying code

and user interface. Difficult to test if code is protected trade secret.

Verifiability: some touch screen systems do not have any paper backup or other method of validating results.

http://www.cnn.com/2012/11/03/tech/innovation/electronic-vote-security

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Next Steps for E-voting?

What measures should be in place to ensure reliability, verifiability, and security? Should these measures be

more robust than traditional voting systems?

Should voters be able to cast ballots online? What legal issues might

emerge?

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Software Licensing

“Can’t we just use the same contract?”

Eli and Jason are enjoying the success of their nostalgic iPhone case and app.

You already drafted a sales agreement for the iPhone case

Can the use the same agreement for their app click through?

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Licensing Introduction

Agreements are often used for the purchase and sale of commodities.

Unlike a commodity sale, software’s value is not from the tangible medium, but from the intellectual property, like music or a film.

Copyright law protects the unique underlying code and other original elements of a software program.

A software license agreement typically provides the legal right to install and run a software program, subject to certain restrictions.

A software license does not transfer ownership of the software to the licensee.

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How is Software Distributed?

Direct sale of the license to the end user

Sub-license through a third party

Resold through a distributor or reseller Retail channels System integrator Value added reseller

Packaged with other hardware or software

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There are many Licensing Models

Perpetual and term licenses Subscription license / rental Remote and local hosting Enterprise and volume licenses Open source, shareware, freeware Feature and capacity based licenses Software as a Service (SAAS), usage and

utility model Concurrent, per computer, and named user

licenses

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A ‘Software License’ may cover more than Software

Support Maintenance Updates and upgrades Training Documentation and manuals Implementation and configuration Customization and development Hosting Hardware Third party components Data migration Integration with other systems

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Agreeing to License Terms

Express agreement

Click-wrap

Shrink-wrap

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Selected Definitions

Software: the instructions telling a computer or device what to do May be on a PC or embedded in a product

Program: a series of instructions to perform a task

System software: control program or operating system

Application software: a program processing data or performing a function for the user

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Selected Definitions (cont’d)

Software license: limited right to use software within the restrictions of the license. More restrictive than assignment or sale.

Source code: computer instructions written by a programmer. Often must be compiled or converted into machine language before it can be used by the computer.

Object code: executable code that can be used by the computer. Difficult to decompile and modify without the source code.

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Source Code & Object Code

#include <stdio.h> void main(int argc, char *argv[]) { int i, result; result = 1; for (i = 1; i<6; i++) { result = result * i; } printf ("Result is: %d.\n",result); }

0000000 7f45 4c46 0102 0100 0000 0000 0000 0000 0000020 0001 0002 0000 0001 0000 0000 0000 0000 0000040 0000 0234 0000 0000 0034 0000 0000 0028 0000060 0008 0001 002e 7368 7374 7274 6162 002e 0000100 7465 7874 002e 726f 6461 7461 002e 7379 0000120 6d74 6162 002e 7374 7274 6162 002e 7265 0000140 6c61 2e74 6578 7400 2e63 6f6d 6d65 6e74 0000160 0000 0000 9de3 bf88 f027 a044 f227 a048 0000200 9010 2001 d027 bfe8 9010 2001 d027 bfec 0000220 d007 bfec 80a2 2005 0480 0004 0100 0000 0000240 1080 000c 0100 0000 d007 bfe8 d207 bfec 0000260 4000 0000 0100 0000 d027 bfe8 d007 bfec 0000300 9202 2001 d227 bfec 10bf fff2 0100 0000 0000320 1300 0000 9012 6000 d207 bfe8 4000 0000 0000340 0100 0000 81c7 e008 81e8 0000 0000 0000 0000360 5265 7375 6c74 2069 733a 2020 2564 2e0a 0000400 0000 0000 0000 0001 0000 0000 0000 0000 0000420 0400 fff1 0000 0001 0000 0000 0000 0000 0000440 0400 fff1 0000 0000 0000 0000 0000 0000 0000460 0300 0003 0000 0008 0000 0000 0000 0000 0000500 0000 0002 0000 0000 0000 0000 0000 0000 0000520 0300 0002 0000 0017 0000 0000 0000 0000 0000540 1000 0000 0000 001d 0000 0000 0000 0000 0000560 1000 0000 0000 0024 0000 0000 0000 0078 0000600 1200 0002 0066 6163 742e 6300 6763 6332 0000620 5f63 6f6d 7069 6c65 642e 002e 756d 756c 0000640 0070 7269 6e74 6600 6d61 696e 0000 0000 0000660 0000 003c 0000 0507 0000 0000 0000 005c 0000700 0000 0209 0000 0000 0000 0060 0000 020c 0000720 0000 0000 0000 0068 0000 0607 0000 0000 0000740 0061 733a 2057 6f72 6b53 686f 7020 436f 0000760 6d70 696c 6572 7320 342e 3220 6465 7620 0001000 3133 204d 6179 2031 3939 360a 0047 4343 0001020 3a20 2847 4e55 2920 322e 3935 2e32 2031 0001040 3939 3931 3032 3420 2872 656c 6561 7365 0001060 2900 0000 0000 0000 0000 0000 0000 0000

