William Carleton, Counselor @ Law

Employees pulling to refresh patent policy?

One of the assertions (arguments?) in Jaron Lanier's new book is that the disruption of the buggy whip industry was not as catastrophic for the economy as it might have been, because a labor movement stepped in and demanded improvements in working conditions and wages as the auto industry took shape.

(Examples like this throw into relief his critique of the digital economy: labor and experience have been devalued, Lanier says, and literally taken out of all accounting.)

Well, I don't want to overstate the value of the Twitter's Innovators Patent Agreement, but it looks like it could gain traction, drive toward becoming an industry standard, if individual engineers bargain for the benefit of its use as a term and condition of employment.

The idea is that, as part of the bargain for an employer taking ownership of a patent on an invention, the employer concedes that the inventing employee has the power to decide whether the patent may be used to sue other companies.

Inventor Loren Brichter, whose pull-to-refresh feature was awarded a patent and is covered by the Twitter agreement, is quoted in The Verge as saying, "I really hope this becomes the de facto standard for hiring — engineers could demand this in their contracts."

For an overview and critique of the Twitter Innovators Patent Agreement that ran on this blog last year, click here.

Light reading

Last night I participated in a "legal best practices" panel at the new WIN Reactor space (near the Seattle Art Museum Sculpture Park).

I'm just getting to know about the Reactor program. Its head, Chip Hallett, described it as a "launch incubator" for startups in the game industry.

The panel was a mix of lawyers and game company founders/CEOs. As anyone would expect going in, the founders/CEOs were more interesting to hear. (That said, Seattle attorney Scott Warner did an uncommonly good job of moderating the discussion; he'd be a good moderator even when the topic isn't legal).

I think the whole show (long – 2 1/2 hours?) is preserved for posterity on video - I can actually see it being a good resource for first time game startup entrepreneurs, because Scott was so careful to cover all the basic topics - so I sure as heck won't attempt anything like a recap here.

What I do want to remark on briefly: the answers the CEOs/founders gave to one of Scott's questions, to the effect of, do you read all the legal contracts that affect your business?

Bob Berry of Uber Entertainment, Matt Wilson of Detonator Games, and Randy Chung of Zhurosoft, each said, yes, of course, every line, you have to.

I knew this is the answer Bob would give, as I and my firm represent Uber and know his style. But I was impressed to hear Matt and Randy equally adamant.

Sensing that he had hit an especially rich vein in the silver mine, Scott pressed everyone for examples of where contracts go wrong, issues presented or sections and legal contracts to be especially wary of. Everyone had great examples. We got into not just legal drafting "gotchas" but also the nitty-gritty of payment terms and how important it is to spell out unspoken assumptions.

If I come across a link to the video archive, I'll try to remember to post it here.

I'll leave you with a link to a video calling card that Bob kindly created for me in the span of about 90 seconds, using a fun app created by a startup which is part of the current WIN/Reactor class, Freak'n Genius. It had me in stitches.

Photo courtesy of Julian Allen, REACTOR community manager.

William dreams of boilerplate

Shiro may dream of sushi, but has he ever visualized, in his sleep, the segregation of quarterly and monthly reporting obligations, to accommodate the deft layering in of a periodic reconciliation covenant?

Yours truly saw this happening in his dreams last night. Chunks of sentences picked themselves up off the page, rearranged, and made space for an insertion, then tightened up like blocks meeting at the bottom of a Tetris screen.

Photo: Paul Trafford / Flickr.

Series Seed, everywhere

Yesterday I was critical of a template inventions assignment agreement, and suggested that state-by-state differences make standardizing employment documents difficult to pull off.

I want to circle back to Ted Wang's Series Seed Equity financing documents today, by way of being positive of the prospects for document standardization in other key areas.

The Series Seed templates are good and they're gaining traction. The AngelList Docs service offers them in a modified version, and it looks like a new, 3.0 "official" version of Series Seed takes advantage of and adopts those AngelList mods.

What's more, the Series Seed document repository has moved to GitHub. I'll bet this move will facilitate not only better dissemination, but communal iteration of the templates, too.

