Regarding patents, Oregon continues to show a growth trend, Washington, reversed a downward trend and shows strong growth in 2012.

A note on patented verses assigned data.  The inventing of a patent does not tell who actually owns the patent, that is the “assignee.”  Swider Medeiros Haver LLP has always tracked both metrics as generally, the assignee exerts more control and more return on the asset.  So while an innovation may happen in a state, that does not mean the owner also resides in the state.  For example, a research facility may have a patent created in Washington, but the corporate assignee may be in Delaware.

Institutions that use Enterprise Resource Planning (ERP) software are under new and constant pressure to make systems cost effective. Discovery of organizational efficiency is the goal.  Saving money on the initial transaction and maintaining an ongoing relationship is a concern.  However, the advent of sophisticated cloud computing applications seems to give organizations, information technology managers and general counsel a great deal of complex decision-making.  ERP vendors are under pressure to maintain and grow market share.  ERP software has proven to save companies tens of millions of dollars when implemented and negotiated professionally. However, when negotiated and implemented poorly, ERP projects have contributed to the dissolution of publicly traded companies. When it comes to difficulties, there are eight recurring themes I’ve noticed in the last eighteen years in negotiating with these providers.

1. Advanced Planning is the Key

Ensure you know what you want and how that fits into the organization, and then name licensing rights accordingly. Recently, it seems software publishers themselves have lost control of the actual product names and associated rights in the product set.  This control loss follows when publishers release a product under one name, discover it is not ready, pull the product, and rename it under something else or integrate it into a new product.  The legacy of thinking on the publisher’s part and the difficulty in the licensee’s part in letting go of the use of the former product may be challenging.  From day one, track licensing types (whether by CPU, site, machine, role, cloud subscription, etc.) and link them to a specific product name and the function on the module and any other restriction, which may even be a named end user. Swider Medeiros Haver LLP uses a universal matrix that keeps varied products, functions, rebranding and licensing rights organized. Planning is needed with regards to: which infrastructure pieces are required; the mix of internal installation of software verses cloud solutions; and how they interface with calls to cloud-based applications. Planning for a de-install if things go sideways is key for this risk mitigation exercise. This includes knowing data portability issues of cloud applications. Periodic testing of what I call “drone” data applications to ensure the cloud application is not corrupting data is also part of a strong risk management strategy.

2. Get the Right Staff on the Project

Managing an ERP takes organized, systematic and savvy team members from information technology (IT), business units, finance and procurement functions. Experienced license and vendor relation managers with their 10,000 hours in are invaluable.  These people make these projects work; the software itself will not solve the problem unless the right people are involved. Finally, note that the procurement negotiators need to realize that these relationships are strategic, never a one-off commodity relationship, but a serial event attended by all the systems and complexities of human interaction.  Experts are required on the front side of the deal and especially in disputes.

3. Licensing Manager Focused on Cost Control

The names, functions and charges of the modules change so you need to ensure that you have a keen idea of what the product set is, who is using it and what the value proposition looks like. As mentioned in another context above, products or modules are pulled off the market, “perfected” and reintroduced years later. Many still pay maintenance / support fees (typically 12-25% on the base license cost) years after the product is de-installed or removed from the market. When managing licenses, pay for the value received.  Avoid paying maintenance / support fees on software you are not running. What is the benefit you are buying?

4. Avoiding Sales Driven Pressure

Licensee must ensure they understand and comply with license terms.  This is a question of process.  Meet with internal folks to verify understanding and have the licensor validate intended use.  In 2011, ERP vendors found themselves under pressure to make the ERP financial model work given the threat of cloud based applications. Now, more than ever, Swider Medeiros Haver is seeing compliance audit teams being used by the sales force to gain concessions. Sales teams are telling licensees they are out of compliance prior to an audit.  In a competitive market, it is not unheard of that the word of a long standing relationship with a trustworthy IT manager is questioned over that of a disgruntled former employee of the licensee.  “Trust but verified” is the rule as misplaced fear opens, and shuts, many wallets.  Using the audit for increased sales is a poor customer relationship management (CRM) tool.

