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Why Should You Consider Filing A Provisional Patent Application

 

Provisional patent applications can help entrepreneurs beat the clock by establishing important filing dates

Provisional patent applications can help entrepreneurs beat the clock by establishing important filing dates.                                             Image by opensourceway.

Since March 16, 2013, the United States switched from a first-to-inventor to a first-to-file patent system, which means the first inventor to file an application (but not necessarily the first to invent), gets the patent. As a result, it is important to file a patent application to claim priority over the invention soon after the invention is conceived (i.e. once the inventor has created a definite and permanent idea of the complete and operable invention) and capable of being described. Moreover, having an invention that is patent-pending adds value and credibility to a business, which helps the business seek additional financing.

However, filing a regular patent application (i.e. non-provisional) can be very expensive, ranging from several thousand dollars to over twenty thousand dollars, which is often outside a business’ budget, especially in its early stages. Additionally, a non-provisional patent application is examined by the Patent & Trademark Office and an applicant’s responses to the examiner’s rejections also incur significant legal fees. This is where a provisional patent application can come in handy. A provisional patent application allows you (the inventor) to claim priority to the invention (and claim that you have a “patent pending”) and push off some of the costs associated with a non-provisional application.

What is a provisional patent application?

A provisional patent application is a temporary patent application that includes the specification of the invention, including sufficiently detailed description and drawings to allow another to make and use the invention. The drawings can be hand-drawn or computer-created (though the latter may be better for business reasons). Moreover, the applicant does not need to draft any patent claims. Because there is no examination of the patentability of the provisional application at the USPTO, the filing fee is relatively low – $65 for micro entities, $130 for small businesses, and $260 for all others. Although ultimately you will need to file a non-provisional patent application in order to obtain a patent in the United States, the provisional application allows you to (1) have an effective filing date that a later non-provisional patent application, filed within 12 months, can claim priority to and (2) say that you have a “patent pending”, which can add more value to your business.

What are the benefits of applying for a provisional patent?

One of the key benefits of a provisional application is that it has few formal requirements, which can translate to a lower cost of obtaining early protection for your invention. As mentioned above, a provisional patent application does not require disclosing any patent claims. Because there is no examination process, an applicant will not have to incur legal fees in responding to “office actions” until after a non-provisional application is filed.

A related benefit of the provisional application is that it allows you to delay filing a non-provisional application for 12-months. A successful and valuable invention is often a work-in-progress, and this grace period can be very valuable for evaluating the merits of the invention and making improvements. While aspects of your invention may be sufficiently concrete and detailed for you to seek protection for, there are still parts that you may want to research and develop. One flexibility to a provisional application is that when you file a non-provisional application, you can claim the priority to multiple provisional applications so long as they are within the 12 months prior to your filing date. In other words, you can combine multiple iterations of your invention into a single document, which is beneficial if you’re still in the processing of developing and perfecting your invention.

In addition, this 12-month grace period can be especially helpful for small entrepreneurs or businesses that do not have the funds upfront to afford filing a non-provisional application. As mentioned earlier, the cost of filing a provisional application is relatively low, especially if you qualify as a micro-entity. Provisional applications allow you to immediately establish a filing date for your invention and to begin promoting and seeking additional funding for your invention without the worry that by disclosing your invention to others, you may lose your claim to your invention. Because the “novelty” of your invention is generally judged as of your filing date, this early filing date can have enormous benefits. By filing a provisional application (and within 12-months, the non-provisional application), if a patent is issued, you can claim priority to the date you filed the provisional application and exclude others from making, using or selling products that embody your invention.

What are the risks of filing a provisional patent application?

While a provisional patent application does not require many of the formalities (such as patent claims or formal drawings) of a non-provisional application, it still must be drafted with care. The provisional application must sufficiently enable and describe the invention that you will later claim in your non-provisional application. If the provisional application does not provide adequate description to enable the claims in non-provisional application, the claim will not be able to benefit from the provisional filing date. As a result, a public disclosure after the filing of the provisional application but before the filing of the non-provisional application could invalidate the claims. For more information about the risks of filing a provisional patent application, see our prior post on the risks of filing a “cover sheet provisional” application.

What are the next steps after filing a provisional patent application?

One important point to keep in mind is that filing a provisional patent application is just the first step towards obtaining protection for your invention. Ultimately, you still need to file a non-provisional patent application to obtain a patent, and to take advantage of the earlier filing date of the provisional application, you must file a non-provisional application within 12-months. Thus, if you’re planning on referencing multiple provisional applications, the critical date you want to file your non-provisional application by is 12-months from the filing date of the earliest provisional application to which you want to reference.

