Strictly Business

Last December, I wrote a series of posts about what was – and remains – a hot topic in patent law:  patentable subject matter under 35 U.S.C. § 101.   The law on patentable subject matter often boils down to whether the invention is so abstract or such a product of nature that the invention is not patent eligible even if it meets the other statutory requirements of being new, not obvious and useful.  Since those posts, the Supreme Court has issued another decision further limiting patentable subject matter in Mayo Collaborative Servs. v. Prometheus Labs., Inc.  I believe that patent eligible subject matter is going to continue to be a thorny issue for many software, medical diagnostic and biotechnology inventions.  However, I believe that in the majority of cases involving mechanical devices, medical devices, and new chemical compositions, patent eligibility under § 101 is going to be a non-issue, that is most inventions in these fields will readily qualify under § 101.

In Mayo, the invention related to the discovery that a particular concentration of drug metabolites in the blood should be targeted by doctors when they prescribe a particular class of autoimmune drugs.  (A drug metabolite is a chemical formed when the body digests – i.e., metabolizes – a drug.  In the pharmaceutical industry, it is extremely common to identify metabolites and their concentrations during clinical testing).    In particular, each claim of the plaintiff’s patent included (1) an administering step that instructed a doctor to administer the drug to his patient (2) a determining step that told the doctor to measure the resulting metabolite levels in the patient’s blood and (3) a wherein step that described the target metabolite concentration and informed the doctor to adjust the patient’s dosage if the patient’s metabolite levels were outside of the target concentration.

Addressing the patent eligibility issue, the Court repeated the commonly recited proposition that laws of nature, natural phenomena and abstract ideas are not patent eligible.  The court then found that the heart of the invention — namely, the discovery of the relationship between the concentrations of certain metabolites in the blood and the likelihood that the prescribed drug dosage would prove ineffective or cause harm — was simply a law of nature.  Further, in the Court’s view, the three recited steps failed to “add enough” to render the claimed method a patent-eligible process.  The Court found that the first step referred to a pre-existing audience, namely, doctors that already administer the drugs, the second step merely told doctors to measure metabolites in the blood, and the wherein step merely informed doctors about the law of nature.  Accordingly, the Court held that the claimed process was not patent eligible.

In my view, the Mayo decision is problematic for a few reasons.  For example, while it’s easy to say that laws of nature, natural phenomena and abstract ideas are not patent eligible, it’s often difficult to apply this rule in practice and conclude when an invention “adds enough” to render a claimed method patent eligible.  Indeed, perhaps for this reason, the Federal Circuit had crafted a machine-or-transformation patent eligibility test in which a claimed process was generally patent-eligible if it was implemented with a machine or transformed matter, and patent ineligible if it was not implemented with a machine or transformed matter.  Additionally, in my view, the proper way to strike down the patent in Mayo was on obviousness grounds.  It has been known for decades that it’s important to measure drug metabolite levels and at the time of the invention at issue in Mayo, scientists knew that the metabolites at issue were correlated with drug safety and effectiveness.  Though the particular target levels were not known, the methods to test metabolite levels were old and there was clearly a motivation to use these known methods to find the target levels.

It goes without saying that how the lower courts will apply Mayo will be important for companies in the software, diagnostic and biotechnology industries.

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© 2012 Shane V. Cortesi — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

This post is the fourth in a series written by Nashville attorney Shane Cortesi on patent protection.

As I mentioned in my previous post on patentable subject matter under 35 U.S.C. § 101, the law in this area has been in a state of flux over the last few years, especially in the case of process patents.  This week, I’ll discuss recent § 101 cases in the software and life science fields.  The common theme in both fields is that enlisting the help of a creative patent attorney may increase a patent applicant’s chance of meeting the patentable subject matter requirement.

Patentable Subject Matter for Software Inventions

Because the heart of software-related inventions often involve only the tangential use of a machine, software-related inventions often present difficult patentable subject matter questions.  Fortunately,  recent Federal Circuit cases involving the patentability of software-related patents provide a helpful road-map to patentability of these inventions.