http://www.cs.cmu.edu/~dst/DeCSS/object-code.txt

Source code Object Code

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Basic Elements of a Software License

[Parties] Description of software License grant, scope and restrictions

May include copyright and patent rights [Pricing model and payment terms or reference to pricing document] Description of use, systems and users Restrictions use, duplication, modification, distribution and reverse

engineering (decompiling) Term and termination Warranty, indemnity, disclaimers and limitations of liability Applicable implementation, development, support or other services Confidentiality (if applicable) Open source exclusion Transferability Other standard terms.

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Recent Case: Is Software Sold or Licensed?

Ensure the software is properly licensed. Unusual opinion in Vernor v. Autodesk. Court looked at characteristics of transaction,

not how the transaction was described by the parties.

Appeals court reiterated the licensor’s rights.

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Source of ‘Code’ for Programming

Home grown or developed internally Transformed works:

Fair use rights to transform existing code into something new

License grant may restrict reverse engineering, decompiling, or other access to source code

Third party custom developer Freeware or software in the public domain

distributed without restriction Some common software programs and routines

are available online without restriction Licensed from commercial source Open source license

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Introduction to Open Source Licensing

Software distributed for free, but with license restrictions

Programs using GPL open source must: Allow access to source code; Allow others to modify the code; Allow others to distribute code, either original or

modified; All derivative works must be distributed under the

license.

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Open SourceLicense Terms Vary

GPL = General Public License

LGPL= Lesser GPL MPL (Mozilla)

BSD / MIT Apache

Viral

Non-Viral

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Benefits of Using Open Source Software

Plentiful and varied 140,000+ projects on sourceforge.net.

Free – no contract

Some programs tested and improved by many programmers

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Open Source Risks

‘Infection’ of other code or programs with license requirements What is a derivative work: dynamic vs.

static code Security risks No warranty or indemnity

Code may contain restricted copyrighted materials

Processes may infringe patents. No standard or easy source of help Different licenses have different

terms

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Open Source Licenses are Enforced

Free Software Foundation enforces open source license requirements http://www.fsf.org/licensing

Reports may be made by:

Disgruntled employees Hackers Savvy programmers

Improper use can: Require the unrestricted release of all associated software Create public relations problems Create copyright liability Encroach on third party obligations

©

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Clients Using Open Source Need a Formal Policy

Policy can provide a roadmap to reduce risk. Don’t rely on informal discussions or communications.

Are there commercial licenses available for similar applications?

Client should audit all software use to ensure license compliance, not just open source applications.

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Open Source Policy

Formal identification of application and review process Is the software modified? How are the libraries accessed?

Define uses: Internal [Manageable Risk]

Linux server External [Higher Risk]

Products transferred to third parties

Cloud Computing

Can refer to any service outside the firewall SAAS Storage as a service Platform as a service

Computing using a consumption (utility) or subscription model

Diminishes need for IT infrastructure

Reduces the amount of hardware and softwarehttp://aws.amazon.com/s3/ 72

Legal Risks

Decentralized control Information security Privacy Data segregation Disaster recovery E-discovery Services often provided ‘as-is’

http://www.networkworld.com/news/2008/070208-cloud.html

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Questions & Answers