Lastly, so long as you do not run afoul of any of the statutory bars (e.g. offering to sell the invention or publicly disclosing the invention), even if you cannot file a non-provisional application within 12-months and claim priority to it, it will not cause you to lose what you have disclosed in your application because the provisional application is not published.

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What’s in a Name? (According to the App Store)

Startups should confirm that their product name does not have any conflicts with other app names.

Startups should confirm that their product name does not have any conflicts with other app names.

Picking a product name may be one of the hardest tasks faced by a mobile app startup. The ideal name is one that seizes people’s attention and stays in their memory, conveys some desirable quality of the app, and—despite an increasingly crowded marketplace—steers clear of infringing other companies’ trademarks. That’s a lot of boxes to check. Startup founders may have to rely on their own creativity to come up with a memorable and evocative name, but they can mitigate the risk of committing trademark infringement by following a few concrete guidelines. This article briefly discusses these guidelines for a startup seeking to release an app in Apple’s App Store.

Trademark Basics and Searching Registered Marks

Trademark law prevents one from using a mark (such as an app name) that is likely to cause customer confusion with an existing mark. Additionally, Section 8.5 of Apple’s App Store guidelines for developers says simply: “Apps may not use protected third party material such as trademarks, copyrights, patents or violate 3rd party terms of use.” This means that Apple, through its own guidelines, has the ability to enforce what it perceives to be the trademark rights of others. That raises the question of whether your app uses another’s trademark.

As covered in previous posts, trademark protection can be acquired through registration with the USPTO or through use in commerce. Founders should check both avenues before committing to a name. The first step simply involves searching USPTO’s Trademark Electronic Search System to see what else is already registered under the proposed name.

Testing the Waters

Sometimes people don’t register with USPTO, but they might still enjoy trademark protection. To determine whether protection has been acquired through use in commerce, an app developer seeking to release an app should search the App Store. This is actually less intuitive than it sounds because Apple separates content in the App Store by device. The easiest way to run a comprehensive search is to go to the iTunes Content Dispute page, and provide your contact information to log in (it doesn’t have to be real if you don’t actually intend to submit a complaint). This takes you to a page (as shown below) with a drop down menu from which you can select iPhone apps, iPad apps, and Macbook apps to search the App Store for each device.

Running a comprehensive search of the App Store can be less intuitive than it sounds because Apple separates App Store content by device.

Running a comprehensive search of the App Store can be less intuitive than it sounds because Apple separates App Store content by device.

You found a similar name. Now what?

Even if a prospective name has been registered or is in use on the App Store, a founder might still be able to go forward with it. Courts apply a standard based on the “likelihood of confusion,” considering factors such as similarity of product/service, strength of the prior user’s mark, etc. So for example, if a founder wanted to use the name “Wizard” for a mobile gaming app, a company which has registered the trademark “Wizard” but is in the construction industry will probably not have a good claim since their product/service is not similar. Similarly, a developer will likely have less risk if it uses a highly descriptive name (for example “storefinder” because anyone else using a similar mark for a similar purpose would likely not have strong trademark rights, if any.

There are several risks associated with using a similar name to an existing app, including:

  • Apple may decline to place your app on the App Store citing Section 8.5 of its Guidelines if it believes your app is using another’s trademark;
  • the owner of the similar mark may complain to Apple and cause Apple to remove your app from the App Store;
  • the owner of the similar mark may seek to enforce its trademark rights directly against you (for example, by sending a cease and desist letter, opposing your trademark registration, or pursuing litigation); and
  • consumers mistakenly downloading your app (seeking the other app with the similar name) may cause havoc with your conversion metrics.

Apple delaying or denying an app’s placement on the Apple Store, or removing your app from the App Store in response to a third party complaint is of particular concern. Apple might be incentivized to err on the side of caution. For example, in response to a complaint, it is easiest for Apple to verify that two apps are similarly named and remove the latter app. It would be costly for them to analyze the “likelihood of confusion” factors for each case that gets brought to their attention. So developers run the risk that Apple can remove their app even if they are legally in the clear with regards to a trademark.

So what’s a founder to do? If the founder has identified sources of risk through TESS or the App Store, s/he should assess the size of the risk. How active and successful are the other companies? Are multiple people operating under the same or similar names? How similar are the other products/services? More often than not, it is best for founders to avoid the numerous problems posed by similarly named existing apps. If a founder continues to see significant value in a chosen app name, despite the existence of an app with a similar name already on the App Store, an experienced trademark attorney can help to quantify and suggest steps to mitigate the risk.

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Application of HITECH and HIPAA to Healthcare Startups

JakeGatofBlogPic

When working with a startup with a technology in the healthcare space, attorneys should be aware that there are new rules and regulations that can have a major impact on how the product should be built and sold to customers.

