As Mr. Sabeti explains, “For-Benefit Enterprise” is a term more and more commonly used to refer to a hybrid form of business enterprise — one that is organized primarily to serve a social benefit purpose, but also generate earned income.

Mr. Sabeti, a co-founder and trustee of the Fourth Sector Network, was in the forefront of recognizing the emergence of this type of hybrid entity, and characterizing it as a “Fourth Sector” apart from but including elements typical of entities in each of our currently recognized three sectors: For-Profit, Nonprofit, and Government.

Forces Driving the Emergence of a Fourth Sector of “For Benefit” Entities

Driven by entrepreneurs motivated to harness the economic engine and energy of private enterprise to serve social and public benefit purposes, the movement toward formally recognizing a separate “Fourth Sector” of For-Benefit Enterprises has been gaining ground. Mr. Sabeti suggests that increasing public dissatisfaction with some of the environmental, ethical, and social costs of our capitalist for-profit model, and recognition of its inadequacy to serve social and public benefit purposes, have helped support the movement toward development of a Fourth Sector of hybrid entities formally and legally recognized as “For Benefit Enterprises.”

Mr. Sabeti touches upon the inadequacy of the for-profit form of corporate organization for For-Benefit Enterprises that exist to serve social or public benefit purposes. The problem stems primarily from the legal fiduciary duty that directors and officers in a for-profit corporation have to maximize profit for shareholders, leaving them open to potential liability to the corporation and its shareholders if they serve social or public purposes at the expense of maximizing shareholder profits. Directors and Officers who have to fear legal liability for failing to maximize shareholder profit in a for-profit entity, are not legally in a position to place priority on a social benefit purpose. This clearly is at odds with serving the social or public benefit mission that founders of a For-Benefit company seek to serve, as a primary corporate purpose.

Similarly, the nonprofit form of organization, with its arcane reporting requirements and rules prohibiting profit for shareholders, is at odds with the co-objective of Social Entrepreneurs of attracting private investment by providing a reasonable profit incentive in order to harnessing the energy of private enterprise to more effectively serve the social aims of the enterprise.

A major challenge for Social Entrepreneurs, therefore, has been trying to exist within the limitations of the only organizational forms that up to now have been available.

Mr. Sabeti points out that, “For-profits and nonprofits exist within supportive ecosystems consisting of well-established laws, accounting standards, financial markets, trained pools of talent, and customized tools and services.” He advocates for the development of similar supportive ecosystems for For-Benefit Enterprises, and points to encouraging developments on this front.

As he mentions, several states have recently passed laws formally recognizing a For-Benefit form of organization, apart from a nonprofit or for-profit entity. In these new types of legally recognized “For Benefit” entities, the fiduciary duties of officers and directors are consistent with serving the social benefit purpose of the enterprise, yet the entity is permitted to make profits, and thereby harness the engine of private business enterprise to serve their social purpose.

See, for example, our previous posts on Social Enterprise/ Public Benefit Corporation Movement Gaining Momentum in the U.S. and on New York Becomes Fifth State to Pass Law Authorizing For-Profit Public Benefit Corporations.

Examples of Some For-Benefit Enterprises

In his article, Mr. Sabeti provides several interesting current examples of For-Benefit Enterprises. Here are a few that he mentions:

• Community Operated and Oriented Plans (COOPs), a new hybrid kind of health insurance entity, was encouraged under the Patient Protection and Affordable Care Act (the “Affordable Care Act”) as a means of increasing competition in the health insurance market. The Affordable Care Act appropriated $6 billion in start-up loans for this new type of entity, which incorporates elements of nonprofit, for-profit, cooperative, and public models. The Affordable Care Act sets a goal of each state having at least one COOP by 2014.
• Riversimple, a British start-up, driven by a social purpose to foster the production of cars powered by hydrogen fuel cells, licenses its designs to an open-source foundation, making it possible for manufacturers anywhere in the world to develop and produce the cars.
• Cafédirect, the UK’s largest “fair-trade purveyor” of hot drinks, was founded by a worker-owned cooperative, an international confederation of nonprofits, a public limited company, and an NGO. The suppliers of Cafédirect hold 5% of the company’s shares and are represented on its board.
• Novo Nordisk, a large Danish pharmaceutical company was founded with the social mission to rid the world of diabetes. Although it is a publicly traded for-profit company, it is controlled by a nonprofit foundation, which, under Danish law, assures that profits can be used for humanitarian purposes and avoids placing pressure for short-term profit maximization on officers and directors, according to Mr. Sabeti.

