February 12th, 2014
Comedian Nathan Fielder has been revealed as the brains behind the “Dumb Starbucks” shop that popped up without fanfare (or a health permit) on a Friday afternoon. It disappeared the next Monday. While the joke seemed to be on the people who waited in line for three hours for bad coffee and Vons-bought pastries, comedian Fielder claimed it was a performance-art parody of Starbucks, and thus was protected by the fair use exception under the US copyright laws.
Mr. Fiedler is, technically, incorrect – fair use is a defense for fairly using someone else’s copyrighted expression, but he is “using” Starbucks’ trademarks to make his point. There is no explicit fair use exception in trademark law, as there is under copyright law. However, there are plenty of trademark cases that show that a parody use of someone else’s trademark does not violate the law.
Trademark law protects trademark owners by preventing other trademarks that are likely to confuse potential consumers into believing the other trademark is associated or sponsored by the first. The purpose is to stop the parasitical behavior that feeds off of others’ success. The Ninth Circuit uses an eight-part test first used in AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (1979) to examine whether there is confusion. Courts look at the factors together; not every box has to be checked to be liable for trademark infringement. Those factors are:
1. strength of the mark;
2. proximity of the goods;
3. similarity of the marks;
4. evidence of actual confusion;
5. marketing channels used;
6. type of goods and the degree of care likely to be exercised by the purchaser;
7. defendant’s intent in selecting the mark; and
8. likelihood of expansion of the product lines.
At first glance, “Dumb Starbucks” is in trouble: the first, second, third, fifth, sixth, and eighth factors are squarely against “Dumb Starbucks.” Starbucks is a very famous mark, rated the 76th most popular in the world. The goods are identical (coffee and sweet treats), and the Starbucks name and logo are used in their entirety.
However, Mr. Fielder’s parody intent comes into play in the fourth and seventh factors. There are few that would not get the joke* of “Dumb” Starbucks – you’d have to be pretty idiotic not to get his intent. Mr. Fielder intends to criticize the pretentiousness of Starbucks, not copy its business model. This intent is reinforced by the giving away of the (by all accounts awful) coffee – no one is going to be in business long with the Dumb Starbucks business model of giving away product. While few have failed by overestimating Angelenos’ gullibility, Mr. Fielder’s intent won’t unfairly suck business and profits away from Starbucks.
In a larger sense, trademarks are a form of commercial speech, and are subject to tighter regulation than non-commercial speech, like Mr. Fielder’s. Starbucks opens itself to criticism with the often bombastic titles and sizes (a “tall” is “small”?). At least as of the posting of this article on February 12, 2014, Starbucks has not gone to court, apparently preferring to register its mild objection in the court of public opinion, and let it die a natural death – the way that it apparently has in other situations (warning: not for children, clergy, or those who get the vapors easily when viewing shocking words.)
* For those who don’t get the joke, you can get a “Dumb Starbucks” Grande Cup on eBay – bids start at just $50.00!
Photo of the original Starbucks in Seattle’s Pike Place Market, by Postdlf, courtesy of Wikipedia Commons and the GNU Free Documentation License.
February 7th, 2014
By Sharon Adams
This single sentence appeared to be dropped into the middle of his speech, and was somewhat confusing given that in 2011 a new “patent reform” bill was passed by Congress, and signed into law by Obama. This relatively new legislation is also known as the “America Invents Act” or AIA. According to Obama, this legislation was designed to “encourage the entrepreneurial spirit wherever we find it” and that this legislation “cuts away the red tape that slows down our inventors and entrepreneurs.”
One of the main features of that bill was to change the US from a first-to-invent to a first-to-file country, bringing the US in line with the practice commonly used elsewhere in the industrialized world.
First-to-invent — the old policy of the US — meant that the actual date of invention was relevant to determining who had inventorship rights to an invention. Inventorship necessarily happens prior to the date of filing — but how much prior can lead to long and expensive lawsuits because the date of inventorship may not be easy thing to prove. “Invention” is a nebulous concept, involving conception of an idea and reducing it to practice. Inventors typically work over a period of time, with various prototypes or experimental models, which may make the exact date of invention difficult to determine. Or, there may be insufficient record to prove a date of invention.
