Ancestry.com Prevails in Yearbook Database Class Action

This week, Ancestry.com Inc. prevailed in a class action which alleged that it misappropriated consumers’ images and violated their privacy by using such data to solicit and sell their services and products. The court granted Ancestry.com’s motion to dismiss the amended complaint with prejudice because the plaintiffs “did not cure the complaint’s deficiencies” after being granted leave to amend the first complaint.

As we previously wrote in November 2020, Ancestry.com was hit with a class action in the Northern District of California for “knowingly misappropriating the photographs, likenesses, names, and identities of Plaintiff and the class; knowingly using those photographs, likenesses, names, and identities for the commercial purpose of selling access to them in Ancestry products and services; and knowingly using those photographs, likenesses, names and identities to advertise, sell and solicit purchases of Ancestry services and products; without obtaining prior consent from Plaintiffs and the class.” In March 2021, the court dismissed the lawsuit based on lack of standing, but allowed the plaintiffs to amend and address the deficiencies. Although the plaintiffs added allegations of emotional harm, lost time, and theft of intellectual property, that didn’t sway the court. U.S. Magistrate Judge Laurel Beeler said that the new allegations “do not change the analysis in this court’s earlier order.” The court held that the plaintiffs still did not establish Article III standing because they had not alleged a concrete injury.

Additionally, the court noted that even if standing were established, Ancestry.com is immune from liability under the Communications Decency Act (CDA) because it is not a content creator. Magistrate Beeler said that Ancestry.com “obviously did not create the yearbooks [. . .] [i]nstead, it necessarily used information provided by another information content provider and is immune under [the CDA].”

Copyright © 2021 Robinson & Cole LLP. All rights reserved.
ARTICLE BY Kathryn M. Rattigan of Robinson & Cole LLP
For more articles on cybersecurity litigation, visit the NLR Litigation / Trial Practice section.

The Vatican Faces a Copyright Infringement Lawsuit

Street artist Alessia Babrow has sued the Vatican, alleging that the Philatelic and Numismatic Office of the Vatican City State copied her artwork without her permission and reprinted it as a stamp. The art was a painting of Jesus by nineteenth-century artist Heinrich Hofmann, to which Ms. Babrow had added the slogan “just use it.” Besides neglecting to request Ms. Babrow’s permission, the Vatican allegedly only credited Hofmann, and not Ms. Babrow, for the derivative work. Ms. Babrow is seeking approximately $160,000 in damages and reportedly turned down a private visit with the Pope in favor of continuing her lawsuit.

The remaining summaries of news headlines are separated by region for your browsing convenience.

 UNITED STATES

Graffiti Cleanup Effort Leads to VARA Lawsuit

Aerosol artist Michael McLeer a/k/a Kaves has sued the New York Police Department for painting over some of his outdoor artworks in New York City that he claims were made with full authorization of the property owner. One of the works that the NYPD allegedly painted over had been in place for 13 years. The lawsuit claims that the NYPD allegedly failed to inquire into the permitted status of the art prior to painting over it. Kaves has sued under the Visual Artists Rights Act (VARA), which has previously been used successfully to protect street art. The matter was filed before the federal court in Brooklyn, the same court in which the now-famous 5Pointz case involving destruction of street art originated.

Painting Stolen by Nazis Finds Home in Oklahoma

Camille Pissarro’s La Bergère Rentrant des Moutons (Shepherdess Bringing in Sheep) (1886) was the subject of an almost 10-year restitution saga led by Holocaust survivor Léone-Noëlle Meyer, whose parents were the lawful owners of the artwork when it was looted by the Nazis in 1941. The artwork was donated to the University of Oklahoma in 2000 by Clara Weitzenhoffer, a subsequent good faith purchaser for value. In 2016, Ms. Meyer reached a settlement with the University of Oklahoma, in accordance with which the artwork was to travel between the United States and France every three years. Ms. Meyer subsequently tried to invalidate the settlement, in part given the subsequent passage of the Holocaust Expropriated Art Recovery Act of 2016, which would have benefited her restitution efforts. After facing significant setbacks in her legal case, including fines for breaching the terms of the agreement, Ms. Meyers has discontinued her efforts to invalidate the 2016 settlement. Now, the painting will be on display on a rotating basis in France and at the University of Oklahoma.

Corita Kent’s Art Studio Granted Landmark Status, Escapes Demolition

Artist Corita Kent, a former Catholic nun who became a Pop artist and an activist, was inspired by Andy Warhol’s 1962 Ferus Gallery exhibition to address the pressing issues of racial and social injustice through art. Her studio in Los Angeles became a gathering spot in the 1960s for female activists. When the studio was slated to be razed and turned into a parking lot by the current property owner, the Corita Art Center called for the studio’s preservation, noting the shortage of cultural landmarks celebrating women’s heritage in Los Angeles (only 3 percent of the cultural monuments in Los Angeles represent women). The Los Angeles City Council agreed to grant landmark status to the studio.

EUROPE

Artists Who Sell Directly to Collectors Are Not “Art Market Participants” Under New UK Law

On June 10, a new anti‒money laundering regulation came into full force in the United Kingdom, under which art market participants (AMPs) who sell artworks for €10,000 or more must comply with the new regulations, including verification of clients’ identity, due diligence on each transaction and involved compliance programs. In a relief for artists, however, the UK Treasury recently announced that artists will not be considered AMPs and will therefore not need to comply with the new costly regulations. Welcome relief it may be, but too late for many artists who already undertook the expense to comply with the regulations.