Associations and Support Groups Fostering the Development of the Fourth Sector

Mr. Sabeti also mentions several associations, institutions and resources that support and encourage the development of the Fourth Sector of For Benefit Enterprise, such as:

• The Global Impact Investing Network, supporting and connecting so-called “impact investors,” historically known as “socially responsible investors;”
• Lex Mundi Pro Bono Foundation, providing lawyers who specialize in representing social enterprises and pro bono publico causes
• Bridgespan and the Monitor Institute, organizations of management consultants focusing on meeting the challenges of delivering “blended value” (both economic profit and social or environmental value) and developing metrix to value social and public value produced by blended enterprises;
• Business Schools Programs Supporting Social Entrepreneurship, such as Duke University’s Center for the Advancement of Social Entrepreneurship, Fellowship programs at Ashoka, the Schwab Foundation for Social Entrepreneurship, and Harvard Kennedy School’s Center for Public Leadership.
• Developing Systems for Measuring and Certifying Quality and Value in the Social/ Public Benefit Arena, such the LEED certification program for green buildings, ISO 14000 environmental management standards, and Green Plus, and B Corporation certifications.
• Associations and organizations that Support Social Entrepreneurs and Social/ For-Benefit Enterprise, such as Social Enterprise UK, Social Venture Network, conferences like the Skoll World Forum on Social Entrepreneurship and SOCAP.

Conclusion

In conclusion of his article, Mr. Sabeti writes,

More Information

An excerpt and reprint of the article, The For-Benefit Enterprise, by Heerad Sabeti, is available from the Harvard Business Review.

For more information about the emerging Fourth Sector, visit the Fourth Sector Network’s website at www.FourthSector.net.

See also Barnhart Law PLC’s Public Purpose Business Law Blog.

see this Power Point presentation prepared by the U.S. Patent and Trademark Office, Office of External Affairs, for a presentation they made to a forum of small businesses:

Trademarks: Identifying & Protecting Your Rights

According to an October 10 report in the New York Times, the energy industry worldwide is undergoing a major realignment away from carbon fuels. This shift is being driven by forces including doubt about the safety of nuclear energy following the Fukushima disaster in Japan, and concerns over safety and environmental risks of oil and carbon fuels spurred by the BP Oil disaster in the Gulf of Mexico and climate change exhibited by extreme weather patterns throughout the world.

“The energy sector is undergoing a major transformation globally,” Dr. Rajendra K. Pachauri, director general of The Energy and Resources Institute in New Delhi and chairman of the Intergovernmental Panel on Climate Change of India, told the Times.

“There are new concerns arising out of the Fukushima nuclear disaster and the serious Deepwater Horizon oil spill that expansion in supply of energy would be associated with larger risks,” Dr. Pachauri said. “Therefore, many countries are rethinking energy supply strategies and the very drivers of energy demand.”

As reported in the Times, Dr. Pachauri predicts that growth in the renewable energy market will be one of the defining features of the future of energy. “Already during the year 2010 new investment in renewable energy reached $211 billion,” he said. “In a number of specific applications, renewable energy is already available at costs that can compete with conventional power.”

His predictions: Under fairly conservative assumptions, he said, renewable sources could provide 17 percent of the primary energy supply globally in 2030, rising to more than 27 percent by 2050. Under more optimistic assumptions, he projects 43 percent renewable energy by 2030 and up to 77 percent by 2050.

However, Dr. Pachauri cautioned that even his conservative predictions are based on the assumption that countries act individually and together to adopt policies encouraging the phasing-out of fossil fuels and adoption of cleaner, renewable power sources in their place.

The Role of Government Incentives Internationally

The countries in which movement toward renewable energy sources is progressing the fastest are those countries that have adopted government policies favoring renewable energy and incentives to promote its development.

For example:

• Germany. Following the Fukushima nuclear disaster in Japan, the government of Germany has adopted official policies aiming to eliminate nuclear power in that country by 2022 — even though nuclear power currently provides 23 percent of that country’s electricity. The German government is also implementing plans to increase the portion of electricity generated from renewable sources to 35 percent by 2020. Due to aggressive government incentives, renewable energy sources already provide about 18 percent of Germany’s electricity. In support of its policies, the German government has also put in place an aggressive program of energy conservation and efficiency to reduce demand.

  Private industry in Germany has also adopted policies consistent with the Government’s aims of eliminating nuclear power and moving toward renewable energy sources. For exampls, Siemens, the largest engineering company in Europe, announced that it was ending plans to cooperate with Rosatom, the Russian state-controlled nuclear power company, in the construction of dozens of nuclear plants throughout Russia over the next 20 years. Siemens’ Chairman Peter Löscher said that Siemens will no longer build nuclear power plants anywhere in the world. Instead, he said, Siemens plans “to expand significantly its portfolio of renewable energy technologies,” as reported by the New York Times.

