Crash Course on Trademarks

One of the myriad items to consider when starting a new business is what to call your company, what logo to use, and how to prevent others from copying your ideas.  Especially for tech startups reading this blog, I want to give a few quick thoughts on trademarks for you to consider as you begin building your brand.

A trademark identifies goods or services as your own; it lets consumers know the origin of a good or service is you--not some third party.  In the U.S. you obtain basic rights in a trademark simply by using it.  That said, there are distinct advantages to registering trademarks with the U.S. Patent and Trademark Office (see below).  Trademarks are not the same as registered business names / assumed names, which are just the name under which you do business (as may be registered typically with the Secretary of State's office).  Trademarks are not the same as web addresses (although a trademark incidentally--if you're lucky enough!--be a web address).

When selecting your mark, you ideally want something that is fairly unique, that is not similar to the mark of another party.  Using a mark that is too similar to another's trademark poses a real risk of a trademark infringement suit (which may lead to you having to pay money damages).  Don't be generic.  Generally, I recommend against last names (since they may require secondary meaning to be of much value).  I also strongly discourage descriptive marks (e.g. "the running store" or "the data vault") since they too can be a lot harder to protect.  If you can, try having an arbitrary or truly unique (possibly nonsensical in ordinary English) mark, since they are the easiest to protect.

Before you use your mark, definitely perform a trademark search to make sure the mark isn't already used.  Any competent trademark attorney can do this and issue a legal opinion on the risks of using the mark, whether the mark is even eligible for registration, what kind of costs you should expect to be involved, how to "police" third party uses of the mark, etc.  Registration is really valuable: while you don't necessarily have to have your marks registered with the USPTO, registration greatly expands the geographic scope of the rights you obtain.

Talk with your attorney about when to apply for USPTO registration.  Applications when a mark is in commerce may be slightly less expensive tan applications in advance of use in commerce.  For cash-strapped startups, that might matter (especially if you foresee multiple applications / multiple marks).  Also, at the end of the process, make sure you establish protocols for "policing" your mark (as mentioned above).  Failure to make sure others do not wrongfully use your mark may jeopardize your legal rights to the mark.

The Internet of Things: Liability Examples in the Energy, Healthcare, and Consumer Appliance Industries

Over the last few years, there has been a tremendous increase in the number of devices connecting to the internet.  Forbes reports that there are more than 5 million developers in the Internet of Things (“IoT”) sphere and that number is expected to double by 2020.  Gartner, Inc., projects that by 2020 more than half of new business processes and systems will utilize some element of the IoT.  Gartner further projects that, by that same time, a black market—worth in excess of $5 billion—will exist to sell fake sensor and video data from IoT devices.  I would like to share a few observations and examples about liability risks associated with the IoT in some of the industries in which my clients regularly work.

I.  Energy Development

One of the most secure sites I have visited in Texas (outside our Air Force bases) is the ERCOT supercomputer in Taylor, Texas.  ERCOT is an independent system operator (ISO) for most of Texas and services 24 million people and billions of dollars of businesses.  Together with its Austin location, the Taylor campus is the “nerve center” for managing the flow of electricity to the overwhelming majority of Texans.  ERCOT has sophisticated systems for monitoring and directing the buying and selling of electricity throughout the state.  Other ISOs, whether in the U.S. or otherwise, perform similar functions.

 This past December the western Ukrainian grid was targeted in a cyberattack that resulted in power loss in multiple cities for several hours.  Imagine Dallas, Houston, Austin, and San Antonio all without power by virtue of one coordinated cyberattack.  In late 2015 Lloyd’s of London published a study called “Business Blackout” that attempts to gauge outcomes (and the resulting economic damages) of such an attack on the eastern seaboard.  Lloyd’s forecast damages between $243 billion to $1 trillion for such a blackout, even where power is restored in most areas (but assuming other areas—even just a tiny minority—are left without power for weeks). 

