Articles Posted in Start-Ups

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Last year, we featured several articles about California’s ride-sharing startups. Ride-sharing companies, such as UberX, Lyft, and Sidecar, are in the business of providing vehicles-for-hire. Using apps and other online programs, the companies connect those in need of rides with non-professional drivers driving their own cars. Two of the companies are making headlines, and the news is not so good. According to PandoDaily — the site of record for Silicon Valley — last month, a San-Francisco based Uber driver, Daveea Whitmire, allegedly verbally and physically assaulted one of his passengers who recorded some of the incident on his iPhone. Uber refused to investigate the matter, and insisted that Whitmire had passed the company’s standard background checks. Whitmire’s account has since been deactivated by Uber and evidence has emerged that Whitmire was a convicted felon.

Since Uber entered the market, its drivers have been accused of improper conduct at least three other times. The most recent incident involving an Uber driver occurred on New Year’s Eve, when an Uber driver hit and killed a 6-year-old girl who was crossing the street with her mother and brother. Uber instantly denied culpability. According to PandoDaily, “[i]n nearly all of [the] cases, Uber has responded in the same way, saying it’s not responsible for the conduct of its drivers.” In response to its decision not to investigate, Uber states that “we’re a technology platform that connects riders and providers, so it’s not our job to investigate.” Several Lyft drivers also have been accused of improper conduct, but, unlike Uber, the company apologized to its passengers and promised to investigate the situations; however, just like Uber, Lyft contends that it is not liable because it is merely a “technology platform.”

Uber and Lyft contend that they cannot be held liable for the drivers’ actions because their drivers are not employees but independent contractors. Last August, two Uber drivers filed a class-action lawsuit against the company, claiming that it is stiffing driver’s on tips. The suit addresses the very issue of worker misclassification and seeks recognition that Uber drivers are employees rather than independent contractors. Are Uber and Lyft correct when they say that they cannot be held liable for the actions of the drivers? Can they be sued for negligent hiring or vicarious liability? Even though we will not know the answers to these questions until a court rules, the headlines discussed above raise very important issues for startups and small businesses regarding the classification/misclassification of workers as employees or independent contractors and the importance of properly screening individuals before hire.

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From November 27, through December 15, 2013, hackers stole credit card numbers and encrypted debit card PIN data from as many as 40 million credit and debit cards swiped at Target. The security breach was the second-largest data breach in United States retail history. According to Target, it “alerted authorities and financial institutions immediately after it was made aware of the unauthorized access, and is putting all appropriate resources behind these efforts. Among other actions, Target is partnering with a leading third-party forensics firm to conduct a thorough investigation of the incident.” In a letter to customers, Target warned that customer names, credit and/or debit card numbers, expiration dates, and the CVV (security codes) were stolen. Target is facing significant financial ramifications including legal costs as well as owing money to the credit card companies that must reimburse their customers. Target also faces significant damage to its reputation.

Several months ago, Forbes magazine reported on class action lawsuits over the failure of businesses to secure consumers’ personal data, such as what occurred in the Target breach. While the filing of such cases may become the trend, it does not appear that they will be successful as recent cases have been dismissed for failure to prove standing. The judges in those cases have specifically ruled that the possibility of future injury in the form of an increased risk of identity theft, is insufficient to establish a present injury, and thus, plaintiffs do not have standing.

Interestingly, just two months before the Target data breach, California Governor Jerry Brown signed into law an amendment to California’s Security Breach Notification Act. According to Forbes, the new law requires “consumer notification if ‘a user name or email address, in combination with a password or security question and answer that would permit access to an online account’ was compromised. The law applies even if that information is not combined with a name, and applies to all types of online accounts.”

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In October, NetApp Inc. sued its rival, startup Nimble Storage Inc., in the U.S. District Court for the Northern District of California, alleging unfair competition, misappropriation of trade secrets, breach of contract, and five other counts related to the hiring by Nimble of former NetApp employees. NetApp accuses Nimble of recruiting its employees and encouraging them to steal confidential information, including sales materials, pricing models, and details about customers. According to the complaint, about 15 percent of Nimble’s employees — or 55 employees — and half of its executives are former NetApp employees. The suit was filed just weeks after Nimble filed to raise up to $150 million in an initial public offering. The company went public on December 13, and is led by former NetApp executive Suresh Vasudevan. Both Nimble and NetApp are in the business of providing data storage.

Startup Secrets

This lawsuit raises a very important issue for startups: Keeping secrets — particularly trade secrets — private. Startups should understand that there are four types of intellectual property that can and should be protected: (1) trademarks; (2) copyrights; (3) patents; and (4) trade secrets. A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. Examples of trademarks include McDonald’s golden arches symbol. Figures or characters, such as Geico’s talking gecko, can also be a trademark. A copyright protects works of authorship, such as writings, music, and works of art that have been tangibly expressed. A patent is a limited duration property right relating to an invention, granted by the United States Patent and Trademark Office (PTO) in exchange for public disclosure of the invention (we have discussed patent trolls many times in previous articles). A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. Examples of trade secrets include the recipe for Coca-Cola and KFC’s fried chicken. Both recipes are allegedly stored in secret safes and known only by a few select employees.