• China. According to a recent article in RenewablesBiz Daily, China leads the world in renewable energy development. Fueled by China’s aggressive government support for renewable energy development, RenewablesBiz reports that:
  • Chinese companies control half the $45 billion global market for wind power.
  • 60 percent of worldwide solar power production is based in China.
  • China intends to produce 20 percent of its power from renewables by 2020.
  • Clean energy technology investments in China soared to $51.1 billion last year, an increase of 30 percent from the previous year and one-fifth of the amount spent worldwide.

Trends Resisting Renewables Growth in U.S.

In the United States, both economic and political factors have recently put brakes on the relative expansion of renewable energy as a share of the nation’s energy supply.

Unlike Germany, China, Scandinavian and European countries, and many other countries, the United States still does not have an official national policy requiring renewable, noncarbon-emitting power generation by any given target date.

“Because the United States has not adopted a national climate change policy that would drive demand for nonpolluting energy sources, the prospects for alternative energy sources like wind, solar, geothermal and hydro are poorer in the United States than elsewhere else in the world,” the Times reported.

In addition, “Republicans in Congress seized on the collapse of [Solyndra, a once-promising solar energy venture in California that received $535 million in federal loans] to question the Obama administration’s approach to supporting alternative energy ventures and the concept of so-called green jobs,” the Times report said. This has dealt a “sharp blow” to renewable energy development in the United States, according to the Times.

Meanwhile, economic forces have been favoring the development of cheap and plentiful natural gas resources in the U.S. Natural gas prices are currently down to $4 to $5 per thousand in the United States. This has shifted industry focus to natural gas development in the U.S.

Experts Call for Increased Government Investment in Renewables R&D

The American Energy Innovation Council (AEIC) called recently for a tripling of government investment in clean energy research and development. The AEIC said that the U.S. energy sector spent only a fraction of what other U.S. industries, such as pharmaceuticals, invested in advancing new technology.

The AEIC is a group of American business executives focusing on what they have termed under-investment in basic energy research. The group includes such business leaders as Bill Gates, chairman and former CEO of Microsoft; Norm Augustine, former chairman and CEO of Lockheed Martin; Ursula Burns, chairman and CEO of Xerox; John Doerr, partner at Kleiner Perkins Caufield & Byers; Chad Holliday, chairman of Bank of America and former chairman and CEO of DuPont; Jeff Immelt, chairman and CEO of GE; and Tim Solso, chairman and CEO of Cummins.

In a recent business plan for the nation’s energy future, the AEIC called for a government investment of U.S. $16 Billion per year in clean energy innovation. Their recommendation stated, in part:

Underscoring their call for government involvement, the American Energy Innovation Council (AEIC) issued a new report in September, 2011, entitled, Catalyzing American Ingenuity: The Role of Government in Energy Innovation. In this report, the AEIC documents that “US government investment in technology research has been integral to American economic competitiveness in many sectors.” However, they find that “needed investments in energy breakthroughs are simply not being made” in the U.S.

“We are in critical need of a government commitment to research into new energy technologies that can free us from our dependence on foreign oil and create affordable clean-energy alternatives,” Bill Gates said. “Yet today, the U.S. government spends only one-sixth as much on energy innovation as it does on medical research.”

“Understandably, especially in this period of tight budgets, people ask why the private sector can’t fund the necessary R&D into energy alternatives,” Gates said. “No matter how well intentioned, utility companies and other private investors simply are not going to invest deeply in the kind of R&D needed to create scalable, low-cost, low-carbon energy innovations. They have little or no economic incentive to do so. This is a unique but critical role for government, one central to our long-term economic competitiveness.”

“Neither the private sector nor the government are making investments in research even remotely commensurate to the vast opportunities in the $5 trillion global energy market,” said Norm Augustine, former chairman and CEO of Lockheed Martin, who is also a former Undersecretary of the Army. “Energy innovation is a matter of national and economic security given oil reliance, nuclear power, climate change and related issues, and must be treated that way by Congress and the Administration in terms of investment priorities.”

Geopolitical Implications

Daniel Yergin, an energy historian, predicts in his new book, The Quest, that more than 80 percent of world energy will still be supplied by carbon-based fuels 20 years from now. He does note some continued encouraging developments in alternative energy technology, however he notes that lead times for implementation of innovative technologies may be long because of the complexity and scale of the global energy supply network.

