Last week, the Supreme Court issued its opinion in Petrella v. Metro-Goldwyn-Mayer, Inc. (MGM), in a majority opinion held that the doctrine of laches could not operate to bar a claim for copyright infringement that occurred within the Copyright Act’s statute of limitation of three years. As a bit of legal background, the doctrine of laches is an equitable defense, in which a party argues that the opposing party has made an unreasonable delay in pursuing its right or claim in a way that prejudiced the party raising the laches defense — as a result of the delay, things have changed to such extent that it would not longer be just to grant the opposing party’s claim, and should therefore be barred. Laches, being an equitable defense, is typically only raised against claims for equitable relief (such as an injunction), as opposed to claims for legal relief (such as money damages). In 1967, Frank Petrella, author of the screenplay on which the movie Raging Bull was based, assigned the screenplay to a production company that ultimately assigned the motion picture rights to MGM. Under copyright law, pre-1978 works had a copyright term of 28 years that could be renewed up to 67 years. Furthermore, upon death of the author, renewal rights would revert to his or her heirs. Frank Petrella died in 1981, causing renewal rights in the screenplay to revert to his sole heir, Paula Petrella, regardless of various assignments of the screenplay. Paula Petrella did renew the copyright in 1991, and became the sole owner of the copyright at that point. In 2009, Paula Petrella brought suit against MGM for copyright infringement based on MGM’s continued exploitation of the movie based on her father’s work. As the statute of limitations for copyright infringement is three years, Petrella only sought damages for the three years prior to her suit, as well as injunctive relief to prevent future use of the work. The district court and Ninth Circuit dismissed the claims on the basis of the doctrine of laches, despite her action not being barred by the statute of limitations, given that Petrella waited nearly 30 years after Frank Petrella’s death and 20 years after renewal of the copyright to bring suit. The Supreme Court overturned the district court’s and Ninth Circuit’s rulings, holding that laches cannot bar legal relief where Congress has enacted a statute of limitations, noting that laches is primarily an equitable defense against claims in equity for which there is no time limitation. However, the Court did leave the door open just a crack when it further held that laches might be applicable in copyright infringement claims for equitable relief where “the consequences of a delay in commencing suit may be of sufficient magnitude to warrant, at the very outset of the litigation, curtailment of the relief equitably awardable.” The lesson for entrepreneurs to take away from Petrella is that just because a copyright holder hasn’t decided to defend its copyright (even for a period of decades) doesn’t mean that they won’t or can’t sue for damages, even if you have already invested time and resources in reliance on that non-action. (Of course, if a copyright holder does some affirmative action to cause you to rely on the holder’s failure to bring suit, you may be entitled to use the separate defense of estoppel). So if you want to use copyrighted material, always obtain the copyright holder’s permission, even if others have been infringing on the work with no sign of protest for years.
A recent blog post argued that Governor Deval Patrick’s proposal to eliminate non-competes will not have the positive impact on the Massachusetts economy promised by the bill’s name, “An Act to Promote Growth and Opportunity”, and in fact may end up having a negative impact on the Commonwealth. The article points out that non-compete agreements are only enforceable in Massachusetts where they are necessary to protect the employer’s confidential information, trade secrets, or goodwill — non-competes that solely seek to prevent employees from becoming competition are not enforceable under Massachusetts law. The article compares this with California law, famous for refusing to enforce agreements “by which anyone is restraining from engaging in a lawful profession, trade, or business”. However, California law does enforce agreements intended to restrict employees from utilizing their employer’s confidential information or trade secrets in competition with the employer. Therefore, the article concludes, the only primary distinction between California and Massachusetts law with respect to non-competes is that Massachusetts also enforces non-compete agreements that seek to restrain a competing employee’s use of his or her former employer’s goodwill. However, I believe that this is an important distinction. Whereas California does restrict employee’s use of confidential information or trade secrets, this is perhaps more appropriately considered protection of intellectual property. What non-compete agreements primarily seek to do is to restrict employees from leaving with client relationships they have cultivated in the course of their employment and with the resources of the company — goodwill. The article cites two studies that refute the popular notion that California’s prohibition on non-competes was responsible for the growth of Silicon Valley or that there was some correlation between the prohibition and the success of the California technology industry, one even going so far as to conclude that California’s prohibition on non-competes actually hinders biotech R&D. However, in my experience I’ve met potential entrepreneurs here in Massachusetts who have been close to dissuaded from launching their own venture because they were subject to non-compete agreements, and did not want to risk either professional relationships with their employers, or subject themselves to possible legal action. The elimination of non-compete agreements will hopefully remove that hurdle for some future startup founders — perhaps not many, but hopefully enough to generate enough innovation to outweigh any possible negative effect on Massachusetts businesses.