The HITECH Act revises the definition of a “business associate” so as to require a company to follow HIPAA regulations if it “creates, receives, maintains, or transmits Protected Health Information (PHI), or “maintains” PHI on behalf of a covered entity (hospital/other providers), or if it is any subcontractor of that entity who will have access to PHI.

Steps to Mitigate Risk:

One way to help your client avoid HIPAA liability is to simply de-identify all health information.  This is of course one method to make PHI unusable, unreadable, or indecipherable to unauthorized individuals, and once PHI has been de-identified in accordance with the HIPAA Privacy Rule, it is no longer PHI and, therefore, no longer subject to the HIPAA Privacy and Security Rules.  The Standard for De-Identification is § 164.514(a).  Health information that does not identify an individual, and with respect to which there is no reasonable basis to believe that the information can be used to identify an individual, is not individually identifiable health information.  There are two ways to ensure that health information has been de-identified, one using an expert determination under 164.514(b)(1) and one through satisfying the requirements of the Safe Harbor enumerated under §164.514(b)(2).  In the startup world, cost of an expert determination makes the Safe Harbor the better option if de-identification is a possibility at all.  Of course with many profile-based software, de-identification may become a serious hurdle to overcome in software design.  Consulting your clients about the benefits of building the technology without such identifying information would of course ease the requirements of complying with HIPAA requirements.

Another way to mitigate potential HIPAA liability is to follow the HIPAA encryption guidelines.  As rulemaking following the HITECH act iterates, “While covered entities and business associates are not required to follow the guidance, the specified technologies and methodologies, if used, create the functional equivalent of a safe harbor, and thus, result in covered entities and business associates not being required to provide the notification otherwise required by §13402 in the event of a breach.”

Encryption works to make PHI unusable, unreadable, or indecipherable to unauthorized individuals only if one or more of the following applies:

If the Electronic PHI has been encrypted as specified in the HIPAA Security Rule by ‘‘the use of an algorithmic process to transform data into a form in which there is a low probability of assigning meaning without use of a confidential process or key’’ and such confidential process or key that might enable decryption has not been breached. Certain encryption processes have been tested by the National Institute of Standards and Technology (NIST) and judged to meet this standard.

Conclusion:

Understanding how HIPAA privacy regulations may now apply to startup clients entering the healthcare IT software space is essential to limit your client’s potential liability.  One option to deal with this risk is to suggest complete de-identification of information through the satisfaction of the Safe Harbor requirements or through an expert determination. The other option is to point your client to the functional encryption safe harbors as tested by the National Institute of Standards and Technology.  Furthermore, the earlier along in the process clients become aware of these requirements, and how they can mitigate risk, the more easily clients may be able to adjust the design of their technology to ease the burden of compliance.

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Trademarks in National Parks

A looming trademark dispute involving our national parks illustrates the importance of clarifying trademark ownership.

A looming trademark dispute involving our national parks illustrates the importance of clarifying trademark ownership. Photo by David Liff.  License CC-BY-SA.

Like the giant sequoias, there is a trademark dispute rising out of Yosemite National Park. Delaware North, a concessions powerhouse, has operated the hotels, restaurants, and other concessions in Yosemite since 1993. Their contract is set to expire in 2016, and as other firms line up to bid on the new contract, Delaware North has made clear to the Park Service that it claims to own the intellectual property in the names of famous sites like the Ahwahnee Hotel and Curry Village. The National Park Service disputes this claim, and says that the names, which historians suspect have been in use for over 100 years, belong to the American people. Delaware North claims the IP is worth $51 million, and says it will seek that amount if the Park Service wants to use the names without Delaware North’s permission.

Background on Trademark Law

The situation implicates some core issues of trademark law and serves as a good trademark primer for entrepreneurs unfamiliar with the field. Words, phrases, logos, and other designators of a product’s source are granted protection under federal law via the Lanham Act. While registering a trademark with the federal government grants certain protections and other benefits, one does not need to register a trademark for protection to exist. For both registered and unregistered marks, trademark protection is gained through use of the mark in commerce in a way that serves as a source designator. While registering a mark gives the registrant nationwide priority to the mark over subsequent users, the first user of any mark has rights to it, registration or not, given certain geographical and industry limitations.

Delaware North’s Potential Trademark Rights

Delaware North acquired the trademark registrations from the company from which it bought the Yosemite properties. Delaware North subsequently sold the properties to the National Park Service, but retained assets like furniture, vehicles, and as Delaware North argues, the IP) and began running the concession for the Park Service. Delaware North’s ownership of the registrations in the park properties, however, is not conclusive as to the marks’ rightful owners. As the National Park Service points out, if another party used the mark as a source designator before the registration, they could have rights in the mark. While a party that has not used a mark for more than three years is generally considered to have abandoned the mark, Delaware North should not expect the Park Service and other interested groups to give up easily.