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Regardless of which political party you align yourself with, the Obama Administration’s October rollout of the Patient Protection and Affordable Care Act, commonly called the Affordable Care Act or Obamacare, was a disaster. The HealthCare.gov website was — and remains — overrun with traffic and technical glitches, and it appears that the number of Americans signing up for coverage is well below the number forecasted by the Administration. Six days ago, the Department of Health and Human Services Secretary Kathleen Sebelius announced an internal review of what happened and why, stating that the Inspector General for the Department would review what happened with the “flawed and simply unacceptable” launch of the website. The Department also released the latest enrollment figures, which shows a promising jump in sign ups during the month of November of 365,000, up from the 106,000 people who signed up in October.

The Affordable Care Act was signed into law by President Barack Obama on March 23, 2010. The goals of the Act are to (1) increase the quality and affordability of health insurance; (2) lower the uninsured rate by expanding public and private insurance coverage; and, (3) reduce the costs of healthcare for individuals and the government. Though there are many critics of the Act, including those who are opposed to specific provisions of the Act and the promised insurance reforms, and those who object to the way in which the Act was passed in 2010, it appears that one group of individuals may be applauding its implementation.

According to a report from the Robert Wood Johnson Foundation, the Urban Institute, and Georgetown University’s Health Policy Institute, the Affordable Care Act is expected to produce a significant increase in entrepreneurship. One of the major roadblocks to entrepreneurship in this country is difficulty obtaining health-insurance coverage on the open market. The report finds that because of the Affordable Care Act, the number of self-employed Americans will be 1.5 million higher in 2014 (an increase of 11 percent). Why? The Affordable Care Act means that access to quality, affordable health-insurance coverage is no longer tied to employment. The report finds strong evidence that without this barrier, the number of self-employed people in the United States will increase with “full implementation” of the Act and lead people to start their own businesses as self-employed entrepreneurs.

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It is becoming increasingly more difficult for startups to survive. According to one report, long-term survival rates for startup companies have been plummeting over the past 20 years: Between 1994 and 2010, survival rates have declined from a nearly 100 percent survival rate in 1994 to just 25 percent in 2010. Separate studies performed by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation — a nonprofit that promotes U.S. entrepreneurship — found that of all companies, only about 60 percent of startups survive to age three and approximately 35 percent survive to age ten.

So, why do some startups fail and how can you ensure a successful startup. Harvard Business School Professor Noam Wasserman has written a book called, “The Founder’s Dilemma: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.” In the book, he has identified some reasons why startups fail. One of the major reasons startups fail is that they are co-founded by individuals who have a prior social relationship, not a prior professional relationship. According to Wasserman, such teams end up in disaster. Another major reason startups fail is that the founding teams divide the equity within a month of founding when uncertainty is at its highest.

While there are some factors that are beyond the control of startups, but may contribute to their demise, such as the economy or new government regulations, there are some things startups can do to help create a more stable company and one capable of surviving. Following are some of the factors experts say are likely to accompany a successful startup: (1) Starting the venture as part of a team and preferably with someone whom you have a prior professional relationship; (2) Drafting a business plan; (3) Starting the business on a full-time basis; (4) Starting a larger company, i.e., larger initial investment, greater number of employees, and greater size of assets; (5) Starting in a notoriously favorable industry; (6) Obtaining work experience in your targeted industry prior to starting your company; (7) Implementing and using a marketing plan; and, (8) Ensuring that financial controls are in place. These are important factors for startups to consider and implement, but what about the founders themselves.

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The Sarbanes-Oxley Act

The Sarbanes-Oxley Act (the “Act”) was enacted on July 30, 2002, in response to several significant corporate and accounting scandals, including Enron. The Act set new or enhanced standards for all U.S. public company boards, management, and accounting firms. Its “long title” is “[a]n Act to protect the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” Besides requiring top management to individually certify the accuracy of financial information, the Act protects employees of publicly traded companies from retaliation for providing information related to possible acts of fraud against shareholders.

Example of Lawsuit Involving the Sarbanes-Oxley Act

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There is a growing trend in California and it is having a huge impact on startups: According to a recent article in The Recorder, a California business law publication, there has been a surge in bias claims against Silicon Valley technology companies. The figures show that employment suits against California technology companies doubled between 2000 and 2012, with discrimination suits making up the largest portion of those employment claims. Observers point out that there is a big problem among technology companies with age discrimination, sex or gender discrimination, and with African-Americans and Latinos being left out of hiring. The lack of diversity in the industry is particularly noticeable to plaintiffs lawyers, and young startup companies tend to be easy targets because they ignore employment laws in their rush to grow and succeed in the industry.