5. Audit Accuracy

When it comes time for the annual “true up,” or even an unplanned audit, ensure you know exactly what the vendor is asking for and that they not only know the product set, but the terms of the licenses. An ambiguous request for an unknown product set can take months to complete, which costs time and money to the licensor, but more so for the licensee.

6. Flexibility

Can you flex up in use or withdraw usage?  Take or pay does favor the licensor but may also corrupt the relationship.  In some industries, CIOs are under similar pressures as if they are a utility operator and must charge fair and reasonable rates for a given business function, in others, cost is not an issue. Should ERP costs get sticky on the upside, reasonable rates become more elusive.  Above all the relationship must be flexible to allow for technological change and change in value and cost.  In cloud computing as with the internet, the consumer is king as choices and price pressure trend downward.

7. Corporate Changes

Corporate changes, mergers, acquisition, divestitures, going public or going private all may have ramifications on your software licensing and can be very costly.  For example, when a company goes public, some data may be pulled from the ERP application which may trigger costs.  If you are on a per data push license, real-time market data reporting, capacity data, usage and other data pushed to mobile devices can ring up charges if the licenses says it can. Determine if a data distribution is part of your intended use.  So a full audit on ERP licensing terms prior to any change in control is essential. So too, per seat charges may increase in a merger or decrease in an asset sale, this may trigger more seat charges, liquidated damages clauses or cause you to incur licensing costs.

8. It’s About the Negotiation

Astronomers say that an asteroid in deep space that is on a collision course with the Earth will miss the target by millions of miles if hit by the force of a paintball in that deep space location; so too can problems, including litigation, be avoided by the parties by negotiating a good manageable license before the software is installed; a few hours spent negotiating critical clauses can save millions down the road in Swider Medeiros Haver’s experience.  Above are a few of the recurring themes, which contribute to optimizing performance in the contractual relationship. All of the above can be addressed in the request for proposal or sales cycle and in any amendment to the original license. The key is to plan where the ERP interfaces with any cloud solution and knowing what rights transfer and when.

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Part of what we espouse at Swider Medeiros Haver LLP (www.swidermedeiroshaver.com) is treating the hopes, dreams and desires of innovative and creative people as a business. This is not more true than in selection of a trademark.  Choosing the right trademark can be complex and emotional.  It should be a strictly data driven logical decision.  A United States trademark protects a word, symbol, sound, device, or any combination thereof that is used as a source identifier for goods or in association with services.  In the latter case, the source identifier is sometimes called a service mark.

Choosing a “strong” mark can help avoid many problems in the future.  New businesses rightly labor over which mark to choose and the usual suspects may not be the best: surnames, geographical indicators, and generic names all wilt in the light of a creative and fanciful mark.  But determining what marks are “generic” and which are “fanciful” requires more than testing the mark with a focus group; a working knowledge of trademark law is needed.  A branding expert recently told me that the Madison Avenue style of focus group in selecting a good mark, one that will imprint itself in the mind of your customers and potential customers, is falling out of favor.  The issue is that strong marks are personal and must appeal on the individual level.  If we see someone like a mark, we will like it also.  Researcher Robert Cialdini calls this phenomenon “social proof” and its ultimate manifestation has the legal corollary of the “famous mark” doctrine.  A good trademark attorney is required to do the job right and nothing in this article should be acted upon as legal advice as your facts and circumstances vary; therefore, obtain competent counsel in your jurisdiction.

A trademark can be “strong” or “weak” depending on the mark selected and how it is used.  The following graphic demonstrates the relative strength of different types of marks.  Let’s assume we just opened a business and nobody has heard of these marks outside of a handful of people who shop at the store.

The look and feel of something that acts as a source identifier may also be protected by trademark law.  This “holistic” trademark is called trade dress, which is “essentially [a business'] total image and overall appearance.”[1]  Trade dress can encompass many features, including “size, shape, color or color combinations, texture, graphics, or even particular sales techniques.”[2]  Popular examples of trade dress are the shape of a car, the architectural decoration of a chain restaurant, or the layout of a retail establishment.

