The High-touch Legal Services® Blog • For Startup Companies

Over the weekend, I answered a LinkedIn question about whether posting a copyrighted photo of another company’s product with disparaging comments about that product might be protected by the “fair use” defense to copyright infringement. I am reproducing the question and answer, in edited form, below.

Q. My website is copyrighted and the newest product is trademark and patent pending. The image was “clipped/copied” by an individual and placed on a website without my permission to do so. Am I right that this is not “fair use” of my work?

A. The “Fair Use” Defense: One Term, Two Different Meanings discusses the four elements of copyright fair use. The analysis always is highly fact-specific, so it is difficult to say whether use on cpaptalk.com qualifies for that defense, but I think there is a reasonable argument that it does.

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I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.

Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan?

A: It is important to distinguish your capital contribution (in exchange for which you receive your membership interest) from loans (which are to be repaid).

The LLC Operating Agreement should have an exhibit that states the amount of your capital contribution. You should make a deposit of that amount into the LLC’s bank account. If your LLC has membership certificates, you (as a member) are entitled to have one made out in your name, showing your membership interest (100%, or all of the Units), and signed by you as the Manager (which role should be specified in the Operating Agreement).

Each loan should be documented by a loan agreement and promissory note. To avoid “imputed interest” problems, the interest rate in each case should be at least as great as the relevant Applicable Federal Rate.

It is important that the LLC be sufficiently capitalized, that separate LLC bank account and accounting books be maintained, and that the loans be documented appropriately to avoid “alter ego” problems – please see Beware Your Alter Ego (discusses corporations, but applies similarly to LLCs).

Check out all posts about LLCs.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Stanford Law School Professor Mark A. Lemley has published a draft paper, Where to File Your Patent Case.

Lemley started with the assumption that plaintiffs frequently look for forums that favor patentees, where cases go to trial (summary judgments strongly tending to favor defendants), and that move cases along quickly. Defendants are likely to want the opposite, a  forum that is unlikely to send cases to jury trial, that regularly rules for defendants, and that takes a long time to do both.

He analyzed outcome data from 21,667 patent cases that were resolved at the District Court level. The findings:

• Plaintiff-friendly courts include those in the Middle District of Florida, the District of Delaware, the Eastern District of Virginia, and the Western District of Wisconsin.
• Contrary to common wisdom in some circles, the Eastern District of Texas is not especially hospitable to plaintiffs in patent infringement suits.
• Accused infringers should try to litigate in the Eastern District of Wisconsin, the Southern District of Ohio, or the District of Columbia.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Sometimes California-based entrepreneurs think that they can avoid CA registration fees and taxes by forming their business entities in another state. Usually, that belief is incorrect: If the entity is doing business in CA, then it must register with the CA Secretary of State, even if the entity was formed elsewhere.

So what constitutes “doing business” in CA? The term used in the Corporations Code is to “transact intrastate business”, which is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (Section 191(a) with respect to corporations, Section 17001(ap) with respect to limited liability companies).

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Two evenings ago, I had the pleasure of being MC for SVASE‘s East Bay Series program, Raising Money from VCs: The Insider’s Perspective.  The discussion examined how venture capitalists use the due diligence process and other tools to decide which companies they will fund.

At the end, I asked the VCs on the panel to do some simple arithmetic: Of the companies for which you begin due diligence, which portion ultimately are funded?

The answer for all four VCs: Less than 1%!

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A friend recently asked whether his LLC, which was seeking investors, should issue membership certificates. Here are the points that I made in my response:

• A California limited liability company may, but is not required to, issue membership certificates (Corporations Code Section 17105).
• However, if the operating agreement includes membership transfer restrictions, buy-sell provisions, reverse vesting, or the like – features that should be included in any multi-member LLC that is seeking investors – then membership certificates with applicable legends should be issued. The reason: If there are no certificates, then a transferee who receives a former member’s interest without knowledge of such provisions may successfully claim that s/he is not bound by them.

Related posts:

• Should My Corporation Provide Stock Certificates to Shareholders?
• Printing Legends on Share Certificates – Why and How
• Can I form an LLC without a lawyer?

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

If your small technology company provides products or processes that might interest the U.S. government, you should know about the Small Business Innovation Research (SBIR) program.

The objective of SBIR is to provide qualified small businesses with opportunities to propose innovative ideas that meet the specific research and development needs of the federal government.

Eleven federal departments participate. These include, for example, the Departments of Defense (including the various armed forces), Education and Transportation.

While there is some variation among departments, SBIR generally is a three-phase process:

• Phase I – Technology feasibility is determined and contracts are valued up to $100,000, lasting from six to nine months.
• Phase II (awarded to successful Phase I contract winners) – The necessary R&D is accomplished to produce a well-defined product/process. These awards typically span 2 years to accomplish the primary research effort and are valued up to $750,000.
• Phase III – Commercialization of a Phase II project result using private sector or federal agency (non-SBIR) funding.

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Some companies are formed as S corporations to avoid “double taxation”: The corporation does not pay federal income tax. Instead, income flows through to the shareholders, who pay income taxes (as in a partnership).

This potential tax benefit is available, however, only if stringent requirements are met. Most notably:

• There must not be more than 100 shareholders.
• Permissible shareholders are limited to individuals (other than non-resident aliens), estates, tax-exempt organizations, and certain qualified trusts.
• Only one class of stock is permitted.

Failure to meet a requirement, even if inadvertent, results in loss of S corporation status.

Entrepreneurs should think carefully about whether S corporation status is appropriate for the long term. Here’s why.

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I just got off the phone with the founder of a website that caters to small businesses. He commented that small-business owners routinely suffer sticker shock when they receive invoices from their attorneys. I responded that lawyers can do three things to reduce the likelihood that the amounts of their fees will be a surprise.

First, some work can be done for a fixed fee. Forming a new corporation or LLC is an example, especially if there is only one founder.

Second, sometimes it is possible to estimate the number of hours (and, thus, the fee) for a matter. Preparing an agreement often falls into this category. As work progresses, if it appears the estimate will be exceeded, I contact the client to explain why additional time will be required, and we proceed accordingly.

Finally, for some tasks it is impossible to estimate how much time will be required. Contract negotiation is the prime example: I’ve had negotiations that finished in 20 minutes, and others that took more than a year to complete. In this situation, I work with the client to establish an initial budget. As we approach the budgeted amount, we confer and, as required, revise it.

As I continue to work with a client over time, the budgeting process tends to become less formal. The client gains a sense of trust and an idea of how much work a given matter will require. Occasionally, an emergency will require that a substantial amount of work be done immediately without an opportunity to provide a fee projection, but that should be the exception rather than the rule.

The bottom line: There is no reason why a business owner should be constantly surprised by lawyers’ invoices.

Photo credit: John Ridley via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Claremont Creek Ventures, the preeminent venture capital firm in the East Bay and sponsor of SVASE’s East Bay Series, was profiled today in a Bloomberg / San Francisco Chronicle article (Venture capital firm sets up near UC Berkeley).

The article points out that Claremont Creek is unusual among VCs in that it is a seed and early-stage investor.

By sponsoring the East Bay Series, Claremont Creek helps entrepreneurs in the East Bay and elsewhere in the San Francisco Bay Area gain insights that will make their businesses more successful.

The next East Bay  Series event, Raising Money from VCs: The Insider’s Perspective, will take place the evening of Wednesday, May 19.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.