Banksy’s Work May Not Be Protected by Either Copyright or Trademark

Famously anonymous street artist Banksy’s words, “copyright is for losers,” are coming back to haunt him as his representatives lose another trademark battle to protect one of his artworks against commercial exploitation by third parties. Pest Control Office Limited, the company that holds itself out as responsible for issuing certificates of authenticity for Banksy, filed a number of applications for trademark protection, in the United Kingdom and abroad for some of Banksy’s works. One such graphic trademark, consisting of Banksy’s image of a monkey wearing a sandwich board, was held invalid by the European Union Intellectual Property Office (EUIPO). The application for declaration of invalidity was brought by a greeting card company that had copied Banksy’s work for use in their greeting cards. The EUIPO cited Banksy’s explicit statements that the public is free to use any copyrighted work, as well as the artist’s elusive identity, making it difficult to protect his artworks under copyright laws, as factors in its decision. Similar applications to invalidate other trademarks of Banksy’s artworks are to be heard by EUIPO within the next month or so. The outcome is likely to be similar.

Oxford Classics Professor Accused of Selling Stolen Art to Hobby Lobby

Craft chain Hobby Lobby filed suit against an Oxford University professor of classics for allegedly selling Hobby Lobby $760,000 worth of stolen ancient Egypt art. According to the complaint, Hobby Lobby made many purchases of art from Dr. Obbink over the course of three years to include in Hobby Lobby’s planned Museum of the Bible, but the art it received had allegedly been stolen from Oxford University’s Sackler Library. Obbink had represented to Hobby Lobby that he was selling papyri that came from private collectors. Hobby Lobby has returned the art to Oxford.

© 2021 Wilson Elser

ARTICLE BY Jana S. Farmer and Sarah Fink of
Wilson Elser Moskowitz Edelman & Dicker LLP
For more articles on art law, visit the NLRIntellectual Property section.

U.S. Department of Education Says Title IX Protects LGBTQ Students

Yesterday, the Office of Civil Rights (OCR) for the U.S. Department of Education released a new Notice of Interpretation clarifying the Department’s position that Title IX prohibits discrimination against gay and transgender students. The interpretation, applicable to both colleges and universities and K-12 institutions which accept federal funding, follows the U.S. Supreme Court’s holding in Bostock v. Clayton County that Title VII prohibits workplace discrimination based on sexual orientation or gender identity. OCR’s announcement is a departure from the previous administration’s position, which declined to extend Title IX’s protections to transgender students. While the Notice does not have the effect of law, it signals OCR’s intentions as it enforces Title IX going forward. “We just want to double down on our expectations,” said DOE Secretary Miguel A. Cardona. “Students cannot be discriminated against because of their sexual orientation or their gender identity.”

OCR’s Notice states that its interpretation is meant to align Title VII and Title IX, acknowledging that courts regularly rely on interpretations of Title VII to inform decisions based on Title IX. The interpretation also follows a March 2021 memorandum from the U.S. Department of Justice, which similarly interpreted the Bostock decision to apply to Title IX. OCR’s announcement has been welcomed by many schools, which had been forced to juggle conflicting Title IX and Title VII standards in the wake of the Bostock decision. Still others have questioned the interpretation’s impact, including schools in locations where the interpretation is in conflict with state or local law. And OCR’s Notice expressly acknowledges that the interpretation does not change the Title IX exemption for education institutions controlled by a religious organization to the extent that the law is not consistent with the organization’s religious tenets.

OCR’s announcement comes during the summer months—as many schools are updating their policies and procedures—and while many institutions anxiously await OCR’s announcement of further guidance and regulations related to Title IX, particularly regarding further guidance regarding the 2020 Title IX regulations. The interpretation also leaves open several key questions including, for example, its impact on single sex institutions or campus affinity groups or how broadly the department will define gender identity. But as schools prepare for the 2021 fall semester, administrators should be ready to address allegations of discrimination based on sexual orientation or gender identity as part of Title IX compliance efforts.

OCR’s Notice of Interpretation may be found in its entirety here.

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more articles on the OCR, visit the NLRCivil Rights section.

U.S. Supreme Court Rejects Latest Challenge to ACA in 7-2 Ruling

On June 17, 2021, the U.S. Supreme Court rejected a long-anticipated challenge to the Patient Protection and Affordable Care Act, known as the “Affordable Care Act” (ACA). This was the third case in a trilogy of challenges to the ACA. See California et al. v. Texas et al., No. 19-840.

In a 7-2 decision, the Court held that the state of Texas (along with over a dozen states and two individuals) simply lacked standing to challenge the constitutionality of a statutory mandate with no consequences. Justices Alito and Gorsuch dissented, and Justice Coney Barrett joined the majority.

The Court did not reach the merits of the appeal, which concerned whether the individual mandate provision of the ACA, previously determined to be unconstitutional, may be severed from the rest of the law or whether the entire law must be struck down. Basically, the plaintiffs argued that if the individual mandate provision was unconstitutional, the entire ACA was unconstitutional.

Instead, the Court determined that the plaintiffs lacked standing, explaining that the plaintiffs could not demonstrate any actual injury traceable to the penalty for violating the individual mandate, which was established in 2017 at an amount of $0.