Lessons for Entrepreneurs

The takeaway for entrepreneurs is that trademark rights can become extremely valuable and it is of the utmost importance to establish whether or not you have rights in a mark you are using early on. This can be especially important when partnering with third parties. Entrepreneurs should understand that ownership of tangible property does not necessarily mean that rights in related intellectual property are secured. As a product or service is marketed to the public under a consistent brand, the trademark rights in that brand will likely increase in value. Entrepreneurs should ensure that they have the necessary rights in any brand related to their products or services.

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Are Trademark Disputes Brewing in the Craft Beer Industry?

The craft beer industry may be ripe for trademark disputes due to the increasing number of breweries, limited number of beer-related puns, and large number of small-scale operations.

Trademark is an important but often overlooked area of the law for new startups and small businesses. Many entrepreneurs believe that merely registering a company with a state as an LLC or Corporation secures trademark rights in the name or brand, while others assume they can secure protection by maintaining a website or social media presence. It is true that each of these steps might help expand protection, but neither will definitively establish the right to prevent others from using a particular mark or independently bestow rights on a company. The lack of understanding has become especially problematic in the expanding market for craft beer, where the exploding number of breweries, limited number of beer-related puns, and large number of small-scale operations have created a veritable minefield of potential trademark issues.

Limited Number of “Punforgettable” Trademarks

One issue stems from the desire to utilize existing pop culture and media to create attention grabbing, punforgettable (see what I did there?) trademarks. “Hoptimus Prime,” “The Empire Strikes Bock,” and “Harry Porter” are certainly memorable, but trading on protected intellectual property and brands can engender lawsuits from big companies with vast resources. These companies are even more likely to bring suits against breweries now that there is some precedent for licensing out popular intellectual property to beer labels (see Game of Thrones branded beer here. 

Local Nature of Early-stage Breweries

A second issue is more problematic because it is difficult to foresee and thus less preventable. The foundation of a trademark infringement claim is customer confusion, and the likelihood of confusion predictably increases when more participants join the market. But when starting out, the primary concern of a small brewery is brewing good beer, and trademark registration is probably doesn’t even enter the mindset of young entrepreneurs trying to keep costs as low as possible. So while a brewery in Oregon may create its own mark independently and believe it to be original, there is no guarantee that a brewery in Massachusetts hasn’t been using the same mark for its own beer. The problem is compounded by the fact that with so many players in the craft beer space, it can be difficult to determine whether someone else is using a mark even if you take the time to search beforehand.

How to Help Protect Yourself

A trademark can be a word, symbol, phrase, design, logo, product packaging, or some combination. The essential requirement is that the mark be used as source designator, so that customers associate the mark with a particular brand or company. For example, Budweiser’s trademarks include its crowned logo and “king of beers” slogan.  Both of these trademarks have been associated with the Budweiser brand, so that when a customer sees them they assume some relationship to Budweiser. For small breweries without the budget for a trademark attorney, the best option to test the availability of a desired mark is to scour the web. First, search the free trademark database and perform a general Google search including your trademark and related terms like “beer,” “brew,” “IPA,” etc. Beer rating sites like beeradvocate.com, which features over 93,000 beer brands, can also be a useful resource for assessing what marks are already being used in the market.

Unfortunately, it may be impossible to know exactly which marks are being used in a fairly regional industry. Since beer can’t generally be sold and shipped to customers across the web, common law trademark protection without registration is far more common, and small breweries may have local clout that doesn’t transcend regions. Still, by performing a few simple searches and conducting due diligence early on, craft beer makers could avoid a lot of potentially ugly legal disputes down the road if business expands and conflicts arise. When thinking long term in any industry, having a memorable mark is great, but avoiding legal disputes is probably better.

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Updates to Michigan’s Legislative Battle to Permit Ride-sharing Statewide

The Michigan House of Representatives failed to pass on Wednesday HB 5951 which would have permitted ride-sharing companies like Uber and Lyft to operate in Michigan and preempted any more-restrictive local regulations.  The House may take up the bill again today.

The Michigan House of Representatives failed to pass on Wednesday HB 5951 which would have permitted ride-sharing companies like Uber and Lyft to operate in Michigan and preempted any more-restrictive local regulations. The House may take up the bill again today.

We recently overviewed Michigan’s proposed legislation, HB 5951 that would effectively allow ride-sharing services like Uber and Lyft to operate statewide by preempting local regulations. Here is a quick update to the status of this proposed legislation.