“What kind of energy mix will meet the world’s energy needs without crisis and confrontation?” Mr. Yergin asks in The Quest.. That is yet to be seen, he concludes. He predicts that there will be a continuing competition for energy investment dollars between oil, gas and coal (which he calls “the incumbents”) and the renewables, wind, solar and biofuels (the “new entrants”).

“A transition on this scale, if it does happen,” he writes, “has great significance for emissions, for the wider economy, for geopolitics and for the position of nations.”

Recent commentary has drawn attention to an evolving trend toward construction of hybrid power plants utilizing clean renewable technologies such as wind or solar energy, combined with natural gas, an inexpensive and plentiful energy source. When the sun is not shining or the wind not blowing, the natural gas combustion engines kick in, allowing the plant to operate continuously, boosting its economic viability.

A recent article entitled, “Hybrid Plants Inch Ahead,” by Editor Bill Opalka and published on September 21, 2011 RenewablesBiz, highlights several hybrid power plants being built or recently operational around the world.

Among the new operating plants mentioned is Florida Power & Light’s first hybrid energy plant, the Martin Next Generation Solar Energy Center, in Martin County, Florida. This is first and largest hybrid solar and natural gas power plant in the world. The solar portion of the plant alone is the largest solar energy plant in the United States, outside California. The hybrid plant went into full operation in December, 2010, and has been operating for nearly one year.

Constance R. (Connie) Barnhart is proud to have represented one of the parties, a supplier of solar thermal components to the plant, in the transactions that led to the construction and launch of the Martin Next Generation Solar Energy Center. See relevant renewable energy experience.

The Martin Next Generation Solar Energy Center

In Martin County, Florida, Florida Power & Light (FPL) installed a new $476 million 75-megawatt solar plant to supply heat in an existing 3,705-megawatt combined-cycle gas plant, which was the largest fossil fuel power plant in the United States. Without creating emissions, the solar-thermal (also called concentrating solar power (CSP)) system of parabolic troughs with 190,000 solar thermal tracking mirrors creates heat, which is used to create steam and generate electricity, in addition to the electricity generated by the combined-cycle gas generators.

“It’s just a way to augment what we already have in a heat recovery steam generator,” John Gnecco, director of project development at FPL told RenewablesBiz. “Combustion turbines are going to run at full capacity most of the time, and when we get the sun, for free, we’ll actually generate more electricity as a unit than we normally would have done,” he said.

“Obviously, it makes this more cost-competitive than if we built a stand-alone 75-megawatt solar thermal plant,” Mr. Gnecco said.

The plant started generating solar steam in September 2010 as the first of its four phases went online, and the new Energy Center became fully operational in December, 2010. FP&L had projected that the plant would generate 155,000 megawatt-hours a year on average.

“We’re tracking that number pretty well, but we really won’t know until we get a full year or two of operations,” Mr. Gnecco told RenewablesBiz.

According to FPL,

See a video about the Martin Next Generation Solar Energy Center, the World’s first and largest Hybrid Solar-Thermal/ Natural Gas Power Plant »

Other Hybrid Plants

According to the article in EnergyBiz, another hybrid plant combining 30 megawatts of concentrating solar power with 470 megawatts of natural gas generation went online in Morocco in November, 2010. And, “a 150-megawatt natural gas hybrid with 20 megawatts of CSP [concentrating solar power a/k/a/ solar-thermal power] capacity was commissioned south of Cairo late last year.”

Another 530-megawatt plant proposed in Turkey, would include 22 megawatts of GE wind turbines and 50 megawatts of CSP technology.

And “General Electric has broadened its game by expanding a combined cycle plant that integrates solar and wind generation,” according to the RenewablesBiz article. GE invested in CSP technology company eSolar this year, and plans to combine its technology with GE’s combined cycle technology.

“This is all about putting together high efficiency, lower fuel costs and the operating flexibility that goes with it,” Guy DeLeonardo, product manager at GE Energy told RenewablesBiz. “As renewable penetration increases, you need to back that with stable generation that drives the need for operational flexibility,” he said.

According to Bill Opalka, author of the RenewablesBiz article, “Intermittent resources like wind and solar ramp up or down during the course of a day, and system integrators often need to balance load with fossil generation. One reason natural gas combined-cycle plants have gained favor is their ability to start quickly or turn down as more renewable energy is integrated into the grid.”

“It’s the idea that when the wind’s blowing and the sun’s shining, they will always be ‘on’ but this type of gas plant would be the first in numeric order to start when the renewable resources tail off,” DeLeonardo added.

“With the shale gas boom in the United States and increasing demand for renewable energy, technologies are providing the opportunity to meld intermittent solar and wind power with natural gas,” Opalka wrote.