For example, in Cybersource Corp. v. Retail Decisions, Inc., the first claim of the patent was directed to a method of detecting credit card fraud between a consumer and a merchant over the internet.  In particular, the method relied on comparing the internet address information used for a particular purchase to internet address information used in previous transactions with the same credit card to see if the internet address information in the present and past transactions was consistent.  The second claim was directed to a computer readable medium (e.g., a disk or other data storage device) containing program instructions for a computer to perform the method.  The Federal Circuit invalidated the first claim, reasoning that the claim was directed to an abstract idea and that even if the internet could be viewed as a machine, it was clear that the internet itself could not perform the claimed method.  The patent eligibility of the second claim at issue, in my opinion, was a closer question.  The court first held that this claim was in reality, a process claim, instead of a machine claim, because the invention underlying the claim was a method for detecting credit card fraud – not a manufacture for storing computer readable information.  The court then found the claim failed to meet either prong of the machine-or-transformation test because the claim merely required the manipulation or reorganization of data (as opposed to transformation of data) and the incidental use of the computer did not impose a meaningful limit on the claim’s scope.  Thus, the court held that the second claim was also directed to non-statutory subject matter.

From a patent attorney’s perspective, perhaps the most important part of the Cybersource decision is the manner in which it distinguished an earlier case that found a software-related invention patentable subject matter.  In particular, in Cybersource, the court distinguished the instant invention from the patented invention in its prior Research Corp. Techs., Inc. v. Microsoft Corp. decision, which involved a method of creating digital images.  According to the court, the distinction was that unlike the invention in the instant case, the method found to constitute patentable subject matter in Research Corp could not, as a practical matter, be performed entirely in the human mind.  Consistent with this distinction, the Federal Circuit in the recent Ultramercial, LLC v. Hulu, Inc. decision upheld the patentability of an 11-step process of distributing copyrighted contents over the internet.  Significantly, the process could not be performed in one’s head but rather required intricate and complex computer programming and required the use of an internet website.  Thus, the claim drafting tip from these recent decision seems to be the following:  ensure that the claimed method cannot be performed entirely in the human mind and, to the extent possible, require the use of intricate and complex programming and the use of a machine.  Of course, care should be taken so that the required use of additional programming steps and/or the required use of a machine do not allow competitors an easy opportunity to design around one’s invention.

Patentable Subject Matter for Life Science Inventions

In my view, the following invention have been subject to the most amount of debate when it comes to patentable subject matter in the life sciences:  1) man-made organisms; 2) naturally occurring materials (e.g., DNA); and 3) the use of diagnostic methods.  Ever since the Supreme Court’s 1980 decision in Diamond v. Chakrabarty, which held that a man-made organism was patent-eligible, courts generally have held that man-made organisms and natural compounds in isolated form are patentable subject matter.  (An exception is that, due to the enactment of recent legislation, human organisms are not patentable subject matter unless they were claimed in a patent issued before September 16, 2011).  Consistent with this precedent, in July of this year, the Federal Circuit held that isolated DNA molecules constitute patentable subject matter in the case Ass’n for Molecular Pathology v. U.S. Patent and Trademark Office.

In my view, the more difficult patent eligibility questions in the life sciences arena seem to involve diagnostic methods.  For example, in Classen Immunotherapies, Inc. v. Biogen Idec, the three patents at issue were related to a method of reducing the risk of chronic immune-mediated disorders by choosing a particular immunization schedule.  According to the patentee, two of the three patents were infringed when a health care provider reads the relevant literature and selects and uses an immunization schedule that is of lower risk for the development of a chronic immune-mediated disorder.  Meanwhile, the patentee argued that the third patent was infringed when a person merely reviews relevant published literature, regardless of whether that person selects and uses an immunization schedule.  Reviewing the patentability of the three patents under § 101, the Federal Circuit held that the first two patents involved the physical step of immunization and thus were patent eligible.  Meanwhile, according to the court, the third patent was merely an unpatentable mental process.