Docracy has posted the Series Seed 3.0 documents as well.

I use and recommend the Series Seed documents for seed financings where the parties agree to price the deal. And I'm noticing and hearing of other law firms that are using the vehicle.

What makes standardization viable in this area, compared to documents dealing with employer/employee rights and relationships?

For one thing, on core, corporate organizational issues, on relationships among companies, boards and shareholders, lawyers across the country can standardize against Delaware law.

Though you never bypass state anti-fraud authority, it also helps that virtually all seed financings are structured to meet the standard, federal 506 securities registration exemption.

In short, the law you are standardizing around is the same as to most (all?) of the key issues to address in an angel seed financing.

Do legal costs for a seed financing plummet - can a lawyer meet Fred Wilson's $5,000 seed financing legal challenge - using the Series Seed templates?

Yes and no.

AngelList says the Wilson Sonsini firm will that's isn't a company using the Series Seed documents in a seed financing, for free. But you have to be a client of that firm, and there is probably some fine print.

My fine print is that first time entrepreneurs can easily overlook the distinction between work to organize the company, and the financing transaction - they often blend the two efforts into the same project ("legal stuff").

In other words, if you are doing foundational things - like getting inventions assignments in place for founders! - at the same time, you won't get the seed financing done for under $5,000 in legal fees (unless you're working with one of those firms that provides start up services for free).

Standard docs vs. differences state by state

A web service called UpCounsel tweeted a link this morning to a template confidentiality and inventions assignment document, so I thought I'd have a look.

The chief merit of the draft is that it's readable. That's important, particularly from the perspective of a company desiring to have enforceable written agreements with employees.

Generally speaking, two businesses entering a contract will be presumed to have either equivalent bargaining power, or at least sophistication or the means to be informed about the document. With regard to contracts between a corporate entity and and individual employee, other laws and public policies kick in that give judges latitude to re-balance, you might say, the contract to not too egregiously disfavor the employee.

So to be able to say, look, the employee could read this and understand what it said, that's important.

The chief failings of the template follow, I think, from the template's aim to provide a "one size fits all" solution. It's designed to straddle the question of whether the person signing is an employee or contractor, and it's designed to be agnostic regarding the state in which the employee might be providing services.

Assignments of invention from consultants and from employees are not the same thing. Maybe I should say, the two situations have their own constraints and present their own opportunities.

I'll focus on just a couple differences that should follow from the employee/contractor distinction, as it pertains to an assignment of inventions.

A person in an employment relationship will have duties of loyalty and other common law presumptions that favor the employer, in terms of the employer's rights in work product; a bona fide contractor, on the other hand, should be presumed to have more autonomy in the relationship, which means the contractual assignment from a contractor will have to take more care to spell out what the deal is vis a vis the contractor's pre-existing IP.

That said, state statutes are expressly more protective of employees than contractors in another regard, which is the scope of the contractual assignment right. California, Washington and other states have specific notice requirements that, the law says, must be included in the employee inventions assignment contract. The UpCounsel template fails to deliver these required notices, and for that reason alone should not be used, at least not in the form presented.

The lesson I draw for this morning is this: we don't have a uniform national law that applies to all US businesses and their contractual relationships; we have 50 or more jurisdictions to deal with, and their differences. Lawyers have a vested interest in the mess, no doubt, but this current reality, at least in the near term, presents a real obstacle to the promulgation of industry template like this one from UpCounsel.

Macy's exclusivity with Martha Stewart

We had such a good time last month parsing a license assignment clause, I thought we'd enjoy having a look at the exclusivity provisions in the contract between Macy's and Martha Stewart Living Omnimedia.

Macy's has sued Martha Stewart's company, claiming that the latter's recently announced deal with JCPenney violates an exclusive contract with Macy's. Reportedly, the judge in the case has sent the parties off to mediate for a month.

I found what looks like the most current version of Macy's complaint, along with a copy of the main contract between Macy's and Martha Stewart Living Omnimedia.