“GIIRS ratings provide investors with standardized impact metrics for an emerging asset class, helping fund the world’s leading social entrepreneurs. GIIRS ratings are like S&P ratings but for [social] impact instead of risk,” B-Lab stated in its 2011 Annual Report.

The GIIRS Rating System is expected to help drive capital to socially responsible businesses, including Social Enterprises and newly formed Benefit Corporations, which are for-profit corporations formed for social or public benefit corporate purposes. See our previous post about New York’s and other states’ new laws authorizing Benefit Corporations, a new form of corporate entity. See also our post about the Social Enterprise/ Benefit Corporation Movement in the U.S. and internationally.

Some of the expected benefits of GIIRS for social enterprises are described on B-Lab’s website:

After a successful Beta launch in the Spring of 2011 with approximately 200 companies and 25 funds, according to the B-Lab Annual Report, the GIIRS Rating System was officially launched at the 2011 Clinton Global Initiative meeting in New York.

As described by the Clinton Global Initiative, “GIIRS Impact Ratings provides an assessment of companies’ and funds’ social and environmental impact, while GIIRS Analytics provides a subscription-based analytics tool that enables industry-wide benchmarking, portfolio management, and due diligence screening.”

Impact Investing

The history and growth of “Impact Investing” was explained in a recent article by the CS Monitor:

Expected Impact of GIIRS

The committed goals of GIIRS, as pledged to and reported by the Clinton Global Initiative (CGI), include:

At Launch GIIRS was capitalized with an estimated $19,000,000, according to CGI.

As announced by CGI at its launch, among the sponsors of the GIIRS are:

The Rockefeller Foundation
Inter-American Development Bank
J.P. Morgan

Calvert Foundation
Deloitte & Touche LLP
Capricorn Management LLC
Prudential Financial
FARM Capital Services
RSF Social Finance
The Skoll Foundation
The Gatsby Charitable Foundation
B Lab
KL Felicitas Foundation
Annie E. Casey Foundation
Armonia LLC
The Tony Elumelu Foundation

More Information

For more information about the GIIRS Rating System, see its website.

See also information about GIIRS provided by the Clinton Global Initiative

Entities of this type are referred to variously as a “Benefit Corporation,” “B Corp.,” “Social Enterprise,” “Social Business,” emerging “FourthSector” entity, or in the UK, a “Community Interest Corporation (CIC)”.

This movement has recently gained momentum in the U.S. with the passage of legislation in seven states specifically authorizing the creation of a new, separate form of corporate entity called a “Benefit Corporation,” in which a for-profit corporation is permitted to pursue primarily public benefit purposes.

In the U.S. this movement has been restrained by long-established corporate laws and judicial precedent in all fifty states which hold that directors and officers of a for-profit corporation have a fiduciary duty to the shareholders of the entity to maximize shareholder profits. Some U.S. courts have specifically ruled attempts by corporate officers or directors to devote corporate resources to serving society or socially responsible causes as a breach of fiduciary duty when shareholders have sued, alleging that serving such social purposes has reduced shareholder profits. See for example, the eBay vs. Craigslist and Craig Newmark, et. al litigation, decided September 9, 2010, in which a Delaware court wrote: “Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistent with the directors’ fiduciary duties under Delaware law.”

However, recently, the Social Enterprise/ Public Benefit Corporation movement has gained impressive momentum in the U.S., because seven state legislatures have now passed legislation establishing and recognizing “Benefit Corporations” as a separate form of corporate entity, in which for-profit businesses are permitted to exist for public benefit corporate purposes. These states include Maryland (the first state to adopt such legislation, in April, 2010), followed by Vermont, Virginia, New Jersey, New York, Hawaii, and California. The bills passed in New York and California are pending signature by the states’ respective Governors, but the legislation has been signed into law in each of the other states.

In addition, similar legislation is pending in several other states, including North Carolina and Michigan.

For a discussion of the provisions of the New York legislation, which is quite typical of the legislation passed in the other states, see our previous post: New York Becomes Fifth State to Pass Law Authorizing For-Profit Public Benefit Corporations.

History: Father of the Movement

One of the pioneers in this area of establishing for-profit business entities to serve public or social benefit purposes, and perhaps the Father of the Movement to promote this type of entity, was by Nobel Peace Prize laureate Prof. Muhammad Yunus. Prof. Yunus who used the term “Social Business” to describe the for-profit self-sustaining micro-finance Grameen Bank and other businesses he founded to help the poor and serve social needs in Bangladesh, which he said that country’s government lacked the resources to address. As defined by Yunus, a “social business” should seek to generate a modest profit to finance its own operations to address a social need. But, the profit would be used exclusively to expand the company’s reach, improve its product or service, or in other ways subsidize its social mission.