Michigan’s House of Representatives Fails to Pass HB 5951 on Wednesday

As reported by MLive, Michigan’s House of Representatives did not pass HB 5951 yesterday.  A House committee approved the bill last week and sent it to the House floor for a vote.  The bill would permit ride-sharing services to operate in Michigan provided they met certain requirements (outlined here) that are largely consistent with Uber’s current practices.

Yesterday, the House failed to pass the bill.  The bill is still alive, however.  Here is what happened, as outlined in the Journal of the House of Representatives for yesterday’s session.

  • The House made certain changes to the bill, including exempting from Michigan’s Freedom of Information Act any list of ride-sharing drivers provided to the state as required by the bill.
  • An amendment was proposed, but failed to pass, that would allow local municipalities to still pass their own ride-sharing regulations, even those more restrictive than state law.  This would effectively strip HB 5951 from having its primary impact (of having uniform state-wide requirements for ride-sharing services).  In particular, the amendment stated:

    Sec. 11. (1) This act does not prohibit a municipality or a group of municipalities that form an authority to regulate transportation network companies under the municipal partnership act, 2011 PA 258, MCL 124.111 to 124.123, or the public transportation authority act, 1986 PA 196, MCL 124.451 to 124.479, from adopting a rule, ordinance, or resolution that is more restrictive than this act.

  • When at least 50 representatives voted against the bill’s passage, the House passed on the agenda item.
  • The House will reconvene at 10am today, December 11, and may take up the bill again.  You can watch a live webcast of today’s House session here.

Opposition from Insurance Industry

Michigan's insurance industry continues to oppose HB 5951.

Michigan’s insurance industry continues to oppose HB 5951.

The insurance industry continues to vigorously oppose the bill in its current form, as laid out in its December 9 letter to the House.  One of their primary complaints is the gap in coverage for a ride-sharing driver who is on duty, but not currently carrying a passenger.

According to the executive director of the Insurance Institute of Michigan, HB 5951 leaves a gap in coverage that “may leave drivers and passengers of ride sharing companies at financial risk.”

In the meantime, all eyes will be on the House floor today to see if an agreement can be reached to allow HB 5951 to pass a House vote.

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Uber’s Regulatory Drama Continues: Portland Sues Uber

The City of Portland sued Uber on December 8 seeking to enjoin Uber from operating in the city limits.

The City of Portland sued Uber on December 8 seeking to enjoin Uber from operating in the city limits.

Yesterday’s post discussed Michigan’s proposed bill HB 5951 which would implement state regulations permitting ride-sharing services such as Uber and Lyft to operate in the state of Michigan provided they met certain regulations that are largely consistent with Uber’s existing practices.  That bill would preempt various city regulations (such as Ann Arbor’s), some of which conflicted with Uber and Lyft’s existing practices.  Just a few days after Michigan’s house committee approved HB 5951 and recommended the house pass the bill, a strikingly different approach has been taken in Portland, Oregon.

City of Portland v. Uber

On Monday, December 8, the City of Portland sued Uber seeking to enjoin Uber from operating in the city of Portland.  This lawsuit comes just days after Uber began operating in Portland on Friday, December 5.  The conflict involves Portland City Code Chapter 16.40, which requires as follows:

  • “for-hire transportation” drivers must obtain a “for-hire transportation” permit
  • for-hire vehicles must have certain decals and plates
  • taxicabs must adhere to certain fare and meter rates
  • taxicabs must adhere to certain regulations related to wheelchair accessibility
  • for-hire vehicles must maintain certain levels of insurance
  • taxicabs must maintain a dispatch system in operation 24 hours/day
  • taxicabs must service city-wide 24 hours/day, 7 days a week and accept any request received within the city
  • taxicab companies must have at least 15 cabs in their fleet and have at least 2/3 of their fleet in service at all times
  • for-hire vehicles must pass regular inspections
  • for-hire vehicles must be equipped with digital security cameras

According to the City of Portland’s complaint, which can be read here, Uber violates Portland City Code because it:

  • does not hold a valid company permit
  • all prospective Über customers must first download the Uber app and enter into an online agreement under terms dictated by Uber, including a waiver of any and all liability to Uber
  • the customer must provide credit card information to Uber, which is charged, rather than having drivers collect a fare from the customer
  • customers hail an Uber vehicle through the Uber app instead of a human dispatcher
  • the Uber app calculates fares based on time and distance rather than through a certified taxi meter
  • Uber’s drivers and vehicles are personally insured, and Uber does not require its drivers to purchase commercial at insurance
  • Uber does not require its drivers to be certified by the City of Portland
  • Uber’s drivers are not required to be dispatched to all ride requests in the city, but rather only to passengers who can pay via credit card and have access to the Uber app or website to request a vehicle

