Showing posts with label lawsuit. Show all posts
Showing posts with label lawsuit. Show all posts
Tuesday, May 06, 2014
Wednesday, March 19, 2014
Chinese And US Patent Lawfare
Today I attended CALOBA's presentation on how Chinese companies handle US patent litigation. I have not found the researchers' slides or data in public media at the time I wrote this article. The research concluded that Chinese companies get sued a lot and are prime targets for US patent trolls. The report's authors used Lex Machina to mine databases on patent lawsuits, so Big Data is finally transforming the legal field. The trends that CALOBA's invited panelists discussed made me think of how Chinese companies are vulnerable to deliberate lawfare tactics. I can summarize the Chinese vulnerabilities they identified, in the best non-lawyer way I can muster.
Vulnerability #1: Speak no evil. Chinese companies underestimate the amount of documentation they must provide during discovery in US-based litigation. They are unaccustomed to such extensive transparency. Their reluctance to disclose emails, meeting transcripts, and other records puts them at risk of losing cases in US courts.
Vulnerability #2: Lost in translation. Chinese companies rely too much on English language translation services. The panelists presented some anecdotal observations that engineering diagrams would have withstood cross-examination in a US patent hearing if they had been accompanied by original descriptions in English.
Vulnerability #3: What goes on in country doesn't stay in country. Chinese executives who are unwilling to travel to the US for a trial hurt their case. American juries want to hear the Chinese executives' side of the story. The panel recalled a funny story about a Chinese company that ignored a default judgment only to travel to the US for business afterwards and see their trade show exhibit seized. They must have assumed the court system would have a short memory. The long arm of US law has a very long memory.
Vulnerability #4: Not enough lawyer firepower. I'm not sure whether Chinese companies take their legal system as seriously as Americans take their own system or give their attorneys as much prestige. The panel implied that typical Chinese corporate in-house counsel either doesn't have enough rank within the company to be heard or has additional duties in low-level management. I should have asked the experts on hand to clarify the social standing of Chinese in-house counsel but it was hard to be heard over the silly questions some dingbats in the audience were asking.
The WIPO published China's own description of its utility model patent (UMP) system in September 2012. I read stuff like this all the time. The US Chamber of Commerce published a detailed description of China's UMP regime in November 2012. I like the US description better. I can't fully trust anything from the Chinese government until they complete their planned legal system reform. The US report clearly identifies that China's focus on pushing raw numbers of patent filings has driven a decline in patent quality. This decline has invited the attention of patent trolls whose legal tactics outwit Chinese companies in US courts. The US has begun fighting its own patent trolls while China remains vulnerable to its own trolls.
I'll offer some broad considerations for US public policymakers, business lobbyists, and entrepreneurs in light of the above conditions. US regulations and laws discouraging patent trolls may limit the ability of US firms to litigate Chinese IP theft. It is too early to tell whether Chinese legal reform will accommodate the kinds of multi-pronged IP strategies US companies are accustomed to using in the US. Patent claim strategies must account for prior art to avoid duplication. Startups have tighter budget constraints and shouldn't pursue expansive patent strategies; they can't afford to patent much besides their core tech. All of that wisdom is totally a stream of consciousness blast, but that's how Alfidi Capital does business. Take it or leave it.
The broad drafts of US patents and the inflexibility of Chinese patent appeals illustrate the asymmetric advantages the US possesses in any potential lawfare contest. The US's ability to conduct lawfare should be a source of national pride. This country graduates more lawyers every year than the rest of the world supposedly has in stock. God bless America for winning the lawfare arms race early.
Vulnerability #1: Speak no evil. Chinese companies underestimate the amount of documentation they must provide during discovery in US-based litigation. They are unaccustomed to such extensive transparency. Their reluctance to disclose emails, meeting transcripts, and other records puts them at risk of losing cases in US courts.
Vulnerability #2: Lost in translation. Chinese companies rely too much on English language translation services. The panelists presented some anecdotal observations that engineering diagrams would have withstood cross-examination in a US patent hearing if they had been accompanied by original descriptions in English.