Upon a careful review, Classen suggests that patentability under § 101 may often depend on the ingenuity of the patent attorney in drafting the claim, by, for example, including in the claim the recitation of a physical step or the implementation of a particular machine.  Indeed, the concurring opinion in Classen admits as much, stating:  “[E]ligibility restrictions usually engender a healthy dose of claim-drafting ingenuity.  In almost every instance, patent claim drafters devise new claim forms and language that evade the subject matter exclusions.”

Thus, as in the software field, enlisting the help of a creative patent attorney may increase the chance that a  life science invention will be patentable subject matter.

Finally, it probably goes without saying, but I’ll say it anyways.  Patent eligibility is a rapidly evolving area of the law and I encourage all that are interested to continue monitoring court decisions in this area.  Indeed, the Supreme Court will hear oral argument in yet another patentable subject matter decision in December and it will be important to hear what the court has to say on patent eligibility in the ensuing opinion.  The case is Prometheus Labs. Inc. v. Mayo Collaborative Serv. and the case involves the patentability of diagnostic patents.

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© 2011 Shane V. Cortesi — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

This post is the third in a series written by Nashville attorney Shane Cortesi on patent protection.

As I mentioned in my earlier article concerning the requirements for obtaining a utility patent in the U.S., in addition to being useful, novel and not obvious, an invention must constitute patentable subject matter under 35 U.S.C. § 101.  In this article, I will briefly discuss the historical context of the patentable subject matter requirement.  Next week I will discuss the application of the requirement in two fields where patent eligibility under § 101 is commonly an issue:  software and biotechnology.

35 U.S.C. § 101 contemplates four categories of patentable subject matter:  processes, machines, articles of manufacture and compositions of matter.  The statute provides:  “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”  Despite the broad wording of the statute, courts have engrafted exceptions to the statute such that at least not all processes and compositions of matter that satisfy the conditions and requirements of Title 35 (e.g., novelty and nonobviousness) qualify as patentable subject matter under § 101.

A good starting place to discuss the evolution of the patentable subject matter requirement is the landmark 1998 decision State Street Bank & Trust Co. v. Signature Fin. Group, Inc.   There, the U.S. Court of Appeals for the Federal Circuit held that a patent directed to a data processing system that relied on a mathematical algorithm for calculating the share price of mutual fund investments was directed to patentable subject matter.  In so holding, the court implied that any invention that produced a useful, concrete and tangible result was patentable subject matter and expressly rejected the proposition, held by some commentators, that methods of doing business as a class were unpatentable.

The State Street decision led to a tidal wave of business method patent applications being filed in the U.S. Patent and Trademark Office (USPTO) ranging from methods of training janitors to dust and vacuum using video displays to methods of using color-coded bracelets to designate dating status.  Because business methods are commonly invoked in practice without being described in printed publications, the USPTO was ill-equipped to assess the novelty and non-obviousness of business method patent applications using its traditional search procedures.  Criticism over business method patents began to mount.

Finally, in 2008, the Federal Circuit, sitting en banc, revisited the patentable subject matter requirement in the case In re Bilski.   In In re Bilski, Mr. Bilski’s invention was directed to a strategy of buying and selling commodities so as to hedge risk.  Significantly, the invention did not require the use of a machine at all, let alone any particular machine.  The Federal Circuit, speaking through Chief Judge Michel, set forth a new, bright-line “machine-or-transformation test” for determining the patent eligibility of processes.  According to the court, to qualify as patent eligible, the process must be 1) tied to a particular machine or apparatus; or 2) transform a particular article into a different state or thing.  The court further stated that processes qualifying under this test may nonetheless be ineligible if the process had no other utility than operating on the particular machine, the machine was insignificant to the claimed process, or the machine was not central to the process’s purpose.   Finding that Mr. Bilski’s invention met neither prong of the machine-or-transformation test, the court held that his patent was invalid under § 101.  In so ruling, the court made clear that a mere-field of use limitation (here, the limitation to the commodities industry) was insufficient to render an otherwise ineligible invention patent eligible.  Mr. Bilski then appealed to the U.S. Supreme Court.

