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By Joel I. Rosenblatt, Attorney at Law
Mr. Rosenblatt, a Registered Patent Attorney with the U.S. Patent and Trademark Office, practices in the commercial law of technology and the Internet and the law of patents, trademarks, and copyrights. He is a Florida Supreme Court Certified Mediator, a Florida Bar Approved Mediator for Computer Law Disputes, certified as a Mediator and Arbitrator for the U.S. District Court for the Middle District of Florida and is admitted to all U.S. District Courts for Florida. Any questions or comments may be directed to Mr. Rosenblatt at (321) 727-7626; FAX: 727-8209 or by email to jirosenblatt@earthlink.net
Start Ups To End Ups
Among science fiction authors were the American writer Edgar Allen Poe and the British writers H.G. Wells and George Orwell. Poe wrote his science fiction, as a reflection of first half 19th century scientific knowledge. Wells was more advanced, using body of knowledge assembled up to the early 20th century and then mixed into his fiction, political commentary of “things to come.” Orwell inverted the science and the political and used fiction to predict the possibilities of the political future. While Wells relied first upon convincing his reader that his science was credible and then presented the political, Orwell presented the political first and used the fiction as a background, minimized to enhance but not detract the reader from the central political lesson.
The protagonist in the Orwellian story, was given the task of aligning written history to current politics. It was a way of correcting, or in Orwell’s “1984,” erasing past mistakes. That was an opportunity available in a future Orwellian society. However, reality teaches the future is predictable only by our knowledge of the present, extrapolated into a risky future, intensified by assumptions of expected, but non predictable human behavior.
Start ups are a case where the present becomes the immutable past shaping the future. Start ups usually never end up as expected and that is the reason why business should be prepared for the best and the worst of times by a clear and comprehensive pre-start up operating agreement, for future use as a road map to avoid catastrophes and their sometimes devastating consequences.
This start up is a mostly true story and happened sufficiently far in the past that it bears no relation. The asset for the proposed business was the invention of a kind of early, and by current standards, primitive digital filtering process for removing noise from a digital signal, easy enough to anyone with a knowledge of addition and subtraction. It involved a computer capable of using electronic signaling representative of mathematical equations (read as transfer functions), to produce a correction signal operating as a correction transfer function. The correction signal was electronically combined with the original digital signal to remove undesirable noise by a simple addition and subtraction process. It was an innovative use of electronic circuitry to do what electronics has always done: process electronic signals according to their mathematical representations as transfer functions and in the same way a hand calculator performs its operations.
Our inventors and start up entrepreneurs, decided first before anything, a patent application was needed. However, this was back in the days when the U.S. Patent Office filing system was “paper,” and anything as novel as a computer was suspect. Not unusual for the Patent Office, at that time, where the law constrained patenting anything that was a law of nature, or a mathematical process, or even anything that was naturally occurring. Fortunately, patent practice advanced into the computer age where the patent attorney became the “intellectual property attorney,” and any computer programmed for a novel function or end result became acceptable to the Patent Office.
Our start up entered business as limited liability company (LLC), a business model chosen to financially protect our founding members without limiting their business operations. Having had experience with other engineering and programming start ups, the futurist attorney preparing the operating agreement used it as a statement of possible “things to come,” and included a procedure for dealing with each predictable event.
Following in the style of Poe and Wells, the attorney prepared the LLC operating agreement from the present and the known future, by listing the invention, the pending patent application, copyright protected software engineering, trademarks and service marks, and identifiable technology and business related, trade secrets, and all intellectual property developed by the LLC members or under the authority of the LLC.
The operating agreement was used to limit the LLC members’ control of the business assets, to plan for dissolution or bringing in new members and to account for members’ contributions, for engineering or business ability or for contribution to capital. To control risk, the operating agreement included a provision for limits on financing and reserves, structured in a series of risk/reward levels tied to cash flow and asset liquidity.
At this time, the start up, unlike Orwell’s hero, could adjust the future with the past, only by a real time restructuring of the LLC operating agreement, as their business was developing fast enough to make it necessary to bring in a new member, who was given a lesser share in the profits and a lesser participation in the LLC management.