Vulnerability #3: What goes on in country doesn't stay in country. Chinese executives who are unwilling to travel to the US for a trial hurt their case. American juries want to hear the Chinese executives' side of the story. The panel recalled a funny story about a Chinese company that ignored a default judgment only to travel to the US for business afterwards and see their trade show exhibit seized. They must have assumed the court system would have a short memory. The long arm of US law has a very long memory.
Vulnerability #4: Not enough lawyer firepower. I'm not sure whether Chinese companies take their legal system as seriously as Americans take their own system or give their attorneys as much prestige. The panel implied that typical Chinese corporate in-house counsel either doesn't have enough rank within the company to be heard or has additional duties in low-level management. I should have asked the experts on hand to clarify the social standing of Chinese in-house counsel but it was hard to be heard over the silly questions some dingbats in the audience were asking.
The WIPO published China's own description of its utility model patent (UMP) system in September 2012. I read stuff like this all the time. The US Chamber of Commerce published a detailed description of China's UMP regime in November 2012. I like the US description better. I can't fully trust anything from the Chinese government until they complete their planned legal system reform. The US report clearly identifies that China's focus on pushing raw numbers of patent filings has driven a decline in patent quality. This decline has invited the attention of patent trolls whose legal tactics outwit Chinese companies in US courts. The US has begun fighting its own patent trolls while China remains vulnerable to its own trolls.
I'll offer some broad considerations for US public policymakers, business lobbyists, and entrepreneurs in light of the above conditions. US regulations and laws discouraging patent trolls may limit the ability of US firms to litigate Chinese IP theft. It is too early to tell whether Chinese legal reform will accommodate the kinds of multi-pronged IP strategies US companies are accustomed to using in the US. Patent claim strategies must account for prior art to avoid duplication. Startups have tighter budget constraints and shouldn't pursue expansive patent strategies; they can't afford to patent much besides their core tech. All of that wisdom is totally a stream of consciousness blast, but that's how Alfidi Capital does business. Take it or leave it.
The broad drafts of US patents and the inflexibility of Chinese patent appeals illustrate the asymmetric advantages the US possesses in any potential lawfare contest. The US's ability to conduct lawfare should be a source of national pride. This country graduates more lawyers every year than the rest of the world supposedly has in stock. God bless America for winning the lawfare arms race early.
Sunday, October 20, 2013
Alfidi Capital Heard Roger Royse at Idea to IPO's Current State of Crowdfuning
I'm always checking out startup action in Silicon Valley. The JOBS Act of 2012 was supposed to make that easier. Performing due diligence online is one thing but actually closing an investment round is quite another. The Idea to IPO Meetup group presented Roger Royse of Royse Law Firm last week down at Menlo College to give us all a rundown of the current state of crowdfunding.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
Sunday, July 21, 2013
Eminent Domain as Nightmare Fulfillment of Unfunded Public Pensions
Detroit's bankruptcy filing is making many other municipalities nervous about their unfunded liabilities for retiree pensions and benefits. A drawn-out bankruptcy fight will be a nightmare for politicians who stake their reputations on good governance and successful turnarounds. Government retirees are still a potent political force and will fight in court for what they think they deserve, regardless of the fiscal harm they cause. States will sell assets to settle their debts if public employee unions do not willingly take cuts in promised benefits.
I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court. Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming. There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall. That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.
This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects. The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments. Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award." I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property. My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion. The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.
Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions. Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners. Finally, consider that legal precedent also allows the taking of personal property and intangible property. I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.
This is a thought piece that I very much want to be invalidated. I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers. I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions. I want to be wrong about this prospect. I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.
I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court. Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming. There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall. That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.
This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects. The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments. Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award." I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property. My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion. The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.
Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions. Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners. Finally, consider that legal precedent also allows the taking of personal property and intangible property. I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.
This is a thought piece that I very much want to be invalidated. I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers. I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions. I want to be wrong about this prospect. I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.
Friday, April 05, 2013
Bank of America Still Paying for Merrill Buyout via Lawsuits
Bank of America has to pay a $2.43B settlement for a class action lawsuit over its buyout of Merrill Lynch. Consider also that BofA is still facing potential a civil fraud lawsuit from the state of New York. A brief history of this acquisition reveals that it cost $20B initially, then forced BofA to incur a $27.6B loss and incur a $20B bailout liability.