It is a strange, yet somewhat common, occurrence that inventions may be simultaneously developed. For example, there were 2 patents claiming a telephone filed on the same day; one by Alexander Graham Bell and the other by Elisha Gray.
Thus, the question of who owned the invention revolved around who was the first to invent, because the first-to-file rule was the law of the land.
The issue of who invented the telephone was the subject of over 600 lawsuits. One of those involved a decision by the US Supreme Court awarded the patent (and thus the invention) to Alexander Graham Bell. The Supreme Court found that Bell was the first to invent. Therefore, Bell was the owner of the telephone invention.
The court stated:
“It appears from the proof in these causes that Alexander Graham Bell was the first discoverer of the art or process of transferring to, or impressing upon, a continuous current of electricity in a closed circuit, by gradually changing its intensity, the vibrations of air produced by the human voice in articulate speech in a way to cause the speech to be carried to and received by a listener at a distance on the line of the current, and this discovery was patentable under the patent laws of the United States.” The Telephone Cases – 126 U.S. 1 (1888) (emphasis added).
Interestingly, Bell would also be the inventor under the new AIA rules that the first-to-file owns the patent. Bell filed his patent application a few hours prior to Elisha Grey. If the first-to-file rule had been in place, it is likely that there would have been less than 600 lawsuits over this invention.
Going back to Obama’s speech, the US has just passed patent reform bill, helping innovation. Why, then, did Obama mention a new patent reform bill? Perhaps Obama’s comment was related to the huge judgment against Google, decided that same day.
January 24th, 2014
On April 5, 2012, the Jumpstart Our Business Startups Act (JOBS Act) became law. The JOBS Act seeks to “increase job creation and economic growth by improving access to the public capital markets for emerging growth companies.” Title III of the JOBS Act or the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” addresses modifications to the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) to permit securities-based crowdfunding.
Crowdfunding is a method of raising funds through the Internet for a variety of projects ranging from innovative new products to artistic endeavors such as books or movies. Popular crowdfunding sites include Kickstarter, Indiegogo, and RocketHub. Crowdfunding, however, currently can not be used in the U.S. to raise money by selling ownership interests in a business, since securities that are not publicly traded or registered with the SEC must fall under one of the exemptions listed under Section 4 of the Securities Act. Title III of the JOBS Act added Section 4(a)(6) to the Securities Act, providing an exemption for businesses to raise money by offering an ownership interest in their business via crowdfunding.
Equity based crowdfunding has the potential to become a very powerful tool for startups and small businesses. Traditional debt financing, such as a business loan from a bank, can be difficult to obtain since many startups and small businesses do not have sufficient assets considered to be suitable to lend against or an established financial history. In addition, the financial covenants that are commonly included in a commercial loan’s terms can put limitations on management’s ability to run their business as they see fit. Similarly, while a business can obtain substantial amounts of capital through equity financing from venture capital and angel investors, many business owners end up giving up more control of their business than they had planned.
Equity crowdfunding could become a viable alternative to raising capital through debt financing or more traditional equity financing. Raising capital via crowdfunding, however, will not be as easy as posting your business on a site like Kickstarter and watching the funds roll in. First, companies cannot begin raising capital via crowdfunding until the comment period for the proposed crowdfunding rules ends on February 3, 2014 and the SEC issues its final rules (you can view the 578 pages of proposed rules at http://www.sec.gov/rules/proposed/2013/33-9470.pdf). The final crowdfunding rules could be out as early as this spring, but could take longer to go into effect.
Second, the amount of capital that can be raised via crowdfunding from investors for equity is limited under Section 4(a)(6) of the Exchange Act. A business will not be able raise more than $1 million during a 12-month period. The amount an investor can invest in one company in any 12-month period is also limited. Investors with an annual income of less than $100,000 can only invest the greater of $2,000 or 5% of their annual gross income into a business. If the investor’s annual gross income is greater than $100,000, the investor may invest up to 10% of his gross income, capped at $100,000.
Naturally, all businesses using this new crowdfunding method are required to make disclosures to the SEC and potential investors. Information that businesses participating in securities-based crowdfunding are required to provide include:
- The name, legal status, physical address, and website;
- The names of the officers, directors, and anyone holding a 20% or more ownership interest in the company;
- A description of the stated purpose and intended use of the proceeds from the offering;
- The target amount, the deadline to meet the target offering amount, and regular updates on the progress of meeting the targeted amount;
- The price of the securities and the method of determining the price;
- Company financials and tax returns; and,
- The terms of the securities.