Trademark rights may be acquired by common law, state registration, and federal registration.  Common law trademark rights come into existence by mere use of the trademark in commerce.  To provide notice of common law rights, the superscript “TM” for trademark or “SM” for service mark should be used after the source identifier.  In the example Acme^TM Books, the word “Acme” followed by TM is a trademark.  In the example Acme^SM Window Washing, the word “Acme” followed by SM, is a service mark.  In both cases, the marks are used as adjectives.  A mark should never be used as a noun.  In addition to providing notice of common law trademark rights, the superscript TM or SM also helps a mark to acquire secondary meaning and to accumulate goodwill to the identified goods or services.  Acquiring secondary meaning is important because marks that are relatively “weak” can become stronger if they have been used for a period of time, and the consuming public has come to associate the mark with a particular good or service.

State trademark registration is often a non-selective process.  If the owner of a mark applies to register the mark in a particular state, and if the mark is not already registered in that state, the state will likely grant the registration without further inquiry.  Upon registration, the owner of the mark will have an exclusive right in that state to use the registered mark in conjunction with the goods or services described in the application.

Federal trademark registration is more rigorous.  The owner of the mark must submit an application to register the mark with the United States Patent and Trademark Office (“USPTO”).  The application must identify one or more fields of use, or “classes”, of goods and services that the mark identifies.  If an applicant desires to file for the same mark in different classes, a separate application must be filed for each class.  If the mark is not yet being used in commerce, the applicant may file an intent to use application.  If the mark is being used in commerce, the applicant must also submit a specimen showing how the mark is used.  The USPTO assigns an examiner to review the application and search for other similar marks.  If the examiner agrees that the mark is eligible for registration in the specified class, a notice of allowance is issued.  Often, the examiner disagrees and issues an office action.  The applicant then has several opportunities to make changes and negotiate with the examiner to get the application allowed.

Once the application is allowed, the mark will be placed on the Principal Register, and the owner will have the exclusive right to use the mark in the United States in connection with the goods or services specified in the registration.[3]  In some cases, a mark is not eligible to be placed on the Principal Register right away.  Such marks are placed, instead, on the Supplemental Register.  After five years of continuous use, the owner of a mark on the Supplemental Register can apply to have the mark moved to the Principal Register on the grounds that the mark has acquired secondary meaning.

Federal trademark registration[4] is expensive relative to state registration or common law rights.  However, federal registration is generally worth pursuing because it provides several advantages, including: (i) constructive nationwide notice of the trademark owner’s claim; (ii) evidence of ownership of the trademark; (iii) access to federal courts for enforcement; (iv) the ability to obtain trademark registration in foreign countries based on the United States registration; and (v) the ability to prevent importation of infringing foreign goods by filing the trademark registration with the United States Customs Service.

1.                  Geographical Indicators

Geographical Indicators (“GIs”) are indicators that identify a good as originating in the territory of which a member desires association, such as a farmer’s association, or a region or locality in that territory, where a given quality, reputation, or other characteristic of the good is essentially attributable to its geographic origin.  GIs are valuable to producers for the same reason that other types of trademarks are valuable – they operate as source identifiers and help to accumulate goodwill.  Because GIs are relatively weak marks, they must have acquired secondary meaning in order to obtain federal trademark registration.  An example is “Champagne” which is a region in France that makes sparkling wine.

2.                  International Trademarks

There are no “international” trademark registrations that provide protection in multiple nations around world, but there are various mechanisms and regimes that purportedly simplify the process of registering trademarks outside of the United States.  The Madrid Protocol is one such mechanism.  The Madrid Protocol is essentially a centralized filing system managed through the World Intellectual Property Organization (“WIPO”).  WIPO does not confer trademark rights, and the Madrid Protocol does not include substantive trademark law.  Rather, the Madrid Protocol provides a mechanism to simplify international registration of a trademark after it has been registered in the office of origin of one of the 72 participating nations.[5]  The United States participates in the Madrid Protocol.  For example, a United States business seeking trademark protection in the European Union, China, and Japan can file a single application through the USPTO (the office of origin for US-based applicants)[6] to WIPO’s International Bureau, and thereby potentially extend protection of the trademark to all three foreign jurisdictions.