Yunus described his concept for “social business” in his books, Creating a world without poverty – Social Business and the future of capitalism and Building Social Business – The new kind of capitalism that serves humanity’s most pressing needs.

Among the several “social business” enterprises and think tanks that Yunus famously operates are the Grameen Bank, a for-profit micro-finance bank to help the poor in Bangladesh, the Yunus Centre in Bangladesh, a think tank for issues relating to social business, and the Yunus Social Business Centre at the University of Florence.

Internationally

Internationally, the Social Enterprise movement has led to the promulgation of laws establishing for-profit public purpose enterprises in several different countries, as illustrated by a 2008 paper prepared for the FourthSector network by one of its legal interns.

The UK, for example, in 2005 established “Community Interest Corporations (CIC’s)” under its Company’s Act. According to the UK Department of Business Innovation & Skills (BIS), the body charged with regulating these entities, “Community Interest Companies (CICS) are limited companies, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage.”

“This is achieved by a “community interest test” and “asset lock”, which ensure that the CIC is established for community purposes and the assets and profits are dedicated to these purposes. Registration of a company as a CIC has to be approved by the Regulator who also has a continuing monitoring and enforcement role,” the BIS states.

Ahead of the U.S. in adopting the Social Enterprise concept, the U.K. today has a thriving “Social Enterprise” (CIC) sector. As stated by Social Enterprise UK, the national body that represents the social enterprise sector in the U.K., “The UK is widely regarded to be a world-leader in social enterprise.”

Social Enterprise UK explains the concept succinctly:

In the U.S.

Conceived similarly, as a way to harness the energy of the for-profit sector to serve public or social benefit, the movement has been promoted in the U.S. especially by such organizations as B-Lab in Pennsylvania and New York and the FourthSector network now in North Carolina, as well as a number of other organizations.

Harvard Business School has for a number of years included “Social Enterprise” in its curriculum, and co-sponsors with Harvard’s Kennedy School an annual Social Enterprise Conference.

B-Lab has been at the forefront of the push to pass legislation formally recognizing the “Benefit Corporation” as a distinct legal entity in the fifty states. In fact, New York’s bill and the Benefit Corporation laws passed and signed in each of the other five states so far quite closely resemble model legislation that was drafted by an attorney for B-Lab, working with a Business Associations Committee of the Pennsylvania Bar Association.

The U.S. movement toward establishing a recognized legal form for Benefit Corporations, which would permit officers and directors to prioritize a public or social benefit purpose over maximizing shareholder profit without risk of being sued by shareholders for breach of fiduciary duty, was given special impetus by litigation involving the Ben & Jerry’s Ice Cream business.

As explained in a report by The Times-Herald Record, “Ever since Ben Cohen and Jerry Greenfield famously lost control of their Vermont ice cream business to the Unilever giant, socially conscious business owners have been looking for a way to build a business model that effectively and legally permits a for-profit, corporate dedication to a public benefit, cause or initiative.”

After Unilever acquired a minority shareholding in Ben & Jerry’s, Unilever successfully sued to prevent the founders from pursuing their intended social causes at the alleged expense of maximizing shareholder profit. As directors and officers of a for-profit corporation, Ben & Jerry were legally bound by a fiduciary duty imposed by law, to maximize shareholder profits in priority to any social or public causes they wished to pursue.

Jerry Greenfield, the “Jerry” in Ben & Jerry’s had set an example that inspired the movement, when he said: “We measured our success not just by how much money we made, but by how much we contributed to the community. It was a two-part bottom line.”

Benefit Corporation Movement Gains Momentum in U.S.

Facilitating the movement toward Benefit Corporations, B-Lab has developed criteria and a process for “B Corporation Certification” (see the sample B-Corp Certificate above). The B Corporation Certification is available, on a voluntary basis, to any corporation which establishes to the satisfaction of B-Lab that it has achieved the required “grade” on a report card of certain weighted criteria published by B-Lab as defining a Benefit Corporation. The standards for B Corporation Certification established by B-Lab have generally been accepted by the states passing Benefit Corporation legislation as satisfying the “third-party standard” for general public benefit required under those laws.

According to B Lab, it has so far certified 454 B Corporations, producing combined revenues of $2.18 Billion in 54 different industries, and these companies have realized a combined $1 million in Annual Savings due to special rates and discounts accorded by their suppliers to Certified B Corporations.

A 2011 Annual Report published by B-Lab explains further the benefits and public policy rationale for Benefit Corporations or “B Corporations.”