Portland’s Cease and Desist Letter to Uber

On December 8, the City of Portland sent a cease and desist letter to Uber demanding that Uber cease operations in the city limits.  The cease and desist letter is attached to the complaint as Exhibit A. While there have been varying reports of the city’s enforcement against individual Uber drivers, it does appear the

Support for Uber and Success in Other Markets

As of publication, close to 10,000 individuals have signed a petition to support Uber’s operations in Portland.   Uber remains wildly popular and it generally overcomes the legal obstacles it has faced in other markets.  As previously reported, Uber faced initial obstacles in Ann Arbor and Detroit.  While Ann Arbor sent Uber cease and desist letters, it generally did not crack down on Uber’s operations, and now a Michigan bill is likely to preempt any local regulations.  In Detroit, Uber worked with the city to enter into an operating agreement stipulating how the company could operate in Detroit.

Ride-sharing In and Around Portland

While regulatory issues are nothing new to Uber, the situation in Portland is slightly unique.  Uber is already operating in several cities in close proximity to Portland, for instance, Vancouver Washington.  Additionally, various tweets, such as the one below, were bring broadly disseminated citing the limited availability of traditional taxi services in and around Portland:


 Going Forward

Going forward, the legal questions related to whether Uber is complying with Portland’s City Code appear to be relatively clear:  Uber is not.  As in other cities, this is likely not a legal battle, but rather one of politics and policy.  If Portland desires to have Uber available in its city, it will ultimately amend its city code to provide for transportation network companies such as Uber, to obtain permits to operate in the city.  Alternatively, as happened in Michigan, the state of Oregon could pass statewide regulations that preempt the regulations of any particular municipality, thus permitting Uber to operate statewide as long as it abides by the state-level regulations.

So far, Uber’s tactics of commencing operations and then working out any regulatory hurdles have worked out with staggering success.  Indeed, Uber recently raised another $1.2B at an amazing $40B valuation.  So far, Uber has proven that massive customer acquisition can cure all evils – even legal and regulatory ones.

 

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Transportation Network Company Bill Supported by Uber Moves to House Vote in Michigan

The Michigan House of Representatives will vote on HB 5951 which would implement state regulations largely consistent with Uber and Lyft's existing practices.

The Michigan House of Representatives will vote on HB 5951 which would implement state regulations largely consistent with Uber and Lyft’s existing practices.

On December 4, Michigan’s House Energy and Technology Committee approved HB 5951.  The bill provides for state regulation of transportation network companies such as Lyft and Uber.  Uber supports the bill because it is consistent with its existing practices.  The bill would supersede any local regulations, such as the city regulations underlying Ann Arbor’s cease and desist letters to Uber and Lyft earlier this year.

Overview of HB 5951

HB 5951 directs the state to issue permits to any transportation network company that meets certain requirements, including:

  • the company carries insurance meeting certain minimum coverage thresholds;
  • drivers are at least 21 years old;
  • each driver maintains a Michigan chauffeur’s license;
  • the company performs background checks on and collects driver history reports from each drive;
  • that each driver vehicle undergoes a yearly safety inspection.

As reported here by Mlive, Michael White, manager of Uber’s Michigan operations, says Uber supports the bill and that Uber’s current practices are largely consistent with the bill’s requirements.

Existing Local Regulations

Currently, various municipalities provide their own regulations purported to cover ride-sharing services such as Uber or Lyft.  For example, as widely reported by outlets such as Business Week and MLive, on May 14 the city of Ann Arbor issued cease and desist letters to Uber and Lyft.  Other cities in Michigan, permitted Uber and Lyft to operate.  For example, Detroit entered into an operating agreement with these companies to permit their operation.  Section 11 of HB 5951 provides: “A local unit of government shall not enact or enforce an ordinance regulating a transportation network company.”  Accordingly, HB 5951 effectively trumps any local ordinances such as those of Ann Arbor seeking to restrict Lyft or Uber from operating.

Uber Urges Support for HB 5951

Beyond Michael White’s strong testimony in favor of HB 5951 at the committee level, today Uber also launched a marketing campaign urging its users to email their state representatives in support of HB 5951.  Michigan Uber users were emailed information about 5951, and a one-click mechanism for emailing the appropriate state representative.

On December 8th, Uber Michigan users received emails from Uber asking for their support of HB 5951.

On December 8th, Uber Michigan users received emails from Uber asking for their support of HB 5951.

HB 5951 Opposition
Not everyone supports HB 5951, however.  As noted here, the taxi industry and  Michigan Municipal league oppose the bill.  Objections include:
  • the bill does not require companies like Uber and Lyft to have large enough insurance policies;
  • the bill is unfair to taxi and limousine services that remain subject to harsher regulations; and
  • the bill may undo some beneficial regulations on limousine services (see the comments here).