From its inception, the status of this case has been of concern to a wide variety of stakeholders in the health care industry. Beginning with the ruling by a federal district court in Texas that invalidated the ACA in its entirety, to the Fifth Circuit Court of Appeal’s ruling that only the individual mandate was unconstitutional while the rest of the ACA should remain intact, onlookers have eagerly anticipated the Supreme Court’s decision on this matter.

For now, the ACA remains the law of the land.

©2021 Greenberg Traurig, LLP. All rights reserved.
For more articles on the Supreme Court, visit the NLR Litigation / Trial Practice section.

Supreme Court: Philadelphia Ordinance Unconstitutionally Burdened Religious Exercise

The U.S. Supreme Court has found that Philadelphia’s ordinance requiring a private foster care agency to certify same-sex couples as foster parents burdened the agency’s religious exercise in violation of the Free Exercise Clause of the First Amendment. Fulton et al. v. City of Philadelphia, Pennsylvania et al., No. 19-123 (June 17, 2021).

Justice John Roberts, writing for the Court, found that Philadelphia unconstitutionally burdened the religious exercise of Catholic Social Services (CSS) — a private foster care agency in Philadelphia — by “forcing it to either curtail its mission or to certify same-sex couples as foster parents in violation of its religious beliefs.”

The Court’s decision primarily focused on whether Philadelphia’s Fair Practices Ordinance was both neutral and generally applicable and, therefore, constitutional, even if it incidentally burdened religion. For employers, however, the Court’s decision that CSS’s actions were not subject to the public accommodation provisions of Philadelphia’s Fair Practices Ordinance presents significant implications in cases alleging discrimination in places of public accommodation. The scope of this decision is limited in its application to the private sector.

Supreme Court Decision

The Court ruled that the contractual terms in contracts offered to private foster care agencies by Philadelphia forbidding discrimination on the basis of sexual orientation were not neutral and generally applicable. This ruling was based on a key exception in Philadelphia’s Fair Practices Ordinance granting the Commissioner of the Department of Human Services the authority to make individual exceptions to its general prohibition on discrimination based upon sexual orientation — “in his/her sole discretion.” Justice Roberts reasoned, “No matter the level of deference we extend to the City, the inclusion of a formal system of entirely discretionary exceptions in section 3.21 renders the contractual nondiscrimination requirement not generally applicable.”

The Court also ruled that CSS’s refusal to certify same-sex couples did not constitute an “Unlawful Public Accommodations Practice[]” in violation of Philadelphia’s Fair Practices Ordinance, which prohibits “deny[ing] or interfer[ing] with the public accommodation opportunities of an individual or otherwise discriminat[ing] based on his or her race, ethnicity, color, sex, sexual orientation,” among other protected categories. The Court explained that the decision whether or not to certify foster parents for adoptions was not a service “made available to the public” because it “involves a customized and selective assessment that bears little resemblance to staying in a hotel, eating at a restaurant, or riding a bus.” Justice Roberts noted, “[T]he ‘common theme’ is that a public accommodation must ‘provide a benefit to the general public allowing individual members of the general public to avail themselves of that benefit if they so desire.’” Therefore, because of the personalized nature of evaluating and selecting foster parents for adoption, CSS’s certification process was not the type of public service that Philadelphia’s Fair Practices Ordinance was intended to cover, the Court said.

Finally, the Court rejected Philadelphia’s various justifications for its non-discrimination requirements in its contracts with foster care agencies. This included the City’s stated interest in “the equal treatment of prospective foster parents and foster children.” The Court acknowledged that “this interest is a weighty one,” but could not justify denying CSS an exception for its religious exercise in this case, while making such exceptions available to others in the Commissioner’s “sole discretion” under the Fair Practices Ordinance.

Concurring Opinions

In three separate concurring opinions, the justices questioned the scope and impact of the majority’s decision, though endorsing its holding. Justice Amy Coney Barrett’s concurrence (joined all or in part by Justices Brett Kavanaugh and Stephen Breyer) questioned what standard would apply if the Court were, in a future case, to overrule Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U.S. 872 (1990), which set the standard that neutral and generally applicable laws do not violate the First Amendment’s Free Exercise Clause. However, Justice Barrett noted the Court need not find a replacement for Smith now, as Smith did not apply in the present dispute, because the contract at issue was neither neutral nor generally applicable. As the CSS contract gave the government the right to make discretionary exemptions from its non-discrimination rule, the law was subject to strict scrutiny, instead of the Smith standard.

In another concurrence, Justice Alito (joined by Justices Clarence Thomas and Neil Gorsuch) reasoned that the majority should have ruled on the constitutionality of Smith, and strongly suggested that Smith should be overruled, because of its perceived failure to sufficiently protect the free exercise of religion, as well as failing to provide a clear-cut standard.

In a separate concurrence, Justice Gorsuch (joined by Justices Samuel Alito and Thomas) agreed that the Court should have ruled on the constitutionality of Smith, and recounted the past cases in which the Court’s decision not to address Smith’s constitutionality led to a perceived lack of predictability and prolonged lower court litigation.

Implications

For organizations with a religious-based mission, the Court’s ruling represents an expansion of their ability to dictate the terms on which they offer their services to the public. State and federal government agencies may want to re-evaluate and re-consider their current contracts with private entities. Employers who contract with state or federal government should examine closely the existing terms and conditions of their arrangements, as well as understand what exceptions, if any, are available under relevant state or federal law.

The implications of the Court’s interpretation of the public accommodation provision under Philadelphia’s ordinance on future public accommodation disputes remains to be seen.