As referenced above, legislation authorizing the establishment of “Benefit Corporations,” for-profit corporations permitted to pursue public benefit corporate purposes in priority to maximizing shareholder profit, has passed in seven states and been signed into law in five of them: Maryland, Vermont, Virginia, New Jersey, and Hawaii. Similar bills have also been passed by the legislatures in New York and California, and, as of this writing, are awaiting signature by the Governors of those states.

According to B-Lab, at least nine other states now have similar legislation to establish Benefit Corporations pending in their state legislatures, including Colorado, North Carolina, Pennsylvania, Michigan, and others.

More Information

For further information about New York’s legislation, which was passed unanimously by both the New York Senate and Assembly and awaits Governor Cuomo’s signature, see our previous post: New York Becomes Fifth State to Pass Law Authorizing For-Profit Public Benefit Corporations

Information on California’s bill is also linked at the bottom of that post.

For more information on the pending Benefit Corporation legislation and B Corporation Certification, see B-Lab’s website.

For information on the case and rationale for Benefit Corporations, see B-Lab’s 2011 Annual Report.

Under the bill, a private, for-profit business would be permitted to incorporate as a “Benefit Corporation,” with the stated corporate purpose of serving a general or specific public benefit (as defined in the bill). The Benefit Corporation is essentially a hybrid form which permits a for-profit corporation to exist for primarily public or social benefit corporate purposes (previously reserved to non-profit entities), rather than exclusively for the purpose of maximizing shareholder profit.

The bill (S00079) passed both Houses of the New York Legislature unanimously: 62 to 0 in the Senate and 139 to 0 in the Assembly. As of this writing, the bill is pending signature by Governor Cuomo, after which it would become law.

Four other states (beginning with Maryland in April, 2010, followed by Vermont, Virginia, and New Jersey) had previously adopted similar laws authorizing Benefit Corporations of this kind. Hawaii passed a similar bill in July, 2011 which has already been signed by that state’s Governor, so upon signature of the New York bill by Governor Cuomo, New York would become the sixth state to adopt such a law.

Protection of Officers & Directors from Shareholder Litigation for Pursuing Public Benefit Purposes Over Maximizing Profit for Shareholders

Under the legislation adopted by each of these states, directors and officers of corporations that properly organize as “Benefit Corporations” and comply with the law cannot be sued by shareholders for breach of fiduciary duty if they pursue the stated public benefit purposes of the corporation in priority to maximizing profit for shareholders. This will be the case, even though the corporation also will be permitted to earn profits and exist as a for-profit entity.

Under current corporate laws and judicial precedents in all fifty states, directors and officers of a for-profit corporation have a primary fiduciary duty to maximize profit for shareholders. After signature of the new Benefit Corporation law by Governor Cuomo, this will change for those New York businesses that organize as “Benefit Corporations” and meet the requirements of the law.

The New York Benefit Corporation Law

“Benefit Corporations require companies to have a legal responsibility to stakeholders as well as shareholders so they can have a positive impact on their surrounding communities,” said Speaker Sheldon Silver (D-Manhattan). “This legislation demonstrates that profit and social responsibility are not mutually exclusive and that socially and environmentally-friendly business practices can enhance a company’s strength and profitability.”

Under the bill unanimously passed by New York’s Senate and Assembly, companies that elect to incorporate as or become a “Benefit Corporation” would be required so to indicate in their articles of incorporation, and to pursue through their business and operations a “general public benefit” (as defined in the law).

In addition to serving a “general public benefit,” a Benefit Corporation would also be permitted to specify in its articles of incorporation any general corporate purposes permitted to a for-profit corporation under New York’s General Business Corporation Law, as well as any “special public benefit” purpose the company elects to pursue, consistent with the law. The bill, however, provides that “the purpose to create general public benefit shall be a limitation on the other purposes of the benefit corporation, and shall control over any inconsistent purpose of the benefit corporation.”

“General public benefit” is defined in the bill as “a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard.”

“Third-party standard” is defined to mean “a recognized standard for defining, reporting and assessing general public benefit” developed by an independent (unaffiliated) third party, which is transparent “because the following information about the standard is publicly available: (A) the factors considered when measuring the performance of a business; (B) the relative weightings of those factors; and (C) the identity of the persons who developed and control changes to the standard and the process by which those changes are made.”

As referenced above, in addition to serving the “general public benefit” and other for-profit corporate purposes, a Benefit Corporation would also be permitted to specify in its articles of incorporation a “specific public benefit” corporate purpose.

