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Early Engagement: How Working with Your Attorney Can Help Steer Your Startup

Consulting an experienced attorney should be part of your business model validation.

Consulting an experienced attorney should be part of your business model validation.

Entrepreneurs may not exactly relish the thought of technological deep-dives with their attorney; in fact, we’ve heard more than a few complain that any time with an attorney would be better spent focused on the real work required to launch the entrepreneur’s business. But the truth is that early engagement with trusted counsel can be a crucial step in the development of a startup’s business model or underlying technology. Startups often operate in complicated spaces, with a host of potential issues involving regulatory requirements, entity formation, and intellectual property law. If a startup is far along in its development, it may be too late for an attorney to be able to advise the startup on how to avoid fundamental legal issues, which could jeopardize the startup’s chance of success. Early engagement with counsel allows the attorney to offer advice in the initial stages of the development pipeline, and puts the entrepreneur in the position of understanding the current state of the law while he is still able to tailor the startup’s business and technology plan accordingly.

Concerning intellectual property, it’s not uncommon for an entrepreneur to hire an attorney to perform a preliminary patent or trademark freedom to operate analysis, which helps the entrepreneur learn whether he needs to design around another’s IP before the costs of changing course are great. This blog post will focus on two recent examples of companies who encountered copyright law issues, and discusses how early legal counsel might have affected business decisions.

Aereo – delivering television over the internet, privately

Aereo is an Internet-based service that allows subscribers to watch broadcast television, either live or previously recorded, on nearly any Internet-connected device. For a low monthly-fee, subscribers can ditch their over-the-air antenna, enjoy the convenience of DVR functionality, and untether from their television. Because of the risk this model poses to the advertising revenue that supports over-the-air television, broadcasters and television content producers are not pleased. Perhaps unsurprisingly, a group of broadcasters sued Aereo for violating their public performance right under Section 106(4) of the Copyright Act.

In July 2012 the Southern District of New York denied a preliminary injunction against Aereo, and in April 2013 the U.S. Court of Appeals for the Second Circuit affirmed the denial. Finding that Aereo’s service does not constitute a public performance, the Second Circuit held that the broadcasters were unlikely to prevail on the merits. The Second Circuit relied in large part on its earlier decision, Cartoon Network, LP v. CSC Holdings, Inc. (“Cablevision”), which had held in part that the “public” of “public performance” should be determined based on the potential audience for a particular transmission, and that as a result the playback of an individual’s copy of a DVR recording, recorded by and only for that individual, did not constitute a public performance.

The fascinating thing about Aereo’s technology is how squarely it fits within the carve-out of what is public, as set by Cablevision. Aereo utilizes many tiny antennas, each as small as the tip of a finger, to deliver content. When a subscriber is watching a live broadcast on Aereo, an individual antenna is assigned to that subscriber, and only that subscriber receives the transmission from that antenna. When a subscriber sets a program to be recorded in advance, an antenna is assigned to receive the program for just that subscriber, and the program is recorded to storage accessible only to that subscriber. Like the DVRs of Cablevision, the streaming service of Aereo cannot be considered public given the private (individual) nature of the potential audience. In fact the technology matches so closely to what was allowed by the court in Cablevision, it almost looks as if someone took the Cablevision ruling and used it as a roadmap of what Aereo should be permitted to do. It’s hard to imagine that the private nature of Aereo’s transmission and recording infrastructure was merely coincidence. Granted, we don’t know whether such advice was made by counsel. But Aereo nonetheless demonstrates the benefits of: (i) understanding the state of the law; and (ii) applying that legal understanding in developing your technology. In contrast, when a startup relies on technology that runs counter to the law, as discussed below, it can be a difficult misstep to recover from.

ReDigi – when a re-sale is not protected by a first sale

ReDigi seeks to be an online marketplace of pre-owned digital goods, where users can buy from and sell to other users. Currently ReDigi only supports the resale of digital music. In the initial rollout (referred to as ReDigi 1.0), once a user offers a song for sale, that user’s copy of the song is transferred from the user’s computer to ReDigi servers. When the song is purchased, the song is transferred from the ReDigi server to the purchaser’s computer.

In 2012, the record label Capitol Records brought suit against ReDigi, alleging that ReDigi’s marketplace transfer necessarily created copies of the song offered for sale, and thus violated the record label’s exclusive reproduction right. In response, ReDigi argued that they were protected by the first-sale doctrine, which allows the owner of a copy of a work to sell that copy. In March 2013, the court granted Capitol Records partial summary judgment on the claims of infringement of the reproduction right, finding that the first-sale doctrine was limited to the sale of a physical copy and did not permit the reproduction undertaken by the ReDigi marketplace.

Compared to Aereo’s situation, where the technology comfortably fell within the contours of favorable case law, the legal arguments launched by ReDigi are not as strong. The plain reading of the first-sale doctrine shows that what is contemplated is the lawful sale of a single copy of an item (“owner of a particular copy”, sale of “that copy”); it is difficult to find a suggestion that the doctrine allows for reproduction in the course of a sale. It may have been the case, however, that first-sale was the strongest defense available once the marketplace technology was set.

It would be interesting to know how a better understanding of the copyright landscape, likely with assistance from an attorney, could have helped ReDigi. For example, could ReDigi have instead architected a marketplace that didn’t involve reproduction? Conceivably, resale could be achieved by performing initial purchases through ReDigi so that tracks are saved on their servers; in this way resale can be accomplished by transferring exclusive access to a file, as opposed to the file itself, from one ReDigi user to another. In fact, that appears to be just the approach used by ReDigi 2.0, which was exempt from the ruling in Capitol Records because it accomplishes resale without copying the offered file. Would ReDigi have implemented ReDigi 2.0 first and avoided litigation had it better understood the exclusive rights of copyright?

Conclusion

The two cases above demonstrate how a thorough knowledge of the law can significantly impact the early operation of a technology startup. Furthermore, the questions of law raised were not tangential to the operation of the businesses, nor were they necessarily solved by technological quick-fixes: the copyright questions were at the core of how both companies’ businesses operate.

As an entrepreneur preparing to launch a startup, what can you do? Find an attorney you can trust, preferably someone knowledgeable in the field in which you’re operating, and develop a relationship with that person. Bring them into the loop early as you begin to develop your startup’s business model or work on the technological solution to an as-yet-unsolved problem. These early conversations can help you tailor the direction your startup takes in order to best fit within the confines of the law. Furthermore, this early attorney engagement can fit in naturally with the sort of conversations you’re already having while preparing to launch your startup. While you’re in the process of validating your business model through talking to potential customers and partners, also take the time to have at least brief conversations with your attorney. In this way you can use this vetting process both to make sure your startup provides something customers want, as well as doing it in a way without running afoul of the law.

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