On review, the Supreme Court reiterated that laws of nature, physical phenomena, and abstract ideas are not patentable. The Supreme Court then held that the Federal Circuit’s machine-or-transformation test merely provided a useful and important clue to patent eligibility under § 101, and, thus, was not the sole test for determining whether an invention is a patent-eligible process.  Reaching the facts at issue, the Supreme Court held that Mr. Bilski merely sought to patent abstract ideas, namely the concept of hedging risk and the application of the concept to energy and other commodity markets, and, thus, the invention was unpatentable under § 101.

In my view, the Supreme Court’s opinion in the Bilski case did little to clarify the law on patent eligibility under § 101.  After all, the opinion leaves open the issue of when a process is sufficiently abstract to render the process unpatentable.   Fortunately, for patent examiners and applicants, the USPTO has provided guidance on patent eligibility under § 101 to assist patent eligibility determinations in the patent application process.  In short, consistent with the Supreme Court’s Bilski opinion, the guidance from the USPTO states that the machine-or-transformation test remains an important clue to patent eligibility.  Indeed, according to the guidance, as of its publication on July 27, 2010, no court presented with the issue had ever held that a process that failed the machine-or-transformation was patent eligible under § 101.  Nonetheless, the guidance provides a number of factors, apart from whether the process transforms matter or relies on the use of a machine, that play into the patent-eligibility determination, at least from the USPTO’s perspective.

Finally, it’s important to keep in mind that whether the invention constitutes patentable subject matter is only a close question in a subset of patent cases.  Inventions in most industries (e.g., electronic hardware, medical devices and pharmaceuticals) will usually readily qualify as patentable subject matter.  The more difficult questions arise when the invention is a diagnostic method, a method of doing business or a program that can be performed in someone’s head.

Next week, I’ll discuss recent post Bilski decisions in the life science and software fields.

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© 2011 Shane V. Cortesi — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

This post is the second in a series written by Nashville attorney Shane Cortesi on patent protection.

As I mentioned in my previous article where I provided an introduction to patent protection in the U.S., there are 3 types of patents:  utility patents, design patents, and plant patents.  This article deals with the requirements for the most common type of U.S. patents, utility patents.

To obtain utility patent protection in the U.S., an invention must be new and not obvious in light of the prior art.   “Prior art” includes publications and patents published before the inventor invented his invention, certain patent applications filed before the Applicant’s date of invention, and public use and public knowledge before the inventor invented his invention.  In addition, a sale, public use, or publication by anyone (even the inventor himself) more than 1 year prior to the date the inventor filed his patent application can prevent an inventor from obtaining a patent.  Finally, in some cases, the granting of a foreign patent before an inventor filed his U.S. application and the prior invention of another in this country before the inventor invented the invention himself can prevent an inventor from obtaining a patent.

In my experience, the aspect of U.S. patent law that most surprises inventors is that their own public use, sale or publication more than one year before a patent application is filed can preclude one from obtaining a U.S. patent.  The standard is even more stringent when it comes to obtaining patent protection overseas because in many countries absolute novelty is the rule and any public disclosure prior to the filing of a patent application can prevent one from obtaining a patent.  Depending on the circumstances, I often find it advisable for an inventor to 1) file a patent application and/or 2) have third parties sign a non-disclosure agreement (NDA), prior to disclosing his/her invention to others.

In addition to being new and not obvious, an invention must constitute patentable subject matter under 35 U.S.C. § 101.  Outside of software and processes that can be performed in one’s head, inventions in most industries (e.g., electronic hardware, medical devices and pharmaceuticals) will usually readily qualify as patentable subject matter.  The more difficult questions arise when the invention is a diagnostic method, a business method or a program that can be performed in someone’s head.  The law on patentable subject matter in the United States is continually evolving, and next week, I will devote a multi-part series to what constitutes patentable subject matter.