(Summer law clerk Nicholas Bonelli contributed significantly to this article.)

Jackson Lewis P.C. © 2021
ARTICLE BY Michelle E. Phillips, Kristopher W. Peters, and Christopher M. Repole of Jackson Lewis P.C.

 

For more articles on the Supreme Court, visit the NLR Litigation / Trial Practice section.

Demystifying Marketing for Your New Law Firm

You’re not a marketer— you’re a lawyer. But any seasoned attorney knows that you need to get your new law firm’s marketing strategy in order if you hope to catapult your business to success. The problem is, you probably have no idea where to start.

There are many different marketing strategies out there. You might not know which ones are most important, or how to go about implementing a marketing plan that makes sense for your firm. In any case, you will need to figure out which strategies work best for your firm if you want to beat out the competition and become the go-to attorney in your area.

Why You Need to Market Your Law Firm

Whether you are a brand new law firm or have an existing practice, it is important that you get started on your marketing plan. There are many different elements that go into marketing a business. You need to choose how you will be identified in advertising and online, connect with other lawyers online, choose your branding logo and colors, purchase business cards, and engage in other efforts to get your name out there.

There are two primary ways budding law firms become successful— they build or engage in strong referral programs, and they become well-known within the community. Back in the late nineties through the early 2000s, you might have been able to purchase a billboard ad or create a commercial to get business in the door.

However, in today’s society, you have to market yourself online as well. But before you get ahead of yourself, first you need to figure out what marketing must-haves you will need the first day that your new law firm opens for business.

New Law Firm Marketing Must-Haves

Before you can open up the doors to your new law firm, there are several marketing materials you will need to have established and on-hand. Some of these are physical materials while others are various virtual tools. Both are equally as important at this stage of your business.

You will also need to begin at this stage of your marketing strategy if you are an established firm that is rebranding yourself. This often happens when existing law firms take on new managing partners, or simply have decided to go another direction in their branding.

No one said marketing your law firm was going to be easy. And you can also expect it to be time-consuming. But your efforts shouldn’t go unnoticed if you plan your marketing strategy out correctly.

Traditional Law Firm Marketing Materials

First and foremost you should begin your marketing efforts on your branding. Choose colors, what you want your firm to go by, and your brand logo. You want to be thinking about how you want your potential clients to perceive you as their lawyer when designing these elements.

From there, you can draw up and print your business cards. Once these are ready you can begin your new law firm’s networking efforts.

The new generation of lawyers who are anxious to get their practice up and running might be less interested in traditional law firm marketing materials such as postcards, newsletters, and other tangibles. But these tried and true methods of marketing are essential for your business.

A key component to marketing in 2021 is your Internet presence. You need more than just a good website. You need to set up your legal services description and professional biography, your website content, your law firm email address, and your professional email signature block.

You should also start to think about setting up your new law firm’s social media profiles including LinkedIn. Remember: referrals are one of the best ways for new law firms to get clients. And the only way to get referrals is by making connections— both in-person and online.

You may want to consider sending out formal announcements to colleagues and others who may be in your network that your law firm is officially open and accepting clients. Sending tangible cards and virtual announcements can both help gain exposure for your new law firm.

Search Engine Optimization for Law Firms

Your law firm is not likely to be successful if you do not have a strong online web presence. When potential clients are looking for a lawyer, they aren’t going to wait until they happen to see a billboard or commercial for a lawyer. They are going to open up their web browser and search Google for the “best (practice area) lawyer near me”.

You want your new law firm to show up in one of those top displayed search results because these are the only ones most internet users will click on. This is where search engine optimization (SEO) matters.

The legal industry is one of the most competitive online. You will be going up against established law firms that likely have teams of digital marketers working to boost their sites in the rankings. Your law firm may be new, but you cannot afford to not implement an SEO strategy for your site before or shortly after you open for business.

Marketing Tools You Need That Can Wait

Once your law firm opens, your marketing efforts shouldn’t stop there. You will need to continue to fine-tune and implement additional marketing measures to help your new law firm succeed.

Once you have your bearings and are ready to expand your marketing efforts, you can strategize further. Do you want to become involved in community organizations? Join bar associations? set up regular email campaigns? Maybe you want to send client retention gifts or order swag items and set up giveaways. Perhaps your focus is on giving back to your community.

No matter what your vision is for your law firm, you will need to continue to reimagine your marketing strategy over time. Even five years is too long to go without revitalizing your law firm’s marketing efforts. Your law firm should always be keeping up with marketing trends. This will help your firm stay ahead of the competition and point today’s clients to you and your law firm for the help they need.

© 2021 Denver Legal Marketing LLC
For more articles on the legal industry, visit the NLRLaw Office Management section.

Yu v. Apple – Transubstantiation of a Camera into an Abstract Idea

Every time the courts re-define a mechanical device as an abstract idea, I struggle with the rationale that is applied to evaluate the claimed subject matter for patent eligibility under s. 101. I am not a computer scientist so the Alice/Bilski notion that a computer programmed to perform a function more quickly than it can be performed by a human sitting at a desk with a pencil and paper is not a technological advance has some appeal. After all, the idea of patents being granted for computerized versions of hoary business practices threatened to overwhelm the PTO. One the other hand, Diehr warned that all inventions can be reduced to underlying principles of nature which, once known make their implementation obvious. Recently, Yu v Apple , Appeal No. 2020-1760  (Fed. Cir., June 11, 2021) exemplifies the dangers of this oversimplification when it is used to render a specialized camera claimed in U.S. Pat. No. 6,611,289 patent-ineligible. This was a split panel decision, with Judge Prost writing for Judge Taranto and Judge Newman dissenting.