Title III also establishes liability for material misstatements and omissions from the disclosure requirements. Securities sold under the Title III crowdfunding provision are also generally not transferrable for one year which may not be appealing to many investors.
Finally, securities-based crowdfunding must be conducted through a registered broker or a “registered funding portal.” Funding portals are a new exemption under the new Section 3(h) of the Exchange Act. To be exempt, the funding portal must be a member of a national securities association registered under Section 15A of the Exchange Act. The funding portals will only be intermediaries for transactions and will not be allowed to give investment advice, provide compensation for solicitation or sale of securities referenced on its portal or website, or manage, possess, or handle investor funds or securities. It is uncertain whether existing crowdfunding platforms, like Kickstarter, that specialize in donation and reward based crowdfunding will leverage their brand recognition and existing platforms to facilitate Section 4(a)(6) security-based crowdfunding offerings. Both new issuers and crowdfunding intermediaries should proceed with caution while entering into the early days of security-based crowd funding.
Despite the compliance issues over transferring equity through crowdfunding, start-ups and businesses lacking tangible assets could find securities-based crowdfunding an attractive source of financing. Crowdsourcing can potentially offer businesses access to capital without the collateral requirements traditionally associated with debt lending while allowing owners to maintain more control over their businesses than is often the case when dealing with angel financers or venture capitalists. With over $1.5 billion raised through crowdfunding platforms in just 2011, securities-based crowdsourcing could become a major player in the financing of startups and small businesses. Despite the many potential advantages, the rules for equity-based crowdfunding are brand new and raising funds through this avenue should be approached with caution and with the aid of experienced counsel.
ADVERTISING MATERIAL. The purpose of this article is to provide information on legal developments that may affect your business and is not to be considered advice nor does reading this content create an attorney-client relationship.
 Currently, the Financial Industry Regulatory Authority (FINRA) is the only national securities association registered under the Exchange Act.
 15 USCS § 78c(a)(80
 Massolution, Crowdfunding Industry Report: Market Trends, Coposition and Crowdfunding Platforms (Abridged) (May 2012)
Image courtesy of Microsoft Office.com Clip Art
January 8th, 2014
California employers, take note: you are required to give notice to all your employees about the earned income tax credit at about the time you give them their W-2 or 1099 forms. If you have individuals who are independent contractors, give them notice as well.
Here is the recommended language, which you can print on a sheet that goes with the W-2s or 1099s, or a company-wide email:
NOTICE TO EMPLOYEES
“Based on your annual earnings, you may be eligible to receive the earned income tax credit from the federal government. The earned income tax credit is a refundable federal income tax credit for low-income working individuals and families. The earned income tax credit has no effect on certain welfare benefits. In most cases, earned income tax credit payments will not be used to determine eligibility for Medicaid, supplemental security income, food stamps, low-income housing or most temporary assistance for needy families payments. Even if you do not owe federal taxes, you must file a tax return to receive the earned income tax credit. Be sure to fill out the earned income tax credit form in the federal income tax return booklet. For information regarding your eligibility to receive the earned income tax credit, including information on how to obtain the IRS Notice 797 or any other necessary forms and instructions, contact the Internal Revenue Service at 1-800-829-3676 or through its Web site at www.irs.gov.”
If you want more information, go to the California Employment Development Department webpage.
January 7th, 2014
The cybersquatter is a parasite that benefits from an internet user’s confusion who thinks that they are accessing a popular website, when they really get something else. The US banned cybersquatting in 1999′s Anticybersquatting Consumer Protection Act (“ACPA”) and is codified at 15 U.S.C. § 1125(d).
Malaysia’s oil company, Petronas, discovered a cybersquatter who used the name of Petronas’ iconic twin towers in a domain name that forwarded to more adult-oriented fare. Petronas quickly demanded that the registrar for the cybersquatting domain name, Go Daddy, take down the “petronastower” website because Go Daddy was allegedly infringing upon Petronas’ mark. However, the website that Go Daddy hosted (but did not create) did not have any infringing content; only the domain name was infringing, and domain name disputes are subject to the Uniform Domain Name Dispute Resolution Policy (“UDRP”), an internet-wide policy required by the body that runs the internet, ICANN. While Petronas wanted Go Daddy to immediately shut down the cybersquatter, under UDRP rules, Go Daddy could not do so until it receives orders to do so from UDRP arbitration or a local court.