Always thinking in terms of expansion, the product was put on the market before a protecting patent on the invention was issued. While the product carried the notice of “patent pending,” that was not enough to discourage competitors who, sensing the Patent Office, at that time, would reject any electronic device described by a mathematical algorithm, manufactured everything from exact copies to improved models.
The marketing of the product without protection from an issued patent challenged our LLC with diminishing sales for its flagship product from better financed competitors capable of filing blocking patent applications on their original invention. The practical effect was to have donated the invention to the public, at least until the patent issued. What the LLC needed was most was a plan for sustaining future operations until an endorsable patent issued and competitors legally eliminated.
As sales diminished, the LLC returned to the operating agreement contingency plans, relying on planned reserves to carry the business until the application issues of “mathematical” subject matter were resolved at the patent appeal level, and the patent issued.
Lucky for our LLC, the future was already here, at least at the level of the patent court of appeals, which instructed the Patent Office, any machine, computer or otherwise, producing any kind of industrial result (more than a mathematical process), was patently able. In this case the industrial result was a transformed noisy input signal into a clean noiseless output audio signal and music to the ears of the listener. For those interested in where the patent law went from there, the present future is any computer programmed to produce an operative result, is a proper subject matter for a patent, even one whose only math operation was to model a business system transferring, and performing operations for information having no significance beyond its identified use in a business model.
The experience of this LLC is illustrative, perhaps instructive, of the protections a startup may need against contingencies. For example, the procedure for a member’s withdrawal could be structured so the business has the funds to pay the departing member without financial disruption. Other almost certain predictions can include a departing member taking the intellectual property of the start up for a new venture or to a competitor. While Florida expressly permits restraints on departing corporate members, it will be useful to identify the important intellectual property at risk and the operating agreement should include provisions for intellectual property inventory and control. This is to identify the departing member with the restricted property. At the same time, it would not be improper to include a catalogue of businesses or products, that would be off limits to the departing member for up to two years.
In the final analysis, what may go wrong that is known and predictable, is preventable. What can’t be predicted, can’t be prevented, or used to protect our start up from becoming another dysfunctional end up.
Stay Tuned for Next Month's Article!
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Joel I. Rosenblatt is state Supreme Court certified and available for mediation and arbitration. He practices as a registered patent attorney in patents, trademarks and copyrights. Specific areas of practice include commercial law related to electronics, computers, data processing, telecommunications, materials and mechanical engineering, the Internet and entertainment and in the development and licensing of technology and creative works. As Intellectual Property and Licensing Counsel for Fortune 200 corporations, he has acquired numerous patents for electronics and computer related inventions, and has prepared and negotiated design, development and distribution agreements for software, telecommunications, electronic technology, and creative works. As a logistics attorney, he has provided counsel and representation in the field of customs, logistics services, and in loss and damage claims.
Mr. Rosenblatt is available for mediation and arbitration in the fields of general law, intellectual property, entertainment, and technology law, and in logistics law and loss and damage claims. Emphasizing technology and the arts, he serves a wide range of intellectual property and commercial needs for individual and business clients. Mr. Rosenblatt, as a senior level attorney can provide clients easy access and quick turnaround.
Education and Professional Affiliations:
Mr. Rosenblatt holds a Bachelor of Electrical Engineering Degree from the New York Polytechnic University, an MBA from the Wharton School of the University of Pennsylvania, and a JD from the Catholic University of America Law School.
Mr. Rosenblatt is a Registered Patent Attorney with the U.S. Patent and Trademark Office and a member of the Florida and New York State Bars. Admitted to practice in the Court of Appeals for the Federal Circuit, the United States Court of Appeals for the 11th Circuit, the United States Court of International Trade and the United States District Courts for the Northern, Southern, and Middle Districts of Florida. Florida Supreme Court Certified for Circuit Court Mediation and approved by the Florida Bar as a Mediator of Computer Law Disputes. Mr. Rosenblatt has completed Florida Supreme Court Certified Arbitration Training and is certified as a Mediator and Arbitrator in the United States District Court for the Middle District of Florida. jirosenblatt@earthlink.net . |
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