Transubstantiation is, of course, a religious doctrine that is the change—though not the appearance—of the bread and wine used in the Eucharist to become Christ’s real presence. I do not intend to discuss religion, but only to provide an example of a big leap of faith. Applying this definition so that the wine and the bread are concrete compositions while the presence of Christ is necessarily an abstract or intangible idea, it becomes apparent that a majority on the Yu panel held that it is appropriate to convert a concrete machine into an abstract idea which, in this case, is defined as its purpose:

          “Claim 1. An improved digital camera comprising:

A first and a second image sensor closely positioned with respect to a common plane…

Two lenses, each being mounted in front of one of said two image sensors:

said first image sensor producing a first image and said second image sensor producing a second image;

an analog-to-digital converting circuitry coupled to said first and said second image sensor and

digitalizing said first and said intensity images to produce correspondingly a first digital image and a second digital image;

an image memory…for storing [the digital images]; and

a digital image processor…producing a resultant digital image from the first digital image enhanced with said second digital image.”

I have compressed the claim somewhat. The panel agreed with the district court that the claims were directed to “the abstract idea of taking two pictures and using these pictures to enhance each other in some way.” The majority continues its Mayo/Alice Step 1 analysis:

“Given the claim language and the specification, we conclude that claim 1 ‘is directed to a result or effect that itself is the abstract idea and merely invoke[s] generic processes and machinery’ rather than ‘a specific means or method that improves the relevant technology.’”

I have written in earlier posts that whether or not a claimed invention is an improvement over the prior art is now a requirement to get past both steps of the Mayo/Alice test. This “improvement test” has not historically been used in patent eligibility analyses. In other words, the fact that a claim provides no more than an alternative route to the same outcome found in the prior art should not be a factor given weight in determining if the claim is a patent-eligible “machine”. That is the task of s.101. Furthermore, once the claim has been simplified to a broad abstract idea, the majority applies a “generic environment” test to the mechanical components recited in the claim. Although the Yu claim recited very concrete components, such as lenses and sensors, because these components were well-known and conventional, they merely “provide a generic environment in order to carry out the abstract idea”  [citing In re TLI Comm. LLC Patent Litigation, 823 Fed. Cir. 607 (Fed. Cir. 2016)]. This is a slippery slope since, if the machine—the camera—does not add up to a technological advance—and the components are, at least, individually described in terms of their “basic functions”, the Mayo/Alice inquiry is over. Almost by definition, there can be no inventive step, and the majority certainly agrees that Step 2 fails to make the abstract idea inventive:

“Here, the claimed hardware configuration itself is not an advance and does not itself produce the asserted advance of enhancement of one image by another, which, as explained, is an abstract idea. The claimed configuration does not add sufficient substance to the underlying abstract idea of enhancement—the generic hardware limitations of claim 1 merely serve as a “conduit for the abstract idea.”[citing TLI again.]

Judge Newman’s dissent gets right down to first principles: “This camera is a mechanical and electronic device of defined structure and mechanism; it is not an ‘abstract idea’… The ‘289 patent specification states that the digital camera achieves superior image definition. A statement of purpose or advantage does not convert a device into an abstract idea…A device that uses known components does not thereby become an abstract idea, and is not on that ground ineligible for access to patenting.” Judge Newman sees the majority’s opinion as “enlarging this instability [of technological development] in all fields, for the court holds that the question of whether the components of a new device are well-known and conventional affects Section 101 eligibility, without reaching the patentability criteria of novelty and nonobviousness.”

© 2021 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

ARTICLE BY Warren Woessner of Schwegman, Lundberg & Woessner, P.A.
For more articles on IP law, visit the NLRIntellectual Property section.

My Mother Wants to Invest in My Startup: Raising Funds With Non-Accredited Investors

Emerging companies are filled with potential, and the entrepreneurs running them have countless great ideas that may one day change the world. These owners typically fund their startup companies with money from their own pockets at first. But eventually, as the company grows, the company needs more capital to fuel that growth. This is when entrepreneurs often turn to outside sources for funds. It may seem innocuous to ask family and friends to contribute to your growing, high-potential business. Of course, they want to support you and the work you are doing.

But don’t be too quick to accept money from your biggest fans. The securities laws in the United States regulate capital raising, and entrepreneurs need to know how to raise funds within the boundaries of the securities laws before taking money from anyone, including family and friends, so as to avoid potential issues after taking that much-needed capital.

Under United States securities laws, and the securities laws of each individual state (or “blue sky” laws), offers and sales of securities have to be either registered or exempt from registration. Generally, registered offerings are too cost prohibitive for startup companies. This means a startup needs to issue securities pursuant to an exemption from registration. The most widely available and used exemptions depend entirely or mostly on limiting the offering to only “accredited” investors, but not every entrepreneur has a rich aunt or uncle in the family who qualifies as an accredited investor. Some exemptions permit offering to non-accredited investors, but depend on those investors still being  “sophisticated.” An investor can qualify as a non-accredited but “sophisticated” investor if the investor, either alone or with a “purchaser representative,” (as defined by the SEC) has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment. While your mother and best friend and second cousin may be very smart and may even run their own businesses, they may lack the sophistication the SEC requires to satisfy exemption requirements. Determining whether to include non-accredited investors, whether sophisticated or not, in the offering at the outset is important because it will affect which exemptions from registration are available for the offering and on what basis.