Petronas ended up suing Go Daddy for direct and contributory cybersquatting. In the trial court the claim of direct cybersquatting against Go Daddy died a quick and well-deserved death. Go Daddy only registered the site; it did not create it or its contents. Further, under the ACPA, a bad faith intent to profit from the cybersquatting is required, but Petronas had no evidence that Go Daddy (as opposed to the actual cybersquatter) had profited from the confusion. This profit requirement for a claim is not normal for intellectual property cases; in trademark and copyright infringement cases, intent to profit is a factor in deciding damages, not whether the defendant is liable.
The claim of contributory cybersquatting was more interesting from a legal perspective. Contributors to intellectual property infringement do not directly do any infringing; rather, they make it possible for others to do so. In 2000, the recording industry went after Napster, the first website that made it possible for users to (illegally) copy each other’s music. Napster did none of the copying itself. Instead, Napster made it possible for users to do the illegal copying themselves. Napster was found liable for contributory copyright infringement, and its illegal ways were soon shut down. (It maintains a diminished, albeit legal, presence on Rhapsody).
The Petronas trial court found that in the Ninth Circuit (covering from Idaho and Montana to all points of the United States west), “one is liable for contributory trademark infringement when he has knowledge of another’s infringement, and either materially contributes to or induces that infringement.” However, it concluded that Go Daddy’s actions did not contribute to the cybersquatting. While the Ninth Circuit affirmed the trial court’s decision, the Ninth Circuit ruled that without a specific ACPA provision allowing a suit for contributory cybersquatting, there could be no such claim:
“the ACPA does not include a cause of action for contributory cybersquatting because: (1) the text of the Act does not apply to the conduct that would be actionable under such a theory; (2) Congress did not intend to implicitly include common law doctrines applicable to trademark infringement because the ACPA created a new cause of action that is distinct from traditional trademark remedies; and (3) allowing suits against registrars for contributory cybersquatting would not advance the goals of the statute.“
Examining the ACPA, the Ninth Circuit found that the requirement of a bad faith intent to profit from cybersquatting prevented it from finding an implied contributory cybersquatting claim. Adding a claim for contributory cybersquatting, which would include a registrar’s normal activities, “would expand the range of conduct prohibited by the [ACPA] from a bad faith intent to cybersquat on a trademark to the mere maintenance of a domain name by a registrar, with or without an intent to profit.” The Ninth Circuit also found that the ACPA’s purpose of protecting consumers would not be served by creating contributory liability. It overturned several lower court decisions that have found a limited claim for contributory cybersquatting.
Justice was still done: Petronas got the cybersquatter shut down early. But Petronas also took a shot at Go Daddy, a deep and easily located pocket from which it could try to recover damages. Claims against Internet registrars like Go Daddy for contributory cybersquatting would force registrars into the role of policemen and guarantors. ICANN and the UDRP already act as the Internet’s domain name police, and forcing registrars into guarantors for those who would violate the rules would skyrocket costs and chill the freedoms for which the Internet is valued.
December 17th, 2013
By: Sharon Adams
YogaGlo Patent # 8,605,152, Figure 1
There has been much controversy in the yoga community about the recent issuance of a patent to YogaGlo. The YogaGlo patent contains claims for videoing a yoga instructor teaching students, with an unobstructed line of sight from video camera to the instructor.
There are so many problems with the YogaGlo patent that it’s hard to get them all into one article. The YogaGlo patent is susceptible to both defensive and offensive attacks. For example, one offensive approach might involve post-grant review proceedings under the new AIA procedures. More on the AIA procedures at a later time.
For now, this article discusses a defensive approach that might be used if YogaGlo claimed someone is infringing its patent. This approach involves an analysis of the scope the claims in the YogaGlo patent under the legal theory of “prosecution history estoppel.” The patent prosecution history (the objections made by the patent examiner and the responses made by applicant) shows that the YogaGlo patent claims have a very narrow scope. Therefore, except in very specific circumstances, this YogaGlo patent is unlikely to be the basis for a valid claim of infringement.