In the end, Michigan’s legislature will have the final say.  The bill appears to have momentum and some have noted they expect it to become law before the end of the year.

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An EGG-cellent Example of How a Law Suit Can Backfire: Unilever v. Hampton Creek

Unilever, maker of Hellman's, sued Hampton Creek for false advertising and unfair competition over its egg-free "Just Mayo" product.

Unilever, maker of Hellman’s, sued Hampton Creek for false advertising and unfair competition over its egg-free “Just Mayo” product.

Hampton Creek, according to its website, is “a company dedicated to [helping everyone] eat delicious food that’s healthier, sustainable, and affordable.”  Earlier this year, Hampton Creek was featured on This Week in Startups where it demonstrated its “Just Mayo” product.

Just Mayo

Just Mayo is an egg-free dressing designed to replace traditional egg-based mayonnaise.  Indeed, one of the main points of Just Mayo, appears to be to avoid the use of eggs.  According to Hampton Creek CEO Joshua Tetrick, eggs are some of the most inefficient food products, requiring an energy to food ratio of 39:1.  Hampton Creek on the other hand achieves an energy to food ratio of 2:1.  According to Tetrick, Just Mayo resulted from two years of research and development by Hampton Creek.

The Lawsuit

Unilever sued Hampton Creek for false advertising and unfair competition.  See the Complaint.

On October 31, 2014, Conopco (a company that does business as Unilever), the maker of Hellman’s mayonnaise, sued Hampton Creek for false advertising and unfair competition under  the Lanham Act (federal law) and various state laws.  According to Unilever, the Food and Drug Administration regulations define “mayonnaise” as “the emulsified semi-solid food prepared from vegetable oil” and containing an “acidifying” ingredient of either (1) vinegar or (2) lemon or lime juice, and an “egg yolk-containing” ingredient.  Unilever also alleges that “mayo” is a commonly understood synonym for “mayonnaise.”  Therefore, according to Unilever, Hampton Creek is falsely advertising its product by calling it “mayo” when it does not include any “egg yolk-containing ingredient.”  See the Complaint here.

False Advertising Under the Lanham Act

False advertising plaintiff’s typically have to prove:

(1) the defendant made a false or misleading statement of fact in a commercial advertisement about a product;

(2) the statement either deceived or had the capacity to deceive a substantial segment of potential consumers;

(3) the deception is material, in that it is likely to influence the consumer’s purchasing decision;

(4) the product is in interstate commerce, and the plaintiff has been or is likely to be harmed by the statement.

Should the case progress, it will be interesting to see how a court addresses the second element above. Just Mayo is specifically and clearly marketed as being egg free.  Therefore, regardless of the FDA’s definition of “mayonnaise” it would seem hard to suggest that Hampton Creek’s “Just Mayo” brand could deceive or have the capacity to deceive a substantial segment of potential consumers looking for traditional egg-based mayonnaise.

The Backlash

Shortly after Unilever initiated its suit, it received significant public backlash.  Well known chef Andrew Zimmerman initiated a petition on Change.org asking Unilever to stop bullying Hampton Creek.  In the word of Zimmerman:

Unilever, a UK-based 60 billion dollar multinational corporation, filed a lawsuit confessing that Hampton Creek is taking away market share from a couple of its products: Hellmann’s and Best Foods. Thus, as Unilever admits, it’s attempting to rely on an archaic standard of identity regulation that was created before World War II to mandate that Hampton Creek removes its products from store shelves.

As of November 20, the petition had over 70,000 online signatures.

Additionally, as reported by One Green Planet, marketing experts have stated that Hampton Creek received over $3M of free product placement based advertising per day in the week following the lawsuit.  Accordingly Hampton Creek received over $21M of marketing benefits in just the first week following the lawsuit.

The Lesson

It will be interesting to see how far Unilever presses the lawsuit.  It is unlikely that they expected this degree of backlash and this outpouring of support for Hampton Creek.  Indeed, given the increasing awareness of the need for sustainable food sources, and allergy-friendly foods, the public opinion appears to be that Hampton Creek is on the right side of history.  Accordingly, filing a lawsuit against a competitor requires much deeper analysis than whether one is likely to prevail on its legal claim.  Here, even if Unilever ultimately prevails on its claims (which is not a certainty, as discussed above), it’s quite possible that Hampton Creek might end up the winner.

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The Risks of Corporate Incubators May Outweigh the Generous Rewards

Corporate incubators can nurture a small startup with big company resources.

Corporate incubators can nurture a small startup with big company resources.  Photo by Pete Prodoehl.

We have seen a recent wave of fortune 500 companies breaking into the entrepreneurship game by establishing their own corporate incubators – Nike, Google, Microsoft and Samsung just to name a few. This article provides an overview of considerations for whether your start-up should accept an offer to join a corporate incubator.