Based on the dissatisfaction of some House members to the SEC’s proposed Regulation D and JOBS Act Title III equity crowdfunding rules, several bills have been proposed to amend various provisions of the JOBS Act and Regulation D, and head off many of the restrictive rules being considered by the SEC. The first bill attempts to ensure the ease of use Reg D, Rule 506, and Form D. First, the bill prohibits the SEC from requiring the filing of a Form D either in advance of or after the sale of securities under Rule 506, or conditioning the availability of Rule 506 on the filing of a Form D. The bill proposes to eliminate verification of accredited investor status of purchasers as a condition of the availability of Rule 506, or at least just Rule 506(c). The bill also proposes to permit companies to use Reg D to sell securities to employees of the issuer. Finally, the bill would prohibit the SEC from requiring the submission of general solicitation materials earlier than 60 days after the closing of an offering, or requiring that general solicitation materials be submitted more than once in an offering. The second bill, proposed by Congressman Patrick McHenry (who proposed the original House bill that ultimately became the JOBS Act) seeks to amend provisions of Title III of the JOBS Act. The bill first proposes to increase the amounts that can be raised by crowdfunding in any 12 month period to $3 million, or $5 million with audited financials, addressing concerns that the costs of compliance with equity crowdfunding regulations would not be worth the limited amounts that can currently be raised with equity crowdfunding. The bill also simplifies the 12-month aggregate limits for each investor, to the greatest of $5000 (annually adjusted by CPI), 10% of annual income, or 10% of net worth. The bill also allows companies raising less than $500,000 to certify their own financial statements, and to only require companies raising between $500,000 and $3 million to have their financials reviewed by a CPA. However, the bill also requires companies using equity crowdfunding to be organized as corporations. The bill also modifies the responsibilities of the intermediary websites that will host the crowdfunding offerings, including requiring intermediaries to inform prospective investors of the risks of crowdfunding investment and testing investors to ensure that they actually understand those risks. The bill also authorizes intermediaries to require companies to state a target offering amount, and withhold funds until that target is met; intermediaries can also run background checks on company executives and perform some due diligence, and de-list companies who fail to comply with the crowdfunding law and regulations. The bill also simplifies the burden for intermediaries in verifying investor information, by allowing intermediaries to accept the self-certification of investors as to their status. Finally, the bill also exempts crowdfunding investors from a company’s shareholder cap, and preempts state securities regulation (although it does not preempt state enforcement actions).
Yesterday morning, Governor Deval Patrick announced his support for proposed economic development legislation that would accomplish two major legislative goals for the entrepreneurial community: the elimination of non-compete agreements, and the retention of foreign university students after graduation. The reform of non-compete law in Massachusetts has attracted much discussion over the past few years. A number of bills have been brought up in the legislature aimed at reforming non-compete laws — the one proposal that seemed to get the most traction was a bill introduced in the last legislative session that would have made all non-competes with a duration over 6 months presumptively unreasonable (the current common law rule of thumb is one year). There have been supporters in the state legislature of eliminating non-competes entirely, but their numbers have likely been limited due to strong opposition from major corporations in the Commonwealth. It remains to be seen whether the Governor’s support will be enough to overcome that opposition. The second piece of the legislation is aimed at retaining foreign university students when they graduate. Currently, many foreign graduates leave the Commonwealth and the country due to the inability to obtain the necessary visas to stay. The Governor’s proposal would take qualified foreign students who are starting or growing a business and place them as entrepreneurs-in-residence at colleges and universities across the state. The bill also contains a number of smaller proposals, primarily aimed at improving entrepreneur and innovation resources in the Commonwealth, improving infrastructure, and providing financial assistance to growing companies. Further reading: http://bostinno.streetwise.co/2014/04/10/patrick-announces-plan-to-abolish-noncompetes-launch-a-global-eir-program-aimed-at-h1-b-visa-program/
Under Rule 506 ©, a company may generally solicit its offering. Currently, all that is required for Rule 506© is to take reasonable steps to verify that all purchasers are accredited investors. However, the SEC is proposing additional requirements for Rule 506©, chief among them being the Advance Form D. Under the current Rule 506 system, a company only needs to file its Form D within 15 days of the first sale. However, the Advance Form D rule requires the filing of a Form D at least 15 days before the first general solicitation is made, and another closing Form D within 30 days of the termination of the offering. Requiring a Form D before the first general solicitation presents a number of logistical problems for companies. First, Form D requires information such as the type and number of securities being sold and the amount being offered, information which the company may not have settled upon at the commencement of the offering. In addition, making a general solicitation pegs a company into 506©, which at the moment isn’t a fatal flaw — all the company needs to do is take reasonable steps to verify that all its purchasers are accredited investors. However, if these proposed rules are adopted, if a company accidentally makes a general solicitation without having filed an Advance Form D, they may end up subject to a penalty of being banned from utilizing Rule 506 for one calendar year. As a result, if the proposed rule is adopted, many startups raising funds under Rule 506 may be counseled to simply file an Advance Form D even if they have no intention of making a general solicitation. However, this forecloses the use of Rule 506(b), which does permit a limited number of non-accredited investors — some companies may continue to utilize 506(b) to bring on non-accredited investors for a number of reasons, perhaps because those investors bring strategic advice or contacts. For those companies who wish or need to utilize Rule 506(b), the proposed Advance Form D requirement means they must risk accidentally tripping into Rule 506© and barring themselves from Rule 506 for a year. These risks have led many to submit comments in opposition to the SEC.