PATENTS ARE A PROPERTY RIGHT WITH DEFINED BOUNDARIES
Patents are a temporary monopoly granted as a right under the U.S. Constitution, Art. I, § 8, cl.8. Like any property right, the boundaries must be clear. Therefore, patent claims are frequently interpreted according to the exact words claimed — the literal words of each claim — and infringement is found only if the accused invention infringes each literal element of a claim.
In addition to literal infringement, courts have also recognized that the “language in the patent claim may not capture every nuance of the invention.” Therefore courts have developed the Doctrine of Equivalents. Under this Doctrine, the “scope of the patent is not limited to its literal terms but instead embraces all equivalents to the claims described.” Festo, 522 U.S. at 733.
The Doctrine of Equivalents was refined and clarified by the U.S. Supreme Court case of Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd, 535 U.S. 722, 731 (2002). Festo analyzed the scope of claims that had been amended during the examination proceedings, and how the Doctrine of Equivalents applied to these amended claims.
Claim amendment is a standard procedure during patent prosecution. In the United States, patent prosecution begins with filing a patent application containing drawings, a specification and claims with the U.S. Patent & Trademark Office. The application is assigned to a patent examiner. Frequently, after reviewing an application, the examiner will reject the claims for a variety of reasons. And, in a response to the rejection, applicants often amend the claims. This is what happened during the patent prosecution of the patent at issue in Festo, and also what happened during prosecution of the YogaGlo patent application.
In Festo, the patent examiner rejected the original claims and the applicant amended the claims to overcome the rejection. As the Court explained, in these instances, the claim amendment is “taken as a concession that the invention as patented does not reach as far as the original claim.” Festo, 535 U.S., at 734 (emphasis added).
The Supreme Court held that prosecution history estoppel arises when a claim amendment is made to secure the patent and the amendment narrows the patent’s scope. Unless an amendment “is truly cosmetic” then the specific reason for amendment is irrelevant, and the scope of the claims will be defined by the patent prosecution history.
In Festo, the Court recognized the tension between claim amendment and the Doctrine of Equivalents, stating: “By amending the application, the invention is deemed to concede that the patent does not extend as far as the original claim. It does not follow, however, that the amended claim becomes so perfect in its description that no one could devise an equivalent.” Festo, 535 U.S., at 738.
ANALYSIS OF YOGAGLO CLAIM 1 UNDER FESTO
Festo explained that prosecution history estoppel applies whenever there has been a claim amendment during patent prosecution. Once there has been such a claim amendment, the applicant bears the burden of rebutting the presumption of prosecution history estoppel.
Festo, 535 U.S., at 740-41.
The YogaGlo patent claims were amended during patent prosecution and thus, prosecution history estoppel is relevant to determining the scope of these claims.
Claim 1 of the YogaGlo patent claims a system for videoing a yoga class, with a video at the rear of the room at a height of “about three feet” and having an “unobstructed” line of sight to the instructor. (Claim 1 is illustrative of the claims in the YogaGlo patent, and is set forth at the end of this article, with bold indicating relevant claim amendments.)
Originally, when the application was filed, YogaGlo claimed a system for shooting a yoga video with a line of sight corridor to the instructor, and a plurality of students between the video camera and the instructor.
The patent examiner rejected original claim 1, stating that it was obvious under 35 USC §103, in light of other references claiming video instruction. The examiner referenced the Khalsa patent application (US 2002/0051958). As seen in the figure below, Khalsa shows video camera 104 filming instructor 101 who is teaching a class with students 103.
In addition, the examiner referenced Saleh (US 8,208,002). The figure below from the Saleh patent shows video camera 514 above the heads of the students, filming the presenter, located at presenter podium 504.
In response to this rejection (and other rejections), the applicant amended claim 1 and added the limitation that the video camera must be at the rear of the room at a height of “about three feet”. Applicant addressed the examiner’s rejections by noting that Salah has the camera placed close to the ceiling, while in the YogaGlo application, the camera was at student level. Applicant responded to the second reference by arguing that Khalsa does not disclose an unobstructed line of sight. Applicant’s statements and claim amendments are concessions by applicant that the patent does not cover these situations.