A brief description of some of the more typical exemptions that contemplate inclusion of non-accredited investors in the offering is below. Depending on which exemption is used, the cost and time it takes to get to the offering may vary dramatically.

Regulation Crowdfunding

Regulation Crowdfunding came about via the Jumpstart Our Business Startups Act of 2012, more commonly referred to as the “JOBS Act.” Regulation Crowdfunding is similar to the popular platform Kickstarter except, instead of giving out a t-shirt to investors, the entity raising capital can give out equity. A capital raise through Regulation Crowdfunding must meet the following requirements, among others:

  1. all transactions must take place through a registered broker-dealer or an online, SEC-registered funding platform;
  2. the company can raise a maximum aggregate amount of $5 million in a 12-month period;
  3. non-accredited investors may invest in the offering, but the amounts in which they can invest are limited; and
  4. the company must disclose certain information by filing a Form C with the SEC.

Generally, securities issued through Regulation Crowdfunding may not be resold for at least one year. An offering under Regulation Crowdfunding is not subject to state securities regulations.

Although non-accredited investors can invest in a Regulation Crowdfunding offering, the amount of securities that can be sold to a non-accredited investor is limited:

  • If the investor’s annual income or net worth is less than $107,000, the investor can invest the greater of $2,200 or 5 percent of the greater of the investor’s annual income or net worth.
  • If the investor’s annual income or net worth is equal to or greater than $107,000, the investor can invest 10 percent of the greater of the investor’s annual income or net worth, not to exceed an amount invested of $107,000.

Accredited investors may invest an unlimited amount in an offering under Regulation Crowdfunding (subject to the maximum amount a company can raise each year).

While the ability to raise a respectable amount of capital from any investor may seem appealing, there are some negatives to consider when thinking of conducting an offering pursuant to Regulation Crowdfunding. First, the Form C that is required to be filed at the outset of the offering requires the company to disclose a significant amount of information. A higher information requirement almost always leads to higher legal and other advisor costs. Second, the company must make annual filings, which include either audited financial statements or financial statements certified by the company’s principal executive officer. Finally, the company has no control over who actually invests. When it comes time to sell the company, the lack of relationship with a potentially large portion of investors may lead to challenges. And if the company is not as successful as planned, these investors could be prime plaintiffs in a securities action.

Regulation D

Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) sets forth safe harbors providing for exemption from registration under Section 4(a)(2) of the Securities Act. Some of these safe harbors are available even if offering to non-accredited investors, including Rule 504 and Rule 506(b) of Regulation D.

Rule 504

Under Rule 504, a company can offer to sell up to $10,000,000 of securities in a 12-month period. A company utilizing this exemption may not be a reporting company, an investment company, or a blank check company. The company may use general solicitation so long as certain state securities disclosure conditions are met, and securities generally may be sold to non-accredited investors, depending on state law. Because Rule 504 does not pre-empt state law, a company issuing securities pursuant to Rule 504 must comply with state securities laws, in addition to the federal securities laws, which requires the issuer to qualify or register the offering in every state in which the company plans to offer the securities, or requires the issuance to be subject to an exemption. Compliance with state securities laws is time-consuming and costly, especially if the company is issuing securities in multiple states.

Rule 506(b)

Under Rule 506(b), a company can raise an unlimited amount of capital and can sell securities to an unlimited number of accredited investors. A company also can sell securities to up to 35 non-accredited but sophisticated investors. However, selling to non-accredited investors, no matter how sophisticated they are, requires the company to provide substantially more disclosure, including financial statements, to such non-accredited investors. A higher information requirement almost always leads to higher legal and other advisor costs. The company also must make itself available to answer questions from non-accredited investors. Rule 506(b) also prohibits the use of general solicitation in an offering.

Regulation A

Another product of the JOBS Act, the amended version of Regulation A (referred to herein as simply “Regulation A”) is sometimes referred to as a “mini public offering.” Companies may sell securities to investors under two tiers, each of which has different requirements. Under either tier, the company must file with the SEC an offering statement on Form 1-A, which must be qualified by the SEC before the company may take any funds from investors. Before the SEC qualifies the offering, the SEC will review and provide comments to the company’s Form 1-A, and the company will have to amend the Form 1-A based on the SEC’s comments to the SEC’s satisfaction.

Tier 1

  • A company can raise up to $20 million in a 12-month period.
  • The company must include in its disclosure documents financial statements that have been reviewed by an independent accounting firm.
  • There is no individual investment limit.
  • The company must file a Form 1-Z exit report.

Tier 2

  • A company can raise up to $75 million in a 12-month period.
  • The company must include in its disclosure documents financial statements that have been audited by an independent accounting firm.
  • Investors in a Tier 2 Regulation A offering that are not accredited investors are subject to an investment limit equal to 10 percent of the greater of the investor’s annual income or net worth if the investor is a natural person or 10 percent of the greater of the investor’s annual revenue or net assets if the investor is not a natural person.
  • The company is required to file with the SEC annual reports on Form 1-K, with audited financial statements, semiannual reports on Form 1-SA, current reports on Form 1-U, and an exit report on Form 1-Z.

