Maryland Business Law Blog

What Do I Do First When My Business is Sued? New Case Illustrates Importance of Litigation Hold

Posted by Edward Sharkey on Tue, 02/12/2013 - 05:00

A new case from New Jersey reminds businesses of the importance of acting promptly to identify and preserve relevant information when the prospect of a lawsuit arises. In the case, the judge granted a business's motion for sanctions against a New Jersey county for failing to properly preserve electronic evidence once it had notice of potential litigation. What did the county do wrong?

The county did not implement a litigation hold even after the litigation was pending. Its errors included failing to disable the automatic delete function on its email server and not preserving copies of its backup tapes.

The county argued that, because there was no "spoliation", or loss of data, the imposition of sanctions was improper. The court held that a party injured by an insufficient litigation hold may recover attorneys’ fees and costs, even if relevant data is not destroyed or lost.

When a party to litigation fails to satisfy its obligation to preserve evidence, the court may impose various sanctions, including dismissal of the claim, granting fees and costs to the injured party, and a “spoliation inference,” which allows the opposing party to reasonably interpret what the destroyed evidence might have proved and entitles that party to an inference by the court that its interpretation is correct.

This case is a reminder of how important it is for a business to implement a satisfactory litigation hold once it has notice of the possibility of a lawsuit. Failure to do so may cause the business to face an uphill battle in court as well as pay for any attorneys’ fees and costs its opponent accrues as a result.

Business Crowdfunding Law Delayed by Inaction at the SEC

Posted by Edward Sharkey on Wed, 02/06/2013 - 05:00

We’ve been following developments concerning the new law allowing businesses to raise capital through crowdfunding. The law would permit companies to sell equity to any person (through a regulated intermediary that will serve a role similar to a stock brokerage) without having to register with the SEC. If this sounds familiar, you may be aware of Kickstarter, IndieGoGo, or Razoo: three popular crowdfunding websites that have helped get business ideas and creative ventures off the ground. These sites do not, however, allow creators to exchange equity for cash. “Equity crowdfunding” remains illegal as long as the SEC’s rulemaking is incomplete. Now, the implementation of the new law remains delayed.

In the JOBS Act, Congress delegated the responsibility to create regulations governing equity crowdfunding to the SEC. It also established a due date of December 31, 2012. The SEC’s deadline has come and gone, and unfortunately we appear to be no closer to having an effective equity crowdfunding law on the books.

Part of the delay can be attributed to bureaucratic turnover: the chairwoman of the SEC, as well as three of her deputies, stepped down from their posts in December. There also is still one vacancy on the five-member commission in charge of the SEC. There is speculation that, in light of these delays, the SEC’s rules will not be finalized until late this year or even 2014.

Once the SEC has drafted and published a set of proposed regulations, there will be a 90-day public comment period before the rules are finalized. In the meantime, the legal, economic, and business communities are busy
submitting comments and offering proposals for what they believe the regulations should accomplish. This response is proof of the eagerness and need in the small business and startup realms for this access to capital.

As angel investment funds dry up and startups find bank loans more difficult to secure, completing the crowdfunding law grows more important. Selling equity in lieu of taking bank loans is a good option for many small businesses. When the SEC issues a finalized version of its rules, these businesses will finally have access to a huge and unprecedented source of capital.

Our attorneys continue to monitor the equity crowdfunding law and the SEC’s rulemaking progress. We will have an update as soon as the SEC releases its proposal. Please feel free to contact us with questions about using crowdfunding for your small business, or with any other business-related legal issues you may have.

New Case Protects Businesses’ Copyrights in Employee-Generated Content - Part II

Posted by Edward Sharkey on Mon, 01/28/2013 - 05:00

In November, we discussed a new case issued by the 9th Circuit Court of Appeals, in which the court addressed a copyright dispute between a company and a former employee. In addition to reminding us that employers can claim content generated by employees “in the scope of employment”, the case also resolved issues concerning the copyright of derivative works. That is, whether work derived from earlier content is worthy of new copyright protection.

“Derivative works” are discussed in the Section 103 of the Copyright Act, and are given copyright protection subject to some restrictions. The 9th Circuit’s opinion sheds some light on when derivative works are eligible for a new copyright, distinct from the original work.

In the case, a freelance computer programmer created order processing software which he licensed to an auto parts website. He was later hired as an employee of the site and made several modifications to the software during his employment, including the addition of a “drop-shipping” feature, which was instrumental in the site’s success.

After he left the company, a legal dispute arose as to the ownership of the copyright to the modified software. The 9th Circuit’s opinion in this case serves as a reminder of the applicable legal standard governing the copyright of derivative works. The 9th Circuit uses a test originally created by the 2nd Circuit, which asks whether:

• The derivative work was authorized;
• The original aspects of a derivative work [are] more than trivial; and
• The author of the derivative work made so few changes to the preexisting work that issuing a copyright for the derivative work would prevent the owner of the preexisting work from exercising some of its rights under copyright law.

If the answers to these questions are “yes,” “yes,” and “no,” respectively, the derivative work is eligible for its own, new copyright.

In this case, the 9th Circuit held that it was possible a jury would find that the programmer had granted his employer an implied license to modify the order processing software. If so, the derivative work would be authorized. The court also said that a jury could find the addition of the drop-shipping feature “more than trivial,” and that allowing the purchasing company to claim copyright of the modified software would not prevent the programmer from exercising his rights to the original software without the drop-shipping feature.

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