Finally, the invention must be “useful.”  In other words, the invention must have a specific, substantial and credible utility.  In most cases, the utility requirement is readily met.  The more difficult questions arise when the invention relates to a chemical or biologic for treating a particular disease and there is little or no experimental evidence showing that the chemical or biologic is useful for treating that disease.

In my experience, I have found that preliminary patentability opinions are often helpful to inventors in determining whether to invest the time and resources in filing a utility patent application.  These opinions usually can be done at a fraction of the price of filing a patent application and generally consist of two phases:  a search performed by a professional patent searcher and an analysis performed by a patent attorney advising the client on the likelihood of obtaining patent protection in view of the search results.

Finally, please note that the above discussion concerning prior art relates to patent applications filed before March 16, 2013.   Due to a change in law, namely the enactment of the American Invents Act (AIA), the scope of “prior art” for patent applications filed on or after March 16, 2013 will differ.  I hope to explore the AIA in a multi-part series on this blog later this year.

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© 2011 Shane V. Cortesi — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

This post is the first in a series written by Nashville attorney Shane Cortesi on patent protection.

Patents are important to companies for at least two reasons.  First, patents held by the company can serve as barriers of entry in preventing competitors from introducing similar products.  Second, patents held by third parties can prevent the company from introducing a product or, potentially, even entering a market altogether.

The most common type of patents are utility patents.  Utility patents are by far the most common type of patents granted in the U.S. and protect useful processes, machines, articles of manufacture, and compositions that are new and not obvious.   For a further discussion of these requirements, see my article on the requirements for obtaining a utility patent in the U.S.   Types of inventions that are commonly protected by utility patents include medical devices, pharmaceuticals, machines and electronics.  In addition, in some cases, it is possible to patent the use of software-based inventions.  Unless certain exceptions apply, once issued, a utility patent will remain in effect until 20 years from the filing date of the first non-provisional application that gave rise to the utility patent.

Another type of patents are design patents.  Design patents protect new, original, and ornamental designs.  In general terms, design patents protect the way an article looks.  If the design of an article is primarily dictated by the article’s function, a design patent probably is not the appropriate form of protection.  Subject matter that potentially can be protected by design patents includes things like furniture (e.g., leg lamps), jewelry, and even potentially the shape of electronic devices.  Design patents remain in effect until 14 years from the date the patent issued.

The third and final type of patents are plant patents.  Plant patents are granted to those discovering and asexually reproducing a distinct and new variety of plant, other than a tuber propagated plant or a plant found in an uncultivated state.  Plant patents form a small percentage of the issued U.S. patents.  Like utility patents, unless certain exceptions apply, once issued, a plant patent will remain in effect until 20 years from the filing date of the first non-provisional application that gave rise to the plant patent.

In the United States, all three types of patents are granted by the federal government.  Moreover, as opposed to granting one the right to practice an invention, patents grant one the right to exclude others from practicing an invention.  In other words, while a patent may be used to block others, the granting of a patent does not mean that the inventor himself is free to practice the invention without infringing a patent of an earlier inventor.  If you are concerned about patents held by third parties, a freedom to operate opinion, obtained from an attorney, may help alleviate some of your concerns.

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© 2011 Shane V. Cortesi — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

As I’ve mentioned before, it’s very important for growing companies to comply with securities laws, even during the initial seed and friends and family rounds of financing.  The possibility of lawsuits and even fines and other criminal penalties give founders a strong incentive to comply with the law.  But there’s another consequence that could result from non-compliant sales of securities: loss of the company’s IP.

Often, co-founders are issued stock or other ownership interest in exchange for a contribution of intellectual property.  That issuance of stock is a securities transaction.  If it is not done in compliance with the law, the purchaser of the security (in this case the co-founder who contributed the IP) has a right of rescission, which means that he can sue in court to have the deal unwound.  In most securities transactions, where stock was issued in exchange for cash, this would simply result in a monetary award of damages.  However, if the stock was issued in exchange for intellectual property rights, then a successful lawsuit by a the founder who contributed the IP could result in the company losing its rights to its intellectual property, potentially crippling the company.