A company selling securities under Regulation A may use general solicitation, though any general solicitation before the Form 1-A has been filed must comply with the requirements for “test the waters” communications. An offering conducted under Tier 1 is subject to state blue sky laws, but an offering under Tier 2 is not. Securities sold in reliance on Regulation A are not restricted securities, meaning they generally can be freely resold, subject to applicable state blue sky laws. As mentioned above, complying with state blue sky laws is time-consuming and costly.

Other registration exemptions may be available in specific situations that allow offering to non-accredited investors, but the above are the most readily available. As the process and requirements for qualifying for any of these exemptions makes clear, raising money from your mother is not as simple as accepting a check. Always have a plan on how and to whom you are offering securities before you start taking money. Meeting the requirements of an exemption that allows offering securities to a non-accredited investor is typically time-consuming, complicated, and costly because of the disclosure requirements.

© 2021 Varnum LLP
For more articles on startups, visit the NLRSecurities & SEC section.

International Travel After the US Travel Ban is Lifted – What Visa Holders Can Expect

At some point this year, we expect that the United States will lift the travel ban that includes all of the Schengen countries, the United Kingdom, China, and others.  While there have been many rumors about when this will happen, the US government remains silent.

When the United States lifts the travel ban, US visa holders in the United States will have many questions about whether they can travel abroad, when they can return, and what impediments they may face.  The following FAQs address these questions.  We will update them as needed.

1. When the United States lifts the travel ban, will I still need a National Interest Exception?

Answer:  No.  If the travel ban is completely lifted and no other restrictions are put in its place, travel will return to pre-pandemic “normal.”  In other words, you will not require any special advance permission to fly directly to the United States from countries that were previously under the travel ban.  You will also not need to show that you are exempt because you have an immediate relative (spouse or child) who is a US citizen.

2. When the United States lifts the travel ban, will I need a Covid vaccination to return after international travel?

Answer:  Possibly. The travel ban may be lifted in phases, allowing first for travel of vaccinated individuals.

3. When the United States lifts the travel ban, will I need a negative Covid test to return after international travel?

Answer:  Possibly. That will be up to the CDC. As of early June 2021, a negative Covid test is required for all US-bound air passengers 2 years of age or older, regardless of where they are flying from. If the CDC decides to change this rule, it will be announced on the CDC website.

4. When the United States lifts the travel ban, can I leave the United States and travel to my home country to see my family and friends?

Answer:  As a US visa holder, you are always free to leave. The issue is when you can return, which may depend on whether you require a US visa in your passport that only US consulates can issue.  (See below.)

5. Will I need a US visa in my passport in order to return to the United States to resume my current nonimmigrant visa status?

Answer:  Except for Canadian passport holders (other than E visa holders), every employment-based nonimmigrant visa holder must have a valid, unexpired visa in their passport that matches their work-authorized status, as indicated on their USCIS approval notice (Forms I-797 or I-129S) in order to return to the United States.  Family members holding dependent status must also have valid, unexpired visas in their passports to return to the United States.

6. My current visa is unexpired and is in the same category as my approval notice.  Will I need a new visa to return to the United States after travel abroad?

Answer: As long as you return with your unexpired, valid visa and your approval notice before either expire, US Customs should admit you in the same visa status through the end date listed on the approval notice.  For example, if you have in your passport an unexpired H‑1B visa that references a prior employer’s name and your most recent H-1B approval notice is for a new employer with a longer expiration date than listed on the visa, the two documents together will allow a US Customs officer to admit you in H-1B status. The visa and the approval notice must be in the same visa classification, however.

7. My current visa has expired, but I have an approval notice extending my status in the same visa classification.  Do I need a new visa to return to the United States?

Answer:  Yes, you will need to use the new approval notice to obtain a new visa at a US consulate abroad.  Your family members will need new dependent visas as well.

8. The visa I used to enter the United States is in a different visa classification than the approval notice my employer obtained for me, which changed my visa classification.  Do I need a new visa in order to return to the United States?

Answer:  If the USCIS changed your status after you arrived in the United States, you will need a new visa in your passport in the same visa classification listed on the new approval notice.  For example, if you entered using an F‑1 student visa, and then a US company filed an H-1B change of status petition for you and approved by USCIS, you will need an H-1B visa in your passport to return following travel abroad.  Your family members will need new dependent visas as well.

9. I heard that if the USCIS extended my status and/or changed my status to a new visa classification, I can travel to Canada or Mexico and back without getting a new visa in my passport.  Is this true?

Answer: Yes, it is true, but only if you are visiting either of those countries for 30 days or less, you do not apply for a US visa while there, and you do not travel to another country in between departing from and returning to the United States.  This process is the “automatic revalidation of visa at port of entry”.  You should consult with an attorney before using this provision of law to make sure that it is still available when you plan to return and that you have the necessary documentation to return after your short trip.

10. I heard that scheduling visa appointments at US consulates has been very difficult during the pandemic and while the travel ban has been in place.  Once the United States lifts the travel ban, will it be easier to schedule visa appointments abroad?

Answer: Possibly, but probably not immediately. We expect lingering backlogs in visa appointments. While we do expect that US consulates will return to pre-COVID appointment scheduling, we do not expect it to happen very quickly.  When the United States lifts the travel ban, the consulates may not be operating at full staff.  Even those that will be fully staffed will not likely return immediately to pre-COVID scheduling, as there is still a risk of COVID transmission in many countries.  As the vaccine rollout becomes more widespread, US consulates are likely to make more appointments available.  For countries with rising COVID cases, appointments will remain hard to secure.  At this time, most US consulates are only scheduling emergency appointments, and those scheduling regular appointments are doing so for late 2021 and early- to mid-2022.