I feel safe in saying that the acquisition of Merrill Lynch will never really pay off for Bank of America. Whatever specious synergy BofA may have gained from combining back office functions is minuscule in the face of $70B+ worth of financial statement degradation. I do not want to hear any claims of referral benefits from Merrill's wealth management and investment banking units to BofA's commercial bank. BofA has never fully integrated its U.S. Trust wealth management arm with the bank's existing wealth management unit, and watching BofA compete against itself in that sector used to amuse me. Merrill's culture is even less compatible with BofA, and it's still separately branded just like U.S. Trust. Imagine an investor walking into a BofA branch and asking for a referral to a wealth manager, and the teller says something like "Sure, we've got a bunch of divisions that all do the exact same thing." Clueless.
BofA earned almost $4.2B in 2012, on declining gross revenue. This settlement will hurt, no doubt. What should hurt even more is that BAC's P/E is a ridiculously high 47.88 as of today's close. That denominator is going to drop once this settlement is paid out. The broad economy's long-term P/E is 14, so if BofA were trading in line with the economy's permanent prospects it would be around $3.50/share. It traded at a little over $5/share back in December 2011, so maybe the market had BAC figured out back then. I have no idea where this share price will go. I also have no idea why any portfolio manager would buy the stock of a bailed-out bank with a history of bad acquisitions, cultural clashes, and unfavorable litigation results.
Full disclosure: No position in BAC at this time.
I feel safe in saying that the acquisition of Merrill Lynch will never really pay off for Bank of America. Whatever specious synergy BofA may have gained from combining back office functions is minuscule in the face of $70B+ worth of financial statement degradation. I do not want to hear any claims of referral benefits from Merrill's wealth management and investment banking units to BofA's commercial bank. BofA has never fully integrated its U.S. Trust wealth management arm with the bank's existing wealth management unit, and watching BofA compete against itself in that sector used to amuse me. Merrill's culture is even less compatible with BofA, and it's still separately branded just like U.S. Trust. Imagine an investor walking into a BofA branch and asking for a referral to a wealth manager, and the teller says something like "Sure, we've got a bunch of divisions that all do the exact same thing." Clueless.
BofA earned almost $4.2B in 2012, on declining gross revenue. This settlement will hurt, no doubt. What should hurt even more is that BAC's P/E is a ridiculously high 47.88 as of today's close. That denominator is going to drop once this settlement is paid out. The broad economy's long-term P/E is 14, so if BofA were trading in line with the economy's permanent prospects it would be around $3.50/share. It traded at a little over $5/share back in December 2011, so maybe the market had BAC figured out back then. I have no idea where this share price will go. I also have no idea why any portfolio manager would buy the stock of a bailed-out bank with a history of bad acquisitions, cultural clashes, and unfavorable litigation results.
Full disclosure: No position in BAC at this time.
Friday, March 29, 2013
TBTF Banks Winning Legal Libor Challenges
The notion that large banks face enormous legal liabilities for their actions during and after the financial crisis is overblown. A U.S. federal judge just dismissed major portions of a complex pile of lawsuits against banks that manipulated Libor. The small chance that the remainder of the lawsuits will end in settlements means banks once again absorb illegal behavior as an overhead cost. This is very normal behavior in a crony capitalist system and indicates very clearly that large banks are increasingly able to operate with impunity beyond legal controls.
I can't connect the dots between a bank's lobbying effort, an appointed regulator's instructions to auditors that water down stress tests, and a judge's decision to ring-fence banks from civil penalties. Nothing is ever that easy. The actors in each phase of that cycle probably don't even know each other. That does not prevent me from seeing which way the wind is blowing. The troika's actions in Cyprus are a waypoint for rules and norms that will soon apply to every advanced economy. The applications in the U.S. will differ in details but not in spirit.
I can't connect the dots between a bank's lobbying effort, an appointed regulator's instructions to auditors that water down stress tests, and a judge's decision to ring-fence banks from civil penalties. Nothing is ever that easy. The actors in each phase of that cycle probably don't even know each other. That does not prevent me from seeing which way the wind is blowing. The troika's actions in Cyprus are a waypoint for rules and norms that will soon apply to every advanced economy. The applications in the U.S. will differ in details but not in spirit.
Wednesday, October 24, 2012
Wednesday, May 23, 2012
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