When could this arise?  Certainly a partnership dispute could cause a departing co-founder to institute such a lawsuit to gain additional leverage in his or her departure.  If a company is doing very well, then normally, even if the departing partner alleges a securities law violation, the company can simply pay him cash for his shares.  But if a rescission action for the securities law violation would result in the loss of mission-critical IP, then the departing shareholder will have an enormous amount of leverage in negotiating his departure.  He could extract significantly larger concessions than he otherwise would have been able to if his remedy had simply been to have the cash he put into the company returned.  In addition, even if there are no disputes, potential investors doing due diligence on the company may be scared away because of the potential cloud hanging over the company’s most important assets.

Therefore, once again it is important to emphasize that start-ups should not ignore securities laws in their early rounds of financing, or even in transactions with their co-founders.  Failing to comply with the law creates a ticking time bomb for a company that can threaten its business in the future.

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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

One of the things that business people find most objectionable about the legal industry is the high cost of legal services.  Bills often exceeds estimates, sometimes and by many multiples. However, while many clients think that the size of the legal bill is something that is completely outside their control, the fact is it’s not.  There are ways for clients to effectively work with their attorneys in a manner that can help keep the legal bill low.  Recently, I came across an article by Tim Greene, founder of the site Fizzlaw.com,  that has some great suggestions on ways clients can keep legal bills low. Here’s a link to his article: http://nyreport.com/node/81790.  Below are the five suggestions Tim had in his article. (The sentences after each suggestion are my own thoughts; you should read the original article to get Tim’s):

1. Avoid paying for a learning curve.  While your brother-in-law may be a great wills and estates attorney, he’s probably not the best choice for the Series A stock offering of a startup.  Sometimes lawyers will take matters that they are not qualified to do and learn along the way.  This can get expensive.  Therefore, clients should use an attorney who has experience in the kind of law and transaction that the client will be hiring him for.

2. Ask for a flat-fee arrangement (at least for a portion of the work).  I have mixed feelings about this one.  Sometimes flat fee arrangements can save a client money, and sometimes they don’t.  In any case, it’s always worth exploring, but realize that both the attorney and the client will need to make sure that the engagement letter includes precisely what is and is not included in the price.  This can get complicated and is sometimes not worth the time spent.  In my own practice, I’m always willing to discuss flat-fee arrangement, but I always let clients know that such arrangements do not necessarily save the client money, but are useful when a client is on a budget and needs certainty.

3.   Establish a budget up front, and stick to it.  It’s important for both the attorney and the client to regularly keep in touch regarding how quickly hourly charges are racking up.  Monthly invoices are strongly suggested, but if the matter is short and moves very quickly,  more frequent communication is sometimes necessary.

4. Do as much as prep work as possible.  Many clients initially go in thinking that because they have a high-priced firm doing their work, they can leave all of the little tasks like organizing the documents and compiling information to the attorneys.  After all, what are they paying them for?  It just seems like good customer service, until the client realizes that they paid hundreds of dollars per hour to get that grunt work done.  I always offer my clients the ability to work on parts of the matter that don’t require an attorney if they are on a tight budget.

5.   Communicate efficiently (especially when being billed by the hour).  Some clients tend to be a bit talkative with their attorneys at first.  Then the first invoice arrives and that comes to an end.  But this suggestion goes beyond merely not being too chatty.  It’s also important for clients to organize their thoughts and documents in advance of a meeting to keep it as short and efficient as possible.

In addition to Tim Green’s five suggestions, I have one additional suggestion of my own: a client should have a clear detailed plan for the transaction from the outset, often developed with the assistance of the attorney.  This crucial stage is not the time to avoid talking to the attorney to save money, because the end result will invariably be a higher bill. Nailing down a specific and detailed structure from the beginning with the help of your attorney will help avoid having to change the deal multiple times over the course of getting the it done.  Each time a deal changes, the lawyers must revise the documents sometimes significantly (and sometimes have to scrap their existing work entirely). This greatly increases legal expenses because a lawyer ends up writing and rewriting documents multiple times, obviously driving the bill up.  Therefore, get a term sheet worked out at the beginning that is sufficiently thorough, so that the deal will not go through multiple incarnations.