11. I have a visa appointment scheduled for early 2022.  If the consulate opens up more appointments, will my appointment be moved to an earlier date?

Answer:  It may depend on the specific consulate whether it will automatically move appointments to earlier dates, or whether it falls on the applicant to reschedule.  It is advisable to check the consulate’s website often to see if earlier appointments become available.  This may require checking daily.

12. What are the chances that I can secure an emergency appointment to obtain my visa?

ANSWER:  Low. At this time, US consulates are inundated with emergency appointment requests, most of which are denied.  Unless the emergency rises to a life-or-death situation, you can assume that you will not get one.  However, there is no harm in making the request.

13. Can I apply for a US visa at a US consulate in a country other than my home country?

ANSWER: Probably not. Because visa appointments are difficult to schedule, most US consulates are not entertaining visa applications from third-country nationals and are only granting visa appointments to local citizens or long-term residents.

14. Can I renew my visa while I am in the United States?

ANSWER:  Unfortunately no. The ability to apply to the State Department for “visa revalidation” ended after the tragic events of 9/11/2001.  Therefore, you must apply at a US consulate abroad.  There are rumors that the US may reinstate visa revalidation in the United States at some point to relieve the backlogs at US consulates, but we do not know if or when this could become a reality.

15. I have an unexpired B-1/B-2 visitor’s visa in my passport.  Can I use it to return to the United States to continue my employment?

ANSWER: No. You cannot use a B-1/B-2 visa (or any other nonimmigrant visa not related to your work-authorized approval notice) to enter the United States for employment.  Doing so would be visa and immigration fraud, and your US employer would be at risk for employing you when not authorized to do so.  You also should not use it to enter the United States intending to have your employer re-sponsor you for a work-authorized change of status, as you cannot enter as a visitor with the intention of changing status after arrival.

16. I have an unexpired ESTA (Visa Waiver) registration (or can obtain the registration). Can I use it to return to the United States to continue my employment?

ANSWER:   No. You cannot use ESTA to enter the United States for employment.  Doing so would be visa and immigration fraud, and your US employer would be at risk for employing you when not authorized to do so.  You also cannot apply to extend your ESTA visit or to change to a new status while you are in the United States.

17. Can I ask for Congressional assistance to schedule a visa appointment?

ANSWER: You can certainly reach out to your member of Congress for such assistance; however, it is unlikely that you will be successful, as Congressional offices are inundated with such requests.  If you have compelling facts, it may help, but unless you have a life-or-death situation, Congressional assistance is not likely to help.

18. If I depart the United States and cannot get a new visa, can I work from abroad until I can obtain the new visa to return to the United States?

ANSWER:  It depends on your company’s policies. Your employer may not allow you to perform your US position from abroad, as it may raise tax or other legal issues.  This is something you should discuss with your manager, human resources, and/or your global mobility department before making plans to depart.

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.
ARTICLE BY Ian P. Band of Hunton Andrews Kurth
For more articles on international travel, visit the NLR Immigration section.

Summer Is Here: International Vacation Travel During a Pandemic

International travel during the COVID-19 pandemic has been challenging, but conditions are finally improving. Many Americans are now vaccinated against COVID-19. The latest CDC reporting indicates 50.9% of the U.S. population has received at least one vaccine dose and more than 41% of the U.S. population has been fully vaccinated.

Many international destinations are planning for an uptick in tourism – including Europe. Unfortunately, there remains no consistency in the rules in effect across the pond. With Europe opening, many have been hoping since May that the United States will reciprocate and eliminate at least some of the COVID-19 international travel restrictions.

The EU Commission’s overall recommendation is that tourists from countries with low infection rates be allowed to enter if they are fully vaccinated with an EU-approved vaccine. This is reflected in some recent developments from European countries. For example:

  • Denmark has opened to EU/Schengen countries and plans to open to international tourists later in June.
  • France plans to use a “traffic light” system to determine which countries’ residents can visit and what restrictions will apply.
  • Malta is open fully to vaccinated travelers.
  • The UK plans to use a “traffic light” system that will determine “green-listed” countries, who will need to quarantine, and what testing will be required.
  • Portugal is open to EU/Schengen countries and the UK.
  • Italy is open to those from the UK, the EU, and Israel who are fully vaccinated.
  • The Netherlands is open to 15 low-risk countries.
  • Greece has been open to the EU, the United States, the UK, and Israel if the travelers are fully vaccinated or have a negative COVID-19 test.

In the meantime, the CDC has lowered travel restrictions for more than 100 countries. Further, especially due to upcoming international travel requirements, the United States is considering offering voluntary documentation that would allow U.S. residents to prove vaccination status. However, these vaccine “passports” have been controversial and a spokesperson from DHS noted that there will be “no federal vaccination database or a federal requirement for Americans to provide they’ve been vaccinated . . . . ” The status of these “passports” promises to be an evolving area, considering the privacy concerns that have been raised, such as in New York.

For now, everything is country by country and airline by airline – and everything is subject to change (make sure your airline tickets and hotel reservations are refundable!).

Those planning to travel need to make sure to check with the appropriate consulates before starting to plan.

Jackson Lewis P.C. © 2021
ARTICLE BY Kristopher W. Peters of Jackson Lewis P.C.
For more articles on international vacations, visit the NLR Immigration section.

 

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