Applicant’s arguments and amendments were in response to specific rejections from the patent examiner. Applicant amended Claim 1 to add the limitation that the camera must be at “about three feet” to overcome the prior art. Thus, it is immediately apparent that any video of a yoga class where the camera is at ceiling height, as in Saleh, will not infringe the YogaGlo patent. Furthermore, because of prosecution history estoppel, any yoga video with a camera height other than “about three feet” is most likely not going to infringe the YogaGlo patent.
In addition to the claim limitations found in the prosecution history, there is also an inherent limitation in the claims involving time. The patent does not claim a time frame for filming a yoga instructor with the camera at about three feet height, and with an unobstructed view of the instructor. However, it is apparent that the only reasonable interpretation of Claim 1 requires that the entire class must be filmed in accordance with the claims of the patent. First, there is no indication in the specification, drawings or claims that the YogaGlo video camera moves at all. Therefore, it is unlikely that any yoga video using a mobile video camera, moving around the room for different views, would infringe the YogaGlo patent.
Second, because of existing prior art, if a mobile video camera pans though a shot where the camera is about three feet high and with an unobstructed view of the instructor, such a video would be unlikely to infringe the YogaGlo patent. There is ample prior art showing this filming technique. See, for example, the screen shot of a Forrest Yoga DVD, filmed before the filing date of the YogaGlo patent application. But, a discussion of the use of prior art is for another article.
Screen shot from the “Forrest Yoga with Ana Forrest, Strength & Spirit” DVD © 2005
Claim 1 states:
A system for automatically producing a video representation of a yoga class configured so a remote viewer enjoys the experience of being in a real yoga class, the system comprising:
- a studio having a front area and a rear area;
- an instructor position located in the front area and facing the rear area;
- a line of sight corridor disposed between the rear area and the instructor;
- a plurality of students at student positions, facing the instructor position, distributed across the studio between the instructor position and the image capturing device wherein the student positions do not impinge upon the corridor;
- an image capturing device for capturing video located in the rear area disposed to provide a participatory view from a height of about three feet by capturing through the line of sight corridor,an unobstructed video of the instructor in the instructor position including images of the students disposed along the sides of the line of sight corridor; and
- sound capture equipment to capture at least audio of the instructions given by the instructor disposed in the instructor position to the students disposed in the student positions.
During patent prosecution, the claim was similar to the non-bolded language. The bolded language indicates a significant addition to Claim 1.
California Creates New Corporate Structures Enabling For-Profit Corporations To Consider the Public Benefit
November 22nd, 2013
In January 2012, California created two new state corporate structures: (1) flexible purpose corporations, and (2) benefit corporations. Unlike traditional for-profit corporations, these new corporate structures are required to provide for benefit to the public. Unlike traditional non-profit corporations, these new corporate entities are not tax exempt. These new entities seek to straddle some of the rigid distinctions that existed under the previously permitted corporate structures.
Flexible Purpose Corporations
California was one of the first states to enact legislation permitting flexible purpose corporations. Corporations Code section 2500 et seq. sets out the legal parameters for California flexible purpose corporations. The articles of incorporation for a flexible purpose corporation must include a specific statement that:
“a purpose of the flexible purpose corporation is to engage in one or more of the following purposes…:
(A) One or more charitable or public purpose activities …
(B) The purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation’s activities upon any of the following: (i) the flexible purpose corporation’s employees, suppliers, customers, and creditors; (ii) the community and society; (iii) the environment.” Corp. Code § 2602.
The board of a flexible purpose corporation is required to annually prepare a report to shareholders containing, among other things, a discussion of the short term and long term objectives of the corporation; the material actions taken to achieve its special purpose objectives; the impact of those actions; and the extent to which the actions achieved the special purpose objectives for that year. Corp. Code § 3500(b)
As of the writing of this article, over 30 states have passed or have pending legislation creating the legal framework for benefit corporations. California Corporations Code section 14600 et seq. sets out the legal requirements for California benefit corporations.
In California, a benefit corporation “shall have the purpose of creating general public benefit.” Corp. Code § 14610(a). And, the benefit corporation “may identify one or more specific public benefits that shall be the purpose or purposes of the benefit corporation.” Corp. Code § 14610(b).