Generally speaking, using the Madrid Protocol can lead to savings in translation costs, legal costs, and application fees.  The simplified application process thereby lowers one of the barriers to global market entry.  Filing for trademark registration under the Madrid Protocol is not, however, the most effective approach for all businesses.  There may be costs associated with clearance and prosecution that are not eliminated by using the Madrid Protocol.[7]  Companies focused on South East Asia or Latin America do not benefit as much from using the Madrid Protocol since many nations in these regions do not participate.[8]  Moreover, the Madrid Protocol does not yet allow applicants to “tweak” their international trademark registrations to localize branding, so a company that does this as part of its business strategy must be prepared to register anew with each change in its trademark.[9]

There are administrative benefits to using the Madrid Protocol in that it acts as a “one stop shop” for administrative procedures and maintenance, but there are also risks.  For example, an error in the original registration may be replicated in all Madrid Protocol applications filed in the member states.  If the original registration is attacked or cancelled within the contestable period (generally five years after issuance in the United States), all dependent Madrid Protocol registrations will also suffer because of the central filing.

[1] Blue Bell Bio-Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir. 1989). [2] John J. Harland Co. v. Clarke Checks, Inc., 711 F.2d 966, 980 (11th Cir. 1983). [3] In some circumstances, a trademark may provide exclusive rights beyond the scope of the goods or services specified in the registration.  If the additional goods or services are “logically similar” to the original goods or services, the owner of the mark may be able to claim that the additional goods or services are within the “zone of expansion” for the mark.  For example, if a business has a famous trademark for women’s scarves, and a second business begins using the same mark for women’s perfume, the first business may be able to prevent the second business from using the mark because women’s scarves and women’s perfume are both logically considered “first floor department store items.”  Scarves by Vera, Inc. v. Todo Imports, Ltd., 544 F.2d 1167 (2d Cir.1976). [4] Lanham Trade-Mark Act, § 43(a), as amended, 15 U.S.C. § 1125(a). [5] http://www.wipo.int/madrid/en/members/ last visited April 15, 2007.  [6] Applicants are required to submit their international application through an Office of Origin.  Protocol Article 2(2).  The Office of Origin is the office of the nation or organization responsible for mark registrations where the applicant is qualified to file.  Protocol, Article 2(3). An applicant is qualified to file in a jurisdiction by establishment, domicile or nationality, where establishment means a real and effective commercial establishment in the jurisdiction.  Protocol, Article 2(1)(i), (ii).  The Protocol provides guidance as to the meaning of these terms, but the contracting party’s laws determine their interpretation.  Guide to the International Registration of Marks, Part B, Chapter 2, supra, Section 02.04-02.08.  [7] SME’s or Micromultinationals?  Leveraging the Madrid System for International Branding, Roya Gafele, at http://www.wipo.int/sme/en/documents/madrid_system_branding.html , last visited April 15, 2007. [8] http://www.wipo.int/madrid/en/members/ , supra. [13] SME’s or Micromultinationals?  Leveraging the Madrid System for International Branding, Roya Gafele, supra.  [9] SME’s or Micromultinationals?  Leveraging the Madrid System for International Branding, Roya Gafele, supra.

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One of the challenges for any small business, including social enterprises, is the ability to raise sufficient capital to fund start-up or ongoing business operations.  Usually an entity’s ability to raise capital is limited in two areas:  first, identifying potential investors and securing the investment; and second, complying with the US Securities and Exchange Commission’s (SEC) regulations.  While securities regulations were implemented largely to protect potential investors and the public from fraud and other harmful business practices, the practical effect is that understanding and complying with the regulations in order to raise money – even where you have an identified investment source, or sources – can be complex and expensive.

For social enterprises, raising capital can be even more difficult.  Small businesses of all kinds are challenged to find financial support, but social entrepreneurs face the additional challenge of connecting with like-minded investors – investors who understand and support the social mission and are willing to invest in a company that prioritizes a social mission (in some cases, over increasing profits in a way that contradicts that mission.)