The issue of sex or gender discrimination in the industry made big news in 2012, when Ellen Pao, a former partner at the California venture capital firm of Kleiner, Perkins, Caufield and Byers, sued her former firm for gender discrimination, claiming that the firm pays and promotes men more than women, excludes women from key meetings, and fails to respond to reports of sexual harassment in the workplace. Since Pao filed her lawsuit, many more women have filed similar claims, and Pao’s attorney says he has seen an increase in gender discrimination claims based on violations of state and federal laws governing maternity and disability leave. Interestingly, Sheryl Sandberg’s book, Lean In: Women, Work, and the Will to Lead, has been credited with increasing demand letters from female employees of technology companies, who claim their employers unfairly denied them promotions. The figures seem to support the claims. According to the Institute for Women’s Policy Research, which analyzed data from the Bureau of Labor Statistics, in 2012, only 20 percent of software developers were female, earning 18 percent less than their male counterparts. On the other hand, the data also shows that the labor pool itself is male dominated, making it difficult to hire women in the industry: In 2010, women made up 57 percent of college graduates, but only 18 percent of computer and information science degrees.

Since 2010, technology companies have also been on heightened alert for age discrimination claims. That year, the California Supreme Court reversed a lower court’s grant of summary judgment to Google in a case filed by 54-year-old employee Brian Reid who alleged he was fired because of his age. Reid claimed his supervisor and other employees called him an “old man” and “old fuddy duddy.” The Supreme Court found that the remarks could be evidence of discrimination.

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Last month, we discussed the plight of FlightCar, a California car rental startup, currently involved in a lawsuit with the City of San Francisco. The City alleges that FlightCar, which rents out vehicles parked at the San Francisco International Airport by their traveling owners to other airport travelers, is undercutting rental car companies at the airport by acting like a rental car company but ignoring the regulations that govern them. The case of FlightCar highlights the situation facing three other California startup companies involved in the business of “ride sharing.”

What are “Ride Sharing” Companies?

Ride-sharing companies are in the business of providing vehicles-for-hire. The services basically use mobile-phone applications to connect people in need of a ride with everyday drivers. In California, the three largest startup companies providing the service are Uber, Lyft, and SideCar.

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Building a business is not easy. It takes a lot of time, energy and money. But if you are lucky, you end up with a successful brand that stands for quality. At some point, you may want to sell your company, allowing it to live on and grow with someone else. If you do plan to sell your business, there are a lot of things to consider.

Take for example the old California case of Mahlstedt v. Fugit. In this case, C. A. Fugit sold his orchard heating business to J. F. Mahlstedt. For five thousand dollars, Mahlstedt received all salable goods used in the business, all machinery used in the business, patents for e heater and items used in advertising. Mahlstedt also received current customer information and promised to keep prices similar. Fugit also promised to refrain from entering into the orchard heater business as a manufacturer or owner in whole or in part, for a least ten years or to act as a salesman or representative of any orchard heater company. This case focuses on the last promise.

About four years after selling his business, Fugit partnered with Mr. Fabrey, who also manufactures orchard heaters in the same area as Mahlstedt’s orchard. The created the Fugit-Fabry Company and advertised that the company was prepared to furnish replacement parts for orchard heating systems already installed or new systems. This use of the Fugit’s name to sell heaters, prompted Mahlstedt to sue Fugit for failing to comply with the sales contract.

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files.jpgThis year is set to be a banner one for anyone interest in intellectual property and related issues–including many start ups. That is because on March 16th, the U.S. will switch to a “first to file” system pursuant to the America Invents Act (AIA). This will apply to all patent applications filed on or after that start date.

As discussed in a helpful TechCrunch primer on the situation, this is a change from our current “first to invent” system. In the old system while filing was obviously important, rules made it more likely that one who invented something first, even if they didn’t file first, to ultimately obtain the patent.

New Law
What does this mean? Essentially, the idea is straightforward: the first inventor to file a patent application for an invention will be awarded the patent. This is the case regardless of whether another actually invented the item first. In other words, filing in a timely manner because much more important than ever before.

Importantly, there is one exception to this general rule built into the law. The “first to file” concept does not apply where an inventor makes a public disclosure of his invention before the first patent application is filed. The public disclosure itself does not end the matter. To take advantage of this exception the inventor must still file a patent application within one year from the date of the disclosure.

This exception is incredibly important, because it is intended to act as a limit on “patent trolls.” In other words, even though filing increases in importance, it still may not be possible for outsider to swoop in and steal a patent, just because they beat an actual inventor to the office. So long as the inventor made some public disclosure–a press release, even a blog post–then they still may be protected so long as they file within a year.

Therefore, it may be easiest for business start-ups concerned with how this law might affect them to consider that there is basically two paths to “win the patent race.” The primary method, as implied in the law, is to be the first to file a patent application. The second is the be the first to publicly disclose the invention. But even then, it is not necessarily that simple. That is because even if you file first, it won’t matter if someone made a public disclosure within a year. Alternatively, even if you make a public disclosure, it won’t matter is another had already filed by time you disclosed.

While the general change to a “first to file” system may seem logical, it will undoubtedly have significant changes on how the process works. For one thing, it will make it critical for many companies–particularly those in competitive sectors–to file as early as possible

Secure Legal Help
Needless to say all intellectual property issues are quite complex, and with laws changing frequently, it is impossible for any business, including start-ups to navigate these complex waters on their own. For help on any number of legal issues affecting start-ups in our area, please contact the Sacramento business attorney at our firm for tailored guidance.
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