Like flexible purpose corporations, benefit corporations have specific accountability requirements. Benefit corporations are required to prepare a public benefit report, assessing the public benefit as measured by an unrelated third-party. In California, benefit corporations must prepare an annual report to shareholders explaining the standard used to measure the public benefit, the process for choosing the third-party evaluator, and the extent of public benefit created. Corp. Code § 14630(a).
B Corporations are a subset of benefit corporations. A corporation designated a “B Corporation” is a benefit corporation that uses a particular third-party, B Labs, as the evaluator. If a benefit corporation receives its third-party evaluation from B Labs, it is a B Corporation.
Thus, all B Corporation are benefit corporations, but not all benefit corporations are B Corporations.
Case Study: Ben & Jerry’s
The sale of Ben & Jerry’s to Unilever is often discussed in the context of Benefit Corporations. The facts show that Ben & Jerry’s stock was initially profitable. However, during the 1990s, it languished, and the stock was trading around $20 per share. Third parties, including Dreyer’s and Unilever, offered to pay substantially more per share to acquire all outstanding stock. Although the owners preferred not to sell, in 2000 Ben & Jerry’s accepted Unilever’s offer, and the corporation was sold.
Since that time, there has been debate among lawyers and others as to whether the company was required by corporate law to accept this offer. But, the fact is that Ben & Jerry’s was a for-profit corporation, bound by for-profit corporate law.
Leo E. Strine, Jr., Chancellor of the Delaware Court of Chancery, stated in “Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit”:
“[A]s a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.”
This is not new law — as is shown in Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919), where shareholders receiving a regular 60% annual dividend brought suit, and won, against Ford Motor Co. for failing to distribute the maximum wealth to shareholders in the form of a special dividend.
As demonstrated in Dodge v. Ford, corporate law requires maximizing profits to shareholders. This exposes the corporate leadership (and the corporation itself) to potential litigation when some shareholders disagree with decisions made by the corporate leadership. Henry Ford, and the Board of Directors at Ford Motor Co., had a plan to accumulate capital in order to expand production capacity. The higher production of cars would in turn lead to higher profits down the road.
Mr. Ford had good business sense, and Ford Motor Company accumulated capital according to the plan. However, the successful execution of the plan and resultant accumulation of cash proved to be a basis for the court to step in and alter the business plans of the corporation.
The court recognized that Mr. Ford personally was responsible for the phenomenal growth of the business. The court stated:
“Mr. Henry Ford is the dominant force in the business of the Ford Motor Company… A business, one of the largest in the world, and one of the most profitable, has been built up. It employs many men, at good pay.”
Despite Mr. Ford’s successful history in running the business, the court apparently believed it was better able to determine the future business plans of Ford Motor Company. The court reviewed the production plans, including the projected number of car sales and projected price for the cars, and determined that Ford Motor Company should not accumulate cash to increase production capacity. Instead, the court decided that the company should distribute the accumulated cash to the shareholders as a special dividend. This court decision remains good law, and is frequently referenced as a clear example that the primary purpose of a for-profit corporation.
Dodge v. Ford makes clear that the purpose of for-profit corporations is to maximize short-term wealth to its shareholders. Socially responsible purposes are not a relevant consideration when a board of directors makes decisions regarding the future actions of a for-profit corporation.
Returning to Ben & Jerry’s — after the third-party offers, Ben & Jerry’s stock price rose significantly and the company faced a decision: to accept one of the offers, or to refuse all offers, keep control of the company, and face potential litigation from shareholders claiming that the Board failed to maximize shareholder wealth. In the end, the board of Ben & Jerry’s apparently decided the prudent course of action was to sell.
Note however, that if Ben & Jerry’s had been a benefit corporation or a flexible purpose corporation, other factors related to the special purposes of the corporation could have legally been considered by the board of directors, and perhaps Ben & Jerry’s would not have been sold at that time.
Interestingly, in Oct 2012, Ben & Jerry’s became the first wholly-owned subsidiary of a publicly traded company to become a certified B Corporation.
The newly-formed B corporation now may legally state that one of its purposes is: “To make, distribute and sell the finest quality all natural ice cream and … promoting business practices that respect the Earth and the Environment.”
The primary purpose of a for-profit corporation is as stated in the name — it is for profit. Case law is clear that a corporate board of directors must make corporate decisions that ensure the primacy of this purpose. Consideration of other purposes, including purposes that benefit the public or the environment, is not permissible in for-profit corporate decision-making.