For these reasons new online models which enable entrepreneurs to market their projects inexpensively to many possible funders has gained popularity among social entrepreneurs.

Current Complexities and Limitations to Crowdfunding  

Some entrepreneurs are able to build effective campaigns on websites like Kickstarter and Indie GoGo, successfully raising enough money to complete their proposal.   Online platforms such as these have provided an avenue for project-based funding for innovative and creative individuals and entities.  But these sites are only useful to certain categories of entrepreneurs – those who have the type of offerings that can fit the specific project funding model criteria, with either tangible products (films, books, artwork, etc.) or intangible experiences (music performances, guest lectures, etc.) that can be given to the participant in exchange for their financial “investment.”

In these cases, supporters of such projects are not “investors” in the traditional sense.   While they may invest financial resources in a certain project or undertaking, they do so with the understanding that they will not share in the risk or reward of the company’s overall operations as a true investor would.   Their participation may help propel the business’ operations forward, but the only direct return they can expect is whatever item or experience is offered in connection with that project.

By contrast, an investor in the typical business scenario is interested in the opportunity to participate in the growth and financial success of a business in an ownership role.  In the securities sense, an investor has the expectation of a profit or potential profit.  An evidentiary instrument of this expectation is part of the investment agreement, typically in the form of a debt instrument, such as a promissory note, or an equity instrument, such as a stock certificate.  Along with this expectation, investors also share in the risks.  If the company fails, the investment is often lost.

Jumpstart Our Business Startups (“JOBS”) Act

For those social entrepreneurs that are seeking investors to participate in their company, the Jumpstart Our Business Startups (“JOBS”) Act, signed by President Obama on April 5, 2012, may open the door to opportunities for true crowdfunding, meaning the ability to raise capital by offering an ownership interest in the venture through crowdfunding portals.   The JOBS Act could help simplify the process of complying with securities regulations, as well as allow for a greater ability to promote the project to potential investors.

There are two noteable provisions of the JOBS Act that may be of interest to social entrepreneurs.  First, the JOBS Act amends Rule 506 of Regulation D of the Securities Act.  The practical effect of this change would allow more widespread advertising or general solicitation for investment, but only where all purchasers are “accredited investors.”  An accredited investor is a category of sophisticated purchasers that includes company officers and directors, banks, certain charities and trusts, and high net worth individuals. (For more information, on accredited investors, please visit http://www.sec.gov/answers/accred.htm)  So, for a social enterprise that is seeking investment specifically from accredited investors, this could allow for broader media and advertising campaigns which could also help the enterprise communicate its mission and build its brand at the same time it is seeking investment.

The more compelling piece of the JOBS Act however is the provision that would allow for crowdfunding.   This would allow entrepreneurs to seek funding through online portals, where they could connect with potential investors who could enter into equity purchase transactions.   The portal operator would be responsible for ensuring that investors have an appropriate understanding of the risks of investing, and that the investor has not exceeded the law’s limits on individual investment (which are based on the investor’s income.)

For now, we can only guess how the provisions of the new law will be implemented in practice.  The SEC requested additional time to implement the changes to Rule 506.  The draft changes are not expected until later this year.

Despite the potential benefits of the new law, the JOBS Act will not eliminate the transactional costs for the entrepreneur.   Companies using crowdfunding portals would still need to provide financial analysis and disclosures, and comply with ongoing reporting requirements.  Additionally, closely held companies who have never worked with outside investors may need additional assistance understanding and complying with proper governance and recordkeeping procedures.  For social entrepreneurs, this would also mean the need to better understand how to protect the social mission of the organization, perhaps by taking advantage of newer forms of entity available in some states, such as benefit corporations.

As always, before taking steps to offer or sell securities to any third party, all entrepreneurs (including social entrepreneurs) should seek advice from competent legal and financial counsel.  This article is not intended as legal advice, and may not be relied on as such.

When it comes to difficulties, there are five recurring themes Swider Medeiros Haver has noticed in the last eighteen years in negotiating with these providers.

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