Guidance provided by UpCounsel IP & Transaction Attorney Patrice Perkins

Startup founders are notoriously fixated on their latest business idea. On their technology, on the millions of people who might benefit from their innovations. And on the financial rewards that come from business success, of course. Unfortunately, many innovators treat legal compliance like a trip to the dentist: something to do later, or only if it hurts.

For ideas that have true commercial value, this approach can create countless hours of unnecessary work, at best, and, at worst, can sow at the outset the seeds of a startup’s eventual demise. It is far better to seek legal advice carrying an idea on a napkin than with a legal complaint or certified letter.

A good lawyer will be a key behind-the-scenes contributor to the success of your startup.

[tweetthis]A good lawyer will be a key behind-the-scenes contributor to the success of your startup[/tweetthis]

Experienced legal counsel will know whether a proposed business venture is clearly unlawful, saving founders time and effort. Legal counsel will be able to flag law-related gray areas that could sap startup founders’ bandwidth and enthusiasm by attracting lawsuits and government investigations. In cases where the business idea is clearly lawful, good legal advice can create efficiencies early on and protect a fledgling venture from competitors and intellectual property theft.

A good lawyer will be a key behind-the-scenes contributor to the success of any startup venture.

“Seeking counsel at the very beginning will help you familiarize yourself with the lay of the land,” says UpCounsel attorney Patrice N. Perkins, a Chicago-based business and IP attorney who serves creative entrepreneurs and innovative businesses.

“The last thing you want to do is launch, only to find out you overlooked an important regulation that carries a hefty penalty,” she says. “I don’t believe that you need a lawyer on retainer prior to launch but you may want to consider a retainer relationship once you move into raising funding.”

Is the Law on Your Side?

Many promising startups, including UpCounsel, challenge business arrangements that enjoy the protection of long-established laws. Others solve problems created by legal systems held over from earlier generations. 

Don’t overlook a regulation that carries a hefty penalty. Hire an attorney now

[tweetthis]Don’t overlook a regulation that carries a hefty penalty. Hire an attorney now.[/tweetthis]

“Depending on your industry, you may have layers of laws regulating you: for instance, if your product or service involves food you may have to comply with FDA regulations,” according to Perkins. “If it involves wine, you’ll have federal and state statutes to abide by.”

A few recent examples of game-changing startups include:

  • Vinebox: an online wine merchant that curates and distributes fine wines by the glass. The sale and distribution of alcoholic beverages is subject to varying laws in all 50 days, many of which protect local monopolies, and all of which were written against the backdrop of the rich cultural history of Prohibition and its repeal by the 21st Amendment.
  • Shypmate: an alternative shipping service that skirts the high costs — and complex regulations — of international shipping by connecting shippers with airline passengers willing to carry the items on their flights.
  • Truebill: a convenience app for consumers that allows them to monitor spending with subscription-based content, apps and on-demand services all in one place. In order to work its magic, Truebill requires access to the consumer’s financial data with multiple service providers. Truebill’s terms of service cover all the bases: privacy disclosures, disclaimers and limitations of liability, intellectual property rights, prohibitions on data-mining and more.
  • a convenience app that connects old-fashioned parking meters with a mobile payment mechanism. Not only must the developers navigate banking and credit card regulations, but they need to hand-sell their technology, one government at a time to thousands of large and small cities.

Established Legal Protections May Fail

Twenty years ago, Congress passed several laws intended to promote the growth of the commercial Internet. One of them was Section 230 of the Communications Decency Act, a federal statute that immunizes interactive computer services from most legal claims arising out of the publication of content submitted by third-parties.

The law has been invoked dozens of times to protect website operators from lawsuits arising from the publication of all manner of user-submitted content: defamatory comments, business reviews, incorrect stock information, and advertising offering counterfeit products and illegal services.

But those court rulings didn’t stop California officials from arresting in October 2016 the chief executive officer of online classifieds website for promoting unlawful sex trafficking by carrying advertisements for sex services on the site.

Last month, a Sacramento court tentatively ruled that CDA Section 230 and the First Amendment required dismissal of the charges. The case is still technically pending, with a final ruling expected to be handed down this week.

Data is the Lifeblood of Modern Business

When it comes to data, the playground adage “finders keepers” does not apply. The most valuable data is either owned by another business or protected by privacy laws. Startups tap into this data at their peril.

A CEO was arrested for promoting sex trafficking by carrying ads for sex services on his site.

[tweetthis]A CEO was arrested for promoting sex trafficking by carrying ads for sex services on his site[/tweetthis]

Consider the case of Power Ventures, a startup that hoped to create a business by aggregating all of a user’s social media interactions in a single platform. Power Ventures’ business idea conflicted with Facebook’s business plans. Facebook’s terms of service forbids third-parties from accessing and copying user information without authorization by Facebook. Power Ventures went ahead and datelined Facebook anyhow.

As Power Ventures soon learned, violating a website’s terms of use can create crushing legal liability under the federal Computer Fraud and Abuse Act. The company has been in court for nearly a decade fighting Facebook’s computer fraud, copyright, spam and breach of contract claims. In July, the Ninth Circuit Court of Appeals overturned a $3 million damages award against Power Ventures, but the computer fraud claims stuck, and the company is now out of business.