The sale of Ben & Jerry’s to Unilever illustrates some reasons why a business may prefer to organize as one of these new corporate forms. At the time of the Unilever offer Ben & Jerry’s was organized as a for-profit corporation and it took the prudent course of action — it accepted the offer from Unilever and distributed the wealth to its shareholders. Now, Ben & Jerry’s, as a subsidiary of Unilever, has re-organized as a benefit corporation and may legally consider environmental factors as part of its business model.
Other business entities may wish to form as a flexible purpose corporation or benefit corporation, to obtain the benefits of corporate law while also pursuing public benefit purposes.
We are delighted to announce and welcome Sharon Adams as Of Counsel at Bay Oak Law Firm, APLC
November 22nd, 2013
One of the major justifications small business owners have for not protecting their information more carefully is “who would want our information? We’re just a small firm that doesn’t handle anything important for anybody.” A recent security breach reveals the risks. A small software service that provides back-end software solutions for car-hire services had its data hijacked . The data included credit card numbers, pick-up and drop-off information, and client names. While actor Tom Hanks is described as a “VVIP” client (hardly surprising), others had data about their preferences, included those who smoked marijuana or had sex in the car. If you are a flower shop, it may not seem important, but if a nearby resident is repeatedly sending flowers to someone not his or her spouse, or sending “Sorry, I screwed up” bouquets to the spouse, that may become sought-after information if the resident becomes notorious later.
Starting next year, companies that have had compromised data relating to consumer user names and passwords will have to inform all its California customers of the data compromise. Senate Bill 46 was signed by Governor Brown in September, and will be effective as of January 1, 2014. Designed to minimize the effects of identity theft, the new notification requirements will give California consumers the chance to minimize the effects of the data compromise – and thereby reduce the potential liability for the website. However, there are real dangers lurking for the companies charged with protecting the information. Enacted as amendments to California Civil Code §1798.29, it will require that every California resident whose data is subject to a security breach be notified “in the most expedient time possible and without unreasonable delay.” Written in plain English, the notice of the security breach is supposed to inform the California resident:
- • of the type of the personal information that was subject to the breach,
- • when the breach occurred and similar information,
- • of the contact information for the leading credit reporting agencies,
- • if a social security or driver’s license number were subject to the breach, as well as
- • other possible ways of protecting from the consequences of the breach.
Data protected is far more than user names and passwords; they also include medical and insurance information, account numbers, and credit or debit card numbers. Notice also that while California residents are protected, it does not limit those required to give notice to California companies. Every website is covered, regardless of its location.
What to Do. If your company suffers a data security breach, avoid the temptation to hide it unless law enforcement specifically asks you to do so (there is a law enforcement exemption to the notice requirements). As soon as reasonably possible, notify everyone involved as soon as possible in a way that complies with the law (electronic notice is allowed). Do so for everyone, both California and non-California residents. The stick here is that failure to provide timely notification can make the company liable for millions of dollars in damages. This law is a true Trojan horse that requires the strictest care. If customers suffer an identity theft and did not get timely notice, this statute will likely allow them to seek damages against you. This could get very expensive, very quickly. Check with your insurance agent to see whether your general liability insurance can provide any protection. If (or when) it does, make sure there is sufficient protection – a $10,000 limit may not cover much. In the meantime, check with your IT people to make sure there are several layers of security for information that could cost you. It took a lot of trickery, and a wooden horse, to conquer the riches of Troy. To steal a fantastical amount of money 50 years ago meant burrowing into a bank vault. These days, untold riches can result from letting computers tap into accounts, while the felon is playing Angry Birds or Candy Crush Saga. Companies are now on the hook for the consequences of a successful data breach.
November 11th, 2013
Bay Oak Law’s own Daniel Gwozdz was recognized by the Bar Association of San Francisco on Veteran’s Day for his service in the US Army between 2000 and 2005. Dan was a scout for the legendary 10th Mountain Division, and served during operations in Operation Joint Guardian in Kosovo, and Operation Iraqi Freedom.
October 1st, 2013
Despite the federal economic shutdown, the federal courts will remain open, for now. They’ll reassess around October 15th — about the time when the debt ceiling is reached.