I represent a number of commercial developers with remote-access metering and operations information.  Try to imagine the damages your commercial project might face if it gets hacked and you go offline.  Aside from any liquidated damages you might owe to the off-taker, consider (1) whether you have the technical prowess within your team to fix the security breach and restore operations and (2) whether your insurance carrier would cover you.  I suspect that many smaller commercial solar operators may be in a pinch to resolve the cyberattack themselves.  While the prospect of an attack on any particular commercial system might be small, it is worth considering in advance how you might respond in the case of such an attack.

II. Medical Devices

The Department of Commerce projects that the medical device industry will be worth roughly $133 billion in 2016.  This past January, the Food and Drug Administration issued a draft guide on post-market management of cybersecurity in medical devices.  The guide encourages developers and manufacturers to establish controls for cybersecurity vulnerability as part of the software validation and risk assessment required under 21 C.F.R. 820.30(g).  As of the date of this blog entry, the draft guidance is not binding upon developers and manufacturers.  That said, compliance with the guidance may be best practice and recommended by counsel in order to mitigate liability.  Imagine a cyberattack that could manipulate the use or function of a medical device.  A more benign attack might merely gather user information and sell that data to a third party; a malicious attack might affect a life function of the user.  Last summer, TrapX reported that at least three major hospitals have suffered data breaches after medical devices had been infected with malware.  These scenarios are not purely hypothetical.  If you are planning or releasing or selling a medical device, start planning your cybersecurity measures and updates now or you may be liable for any resulting damages of an attack.

III. Liability with Consumer Appliances

In January 2016 The Telegraph reported that the Nest thermostat had a software glitch that forced the shutting down of the device.  The shutdown led some users unable to control the temperature in their homes.  Users complained of cold homes and possible burst water pipes.  While the glitch may seem trivial in contrast to the energy or medical device hacks, Nest may be faced with personal injury and/or property damage lawsuits.

IV. Concluding Thoughts

The size and types of damages that result from a cyberattack may vary considerably based on the type of IoT device your company markets.  However, with almost all such devices comes the risk of a cybersecurity breach that may result in liability to you.  At a minimum many cases will involve confidential or private information of the user.  At a maximum there may be significant property damage or loss of life.  As you look to bring your IoT device to market, it is imperative that you identify and manage each of these security risks and develop protocols for monitoring for and correcting any possible breaches.

Crowdfunding Portal Rules & B2C Ventures

Over the last few years I have been working with a number of Austin-based startups, primarily in the tech sector.  Austin-based VC (and even a number of angels earlier in the capital raising progression) seem more accustomed / are more comfortable with B2B models or B2C already demonstrating significant sales.  While I understand the caution these investors exercise while evaluating the various investment opportunities that come to them, the result is that investment capital for early stage B2C ventures in Austin can be extraordinarily difficult to source locally.  Not to sound crass, but raising capital for a venture should be hard: someone throwing money at your endeavor without good cause would be outright foolish.  That said, B2C developers understandably get frustrated from their comparative hurdle for sourcing capital.

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act").  Via that act, Congress carved a significantly easier path for startups to access certain smaller amounts of capital.  This past January, the Securities and Exchange Commission (SEC) approved crowdfunding portal rules proposed by the Financial Industry Regulatory Authority (FINRA) for implementing the JOBS Act.  The FINRA rules may be found here.  These rules will go into effect on May 16, 2016.

Section 302 of the JOBS Act provides a specific crowdfunding exemption to existing federal securities law by amending Section 4(a)(6) of the Securities Act of 1933.  The amendment to Section 4(a)(6) specifically exempts from registration a securities offering of less than $1 million on an aggregate basis during a 12-month period, so long as that the offering is conducted through an approved broker or funding portal.  A number of these funding portals are being formed now and should provide significantly easier access to smaller amounts of capital than currently exists.  If, like many Austin B2C founders, your business is in need of equity investment but you are not making progress among local investors, consider investigating your options with the new crowdfunding portals.  For more information about the legal practical limits of using this new source of equity, please contact our firm.

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