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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

I am frequently asked by entrepreneurs whether I think a startup should ask potential investors to sign a non-disclosure agreement (NDA).  While the answer depends largely on the situation, my view is that in most cases an NDA is unnecessary if the only information being conveyed to potential investors is their company’s general business plan or overall market strategy.

Entrepreneurs generally tend to overestimate the need for an NDA in these situations.  They will often seek to obtain NDAs from others, including potential investors, just to hear their business plan.  This is often a waste of time and energy and can be a turnoff to potential investors.  Many professional investors like VCs or even angels hear numerous business plans and will simply not sign an NDA to hear each one.  If they did, they would be putting themselves at risk, because each time they sign a new NDA, they create the potential to be sued for an alleged breach of that NDA (whether they actually breached it or not).  Given that there are so many businesses out there seeking their capital, it’s easier just to forgo hearing the pitch from a business that insists on the investor signing an NDA.

That said, an NDA can be very useful and highly necessary when there are genuine trade secrets or technical details that need to be protected (i.e. some kind of “secret sauce”).  This could be in the form of a chemical formula, programming code, technical plans, or some other hard information where there is a genuine risk of misappropriation.  Therefore, NDAs should generally only be used when conveying actual proprietary information that goes beyond mere discussions of overall business plans.

To get an investor’s perspective, I recommend that you read the following article by Aristos Peters, who raises funds for early stage startups: Why I don’t sign NDAs (usually).

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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

In this era of specialization, a startup can’t simply have one lawyer who will do all of its work.  A corporate and finance lawyer may handle projects such as the company’s initial incorporation, securities offerings, loan financings, and general contracts.  But many startups also need to consult with an attorney on patenting their product or business model.  A corporate attorney generally will not have much knowledge on this topic (and if he does, it may be a red flag that your attorney is spreading himself a little too thin – corporate law and patent law are both complicated areas requiring in-depth specialization).  How does one go about finding a patent lawyer?  For one, if you already have a corporate lawyer, you can ask him for some recommendations.

I recently came across this article that entrepreneurs may find useful: How to Find a Good Patent Lawyer.  It makes some good points, such as the importance of conducting an in-depth interview of your potential lawyer.  I do disagree with one of its other points: the author argues that it’s a bad idea to ask your personal and business contacts for recommendations and that you should instead go onto a site like lawyers.com to find a patent lawyer.  Lawyers.com is an advertising site, pure and simple.  For sure, if your contact recommends going to a friend’s brother who is an attorney that does “wills and stuff” (as the article uses as an example) then certainly don’t take such a recommendation.  However, if you contact is sophisticated in business, you probably won’t get a useless recommendation like that and may instead get some insightful leads.  Good luck.

Article Referenced: How to Find a Good Patent Lawyer

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© 2011 Alexander J. Davie – This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Raising money for your company can be an exciting, challenging, and stressful time.  There are always plenty of other businesses and ideas out there competing for scarce funds.  When you find a venture capital fund willing to potentially invest in your company, you will probably feel like you’ve struck gold.  However, receiving a proposed term sheet from a VC should be seen as the beginning of a process, not the end of one.  If possible, it’s always best to have interest from more than one VC, to ensure that you receive the best deal possible and don’t get pressured into a bad deal.  The terms of an investment in your company from an outsider do matter, and can make a big difference down the road.

Some VCs may try to pressure you into accepting their terms before you are able to shop around for a better deal.  What should you do?  Fellow blogger Mark Suster wrote a piece a few years ago on this topic, and I think it’s still relevant today.  If you’re in the process of raising money from venture capitalists, I recommend that you read it.  To sum up his post: don’t cave into pressure tactics.

Article Referenced: Beware of Gym Salesman VC

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© 2011 Alexander J. Davie – This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.