Similarly, a startup called 3Taps offered an improved interface to online classifieds website craigslist by scraping craigslist ads and enhancing them with maps and other content available elsewhere on the Internet. According to craigslist, 3Taps’ conduct violated its terms of use. Craigslist sued, and 3Taps crumbled after a few years of litigation. For more information read 3Taps’ founders defiant business obituary.

And just this month, Prisma, a startup that gives its users the ability to apply artistic effects to images and video, had its access to Facebook Live cut off by Facebook officials.

In all these cases, the lesson is the same: startup founders expose themselves to enormous legal risk when they build their businesses with data arguably belonging to someone else.

What Can Be Done?

Unlike Google, Facebook or Apple — which have paid millions to settle legal claims against them — startups are brittle creations.

For them, a law-related pitfall can be a death sentence. Startup operators should ask: “If I had to consult a lawyer, would I rather walk into her office with new business idea or a legal complaint just filed against me?”

Fortunately, most legal risks associated with a startup venture can be mitigated with planning. Perkins suggests that startup founders obtain legal advice soon after conception of a new business idea and pre-launch. This is the time to evaluate the steps necessary to protect the business idea and to lay the groundwork for successful investor overtures, she says.

“I recommend researching and developing relationships with attorneys right away,” Perkins suggests. “You don’t want to be in the position of vetting counsel while an immediate need is already in front of you. Connect with attorneys in these key practice areas: corporate transactions and securities, employment, intellectual property and internet/privacy law.”

Patentability and branding issues also benefit from early evaluation and advice from legal counsel, Perkins says.

Privacy laws are an emerging area of concern for startups.

[tweetthis]Privacy laws are an emerging area of concern for startups[/tweetthis]

According to Perkins, “You should give your attorney full disclosure on what your big picture is for your venture. Minimally, you should walk away with a list of your immediate or near future legal needs, as well as those needs that are further out. This will help you prioritize, plan a reasonable budget and launch with minimal risk.”

Also important at this point in a startup launch is the creation of contractual agreements for the development team, she says.

Startups that believe they are vulnerable to data theft can protect themselves with both technology and a well-crafted terms of use policy. Liability disclaimers and arbitration clauses can minimize exposure to class actions and ruinous legal judgments. Privacy policies published at the outset of a new venture can ensure that all personal data collected can be processed and put to business purposes.

Privacy laws are an emerging area of concern for startups, particularly online startups that draw users from around the globe, Perkins says.

“Either you are tracking your consumers’ activity in some way, or collecting other behavioral or personal data. Maybe your app has geo-tagging features. You need to have well-drafted privacy policies, disclaimers and terms of use/service on your websites,” she says. “You don’t want to rely on a template to cover the bases for you. A lawyer will have an in-depth conversation with you about the features of your new product or service and its impact on users. From there, the lawyer will assess every area of potential risk and draft your policies with that in mind.”

Relevant government entities likewise span the globe: federal and state government, national governments abroad and the European Union’s privacy apparatus all come into play. For ventures that handle personal information, an in-depth conversation with a knowledgeable attorney about the features of the startup’s product or service is a prerequisite to meaningful compliance with privacy laws.

Startups targeting highly regulated industries such as healthcare, food and drug, and financial services will have an additional layer of legal compliance to address.

“At conception, you want to get advice around disclosure of your idea, what you should be thinking about and preparing for if you will seek early-stage investors, and contractual agreements for your development team,” according to Perkins.

8 Questions Founders Should Ask Themselves

Perkins says that startup founders who answer “yes” to any of the following questions should strongly consider obtaining early legal advice from a knowledgeable attorney:

1. Does my idea involve the collection or processing of personal information?
2. Does my idea disrupt traditional industries or longstanding business practices

Patent and branding matters benefit from early evaluation by an attorney

[tweetthis]Patent and branding matters benefit from early evaluation by an attorney[/tweetthis]

3. Does my idea involve the use of property residing on somebody else’s computer network?
4. Is the name of my business critical to my success?
5. Does my idea involve, or use, a process or method that is covered by an existing patent?
6. Should I seek a patent on my business method or process?
7. Is my idea in directed to a pervasively regulated market?
8. Does my idea critically assume that current laws either will or will not change?

A startup’s legal compliance issues might be a speed bump, a showstopper or a ticket to prison. Knowing the answer to these questions in advance could be the key to an orderly and successful venture.

About Patrice Perkins
Patrice is a transactional business and IP attorney with more than seven years of experience in corporate transactions, trademark and copyright matters on behalf of clients in new media, e-commerce, technology, entertainment and other creative industries.

Request a free quote from Patrice.

About the author

Thomas O'Toole

Thomas O'Toole

Tom is a longtime technology law journalist, formerly with Bloomberg BNA and BNA Inc. He is an attorney, a certified information privacy professional (CIPP/US, CIPP/E) and owner of Second Chair Media LLC, a content marketing shop for law and technology firms.

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