Overview of Corporate Incubators

Corporate incubators are industry specific accelerators that help start-ups and entrepreneurs build a successful company/product but only within the structure of a large corporation. As compared to the traditional accelerator (e.g. Techstars or Ycombinator) that invest money and resources in a broad array of startups which span many platforms, corporate incubators are designed to help the sponsor build a portfolio of long-term product options, develop offshoots to existing products and generate innovative ideas that can help the sponsor grow its profits.

Why Established Companies Seek to Incubate Startups

Corporate incubators and accelerators are a vital source for idea generation and growth. Particularly for markets that are constantly evolving, an in-house incubator can help large companies pivot and change directions or develop a new business quickly. Even for companies in mature industries where M&A is drying up quickly (i.e. manufacturing or many food & beverage sectors), incubators and accelerators have become a part of their corporate structure to derive new profits. Not only do corporate incubators provide valuable ideas but they can also provide a company with home grown talent if the company runs short on valuable human capital. Given the level of visibility and access corporate executives have to talented young entrepreneurs through the incubator, it is not uncommon for the sponsor to make employment offers from its toy chest full of start-ups.

Benefits to Joining a Corporate Incubator

While joining a corporate incubator may seem like “selling out,” the benefits of a corporate sponsor may be too much temptation for any starry-eyed entrepreneur to resist. Corporate incubators give a start-up access to the company’s vast array of resources such as R&D, legal services, mentorship and often stable financial assistance to help the start-up scale its business. Furthermore, as compared to your typical accelerator or incubator, corporate incubators are generally industry focused and can provide tailored mentorship and resources that even some of the top accelerators such as Ycombinator or Techstars may not have access to. Not only are the resources a substantial benefit but another advantage is that a corporate incubator can immediately place a start-up on the radar of a strategic acquirer. Getting support from a corporate sponsor can be a significant step in the right direction for a start-up and often signals that the entrepreneurs may be on to something big and therefore should think seriously about an offer to join a corporate incubator. Like most things in life, however, there is often no such thing as a free lunch and there some serious challenges that start-ups should be aware of before joining the corporate payroll.

Considerations to Joining a Corporate Incubator

(1)  Make sure you have clean title to your intellectual property

Joining a corporate incubator can be tricky when it comes to IP related issues especially when dealing with who owns any new IP that comes out of the incubation process. Before starting at a corporate incubator, make sure that all IP that has been created by any of the founders or employees has been documented and assigned to the business. While negotiating with a corporation is not easy and offers are often provided on a take-it-or-leave-it basis, try to work with legal counsel to ensure that any and all IP developed while in the incubator belongs to your start-up.

(2)  Corporate bureaucracy can crush a start-up’s flexibility

One of the best aspects of being a start-up is the ability to be nimble and make quick decisions when needed. Large corporations are often not afforded this benefit as their size and governance structure can slow decision-making. If the corporation running the incubator obtains certain veto or control rights in a startup, that startup may lose its ability to make quick decisions. Getting caught up in such corporate bureaucracy and indecision (or a slow and lengthy decision making process) can quickly destroy a budding company. A startup can protect against this risk by closely reviewing the deal documents and avoiding granting the company running the incubator control over important decisions that a startup needs to make quickly (i.e., hiring, product direction, market strategy, issuances of equity to new hires, etc.) If the company running the incubator insists on such control rights, a startup should get to know and staying aligned with the key corporate decision makers and stakeholders.

(3)  Corporate sponsorship may drive away venture capital funding

If you do choose to join a corporate incubator, don’t be surprised if you don’t have too many venture capitalists knocking on your door at the end. While VCs won’t necessarily be bothered by the “selling out” aspect of corporate sponsorship, they will be very concerned about having to deal with XYZ conglomerate as a significant investor not only with a sizeable equity stake but also potentially pro-rata rights and big city corporate lawyers to enforce all the initial investor rights agreed to by the start-up. Even if VCs can get over having to deal with the corporate sponsor, many will be concerned with whether the management team has that magical start-up wherewithal that makes them worth investing in. VCs often view companies in corporate incubators as being hand-held and as a result may not have learned the hard lessons necessary to run and scale a successful business.

Conclusion

Joining a corporate incubator or accelerator can be one the best steps a young and potentially successful company can take and should be given serious thought if such an offer should present itself. It is important, however, to understand the risks of doing so and what it can mean for your company’s brand, image and future opportunities as it starts to take-off. Finally, if you do choose to join a corporate incubator, always always always have a well thought out Plan B in your back pocket as large companies are known for pulling the plug on such corporate programs without much notice even with the slightest downturn in quarterly earnings.