It wasn't hard to find these documents - I went straight to the new York State Supreme Court website and use the native search functions it provides - but I have to say, the news stories I've seen don't make it easy for the layperson to access primary documents. That reflects poorly on professional journalism.

If you're a journalist and you're writing about a high-profile lawsuit or a key provision in an essential contract in dispute, why not link to the complaint and to the contract? One of the glories of our open judicial system is that disputes are adjudicated in public, and so the complaints, answers, briefs and exhibits that get filed with a court are (subject to redactions when confidentiality is warranted) open to the public. When courts take the trouble to make documents available online, there really is no reason for a journalist writing about the case to not link to the source documents.

Anyway, it's going to take a post or two (or more) to unpack the contractual genesis of Macy's complaint. Maybe because the "intellectual-property" at issue is pretty nebulous - little more than the Martha Stewart name and some personality rights - the defined terms deployed go off in different directions, and it's not yet clear to me that they meet back at one consistent center. Then again, maybe they do; but it will take some work to find the center.

Here's an example of what I mean: the contract uses a defined term, "Exclusive Products," styled in the conjunctive, and in a manner that may almost seem calculated to obviate connotations of exclusivity. Here's that defined term:

"'Exclusive Products' shall mean those products in the Exclusive Product Categories that are branded under the Trademark, manufactured by Licensee, and marketed and sold by Licensee or, under the conditions set forth herein, through an MSLO DTC Channel."

There are two or three other defined terms to unpack here, for sure, but I hope you see my point. Reading this defined term in isolation suggests that products don't become "exclusive" unless and until Macy's manufactures, markets and sells them.

More to come. Maybe this post will beget a miniseries.

Redacted pages (one pictured) in the Macy's complaint remind me of the Martha Stewart Collection Dinnerware, Lisbone Black Collection.

Provisions restricting assignment can be tricky

It can be tough to get a firm grip on a contract's assignment provision.

This truth was brought home again by a decision last week from the Delaware Court of Chancery, the highest court in *the* state known to set the standards in corporate law.

The case is Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, and DLA Piper's Trent Dykes has posted to the Venture Alley blog about it.

The assignment clause at center stage in the case reads in pertinent part as follows:

"Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . . . Any purported assignment without such consent shall be void."

Sounds tight, no? You might expect that if the licensee sold its company to another party - and wanted to be paid in the transaction for the value of the license - the consent of the licensor would be required?

But contract law is not always intuitive and the structures of a transaction and the words written in contracts can make critical differences.

Trent links to a detailed summary of the case by his partner, John Reed, in which we find this helpful upshot:

"[T]he Court granted summary judgment that a reverse triangular merger was not an assignment by operation of law or otherwise, meaning that the acquisition of the company holding a license to valuable technology did not require the consent of the entity that granted the license."

I went to the underlying case asking myself the question, "so just what kind of assignments would require consent, under the assignment clause in the case?"

Let's take as a given that a purported sale, transfer or assignment of just the license itself - not as part of a merger or sale of a company - would trigger the consent requirement of the contractual assignment clause above. Let's also grant that a sale of the licensee's business, structured as an asset sale where the buyer was purchasing all or substantially all of the assets of the licensee, would trigger the consent requirement. Those kinds of transactions involve straight out assignments.

More interesting, and more problematic, is what kinds of structures are implicated when the concept of "assignment" is broadened to include the additional concept of an assignment "by operation of law." The Meso case is telling us that a reverse triangular merger is *not* an "assignment by operation of law."

Vice Chancellor Parson's opinion in the Meso case does get into a discussion of how to giving meaning to that phrase, "by operation of law." Generally speaking, an assignment "by operation of law" can be found or inferred when the party under the contractual restriction on assignment is not the surviving entity in a merger. The court stated that certain cases cited by the effective licensor "are distinguishable because they involved forward triangular mergers where the target company was not the surviving entity, whereas in this case [the effective licensee] was the surviving entity in a reverse triangular merger."

In short, the entire question of whether or not consent was required under the assignment provision may well have turned on the choice, in an M&A context, on what entity would be legally deemed to be the survivor.

Photo: Josh Bancroft/ Flickr.