“Specific public benefit,” as defined in the bill, includes:

The New York bill also provides that the Benefit Corporation would be required to deliver an “Annual Benefit Report” to its shareholders, specifying its progress in meeting its general benefit purpose and specific benefit purpose(s) in accordance with its “third-party standard,” and including certain other information set forth in the bill. The Annual Benefit Report (except for confidential financial information) would be required to be posted on the company’s public website.

The New York bill also includes provisions clarifying the fiduciary duties of directors and offers of a Benefit Corporation, as well as provisions that require approval of certain corporate actions (including change of corporate purpose, termination of Benefit Corporation status, or merger with a company that is not a Benefit Corporation) by a three-fourths vote of all shareholders in each class of stock entitled to vote on the action.

The bill, sponsored by Senator Daniel Squadron (D-Brooklyn) in the Senate, has been sent to Governor Cuomo for signature.

The Social Enterprise/ Public Benefit Corporation Movement

A movement has been building for more than 15 years, both in the U.S. and internationally, to establish this type of hybrid private, for-profit entity organized to serve a public or social benefit. Entities of this type are referred to variously as a “Benefit Corporation,” “B Corp.,” “Social Enterprise,” emerging “FourthSector” entity, or in the UK, a “Community Interest Corporation (CIC)”.

For more information on the Social Enterprise/ Public Benefit Corporation movement in the U.S. and internationally, see our separate post on Social Enterprise/ Public Benefit Corporation Movement Gaining Momentum.

Conceived as a way to harness the energy of the for-profit sector to serve public or social benefit, the movement has been promoted in the U.S. especially by such organizations as B-Lab in Pennsylvania and New York and the FourthSector network now in North Carolina, as well as a number of other organizations.

B-Lab has been at the forefront of the push to pass legislation recognizing this type of entity in the fifty states. In fact, New York’s bill and the Benefit Corporation laws passed and signed in each of the other five states so far quite closely resemble model legislation that was drafted by an attorney for B-Lab, working with a Business Associations Committee of the Pennsylvania Bar Association.

B-Lab has also established a voluntary “B Corporation Certification” program in which companies can choose to seek certification by B-Lab as a “B Corporation” by demonstrating that their operations achieve a required minimum score on a “public benefit” report card based upon a set of transparent weighted criteria developed by B-Lab for rating the “general public benefit” delivered by a company. A sample of B-Lab’s Certified B Corporation logo, which certified companies are permitted to display, is shown at the upper right of this post. By displaying this logo, a certified company can signify publicly that it has achieved Certified B-Corp status.

It is not currently necessary for a company to be legally organized as a “Benefit Corporation” under state law in order to qualify for B Corporation Certification from B-Lab. The states that have already adopted Benefit Corporation legislation, however, have generally accepted the B-Corp Certification by B-Lab as satisfying the independent “third-party standard” for measuring general public benefit that is required under those laws.

For more information on the B Corporation Certification program and the marketing and other benefits that companies see in obtaining it, see B-Lab’s website.

As referenced, in addition to the Benefit Corporation bill passed in New York, similar legislation has already been signed into law in Maryland, Vermont, Virginia, New Jersey, and Hawaii. And, according to B-Lab, at least nine other states now have similar legislation to establish Benefit Corporations pending in their state legislatures. These states include Colorado, North Carolina, Pennsylvania, Michigan, California, and others.

Other recent reports indicate that both houses of the California Legislature have in fact now passed the Benefit Corporation bill, and it has been sent to Governor Jerry Brown for signature.

The article was published in the renewable energy industry journal EnergyPulse.

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The target company or the issuer is referred to, together with its subsidiaries, as the “Company”.

This checklist is intended as a sample, for information only. It should not be used in an actual transaction. The due diligence request checklist presented in an actual transaction must be tailored to that particular transaction and to the particular Company (the target company in an M&A transaction or the issuer in an offering of securities). This should be done by counsel for the buyer or the underwriter, as the case may be, who should be competent and experienced in matters of these kinds.

Some of the documents listed below may not pertain to a particular Company involved in an actual proposed transaction and its business. Where blanks are shown in this sample checklist, numbers pertinent to the particular transaction involved would typically be filled in.

In an actual transaction, the Company would typically be requested to respond to the due diligence checklist presented, and to provide an indication of which documents exist and will be produced by the Company. The Company would also be requested to indicate in its response if any of the requested documents do not exist or if a particular request does not pertain to the Company or its business. The Company would typically be instructed to read references below to the Company to include the Company, its subsidiaries and each of its predecessor corporations, if any.

Corporate Documents

1. Articles of Incorporation and By-laws of the Company, as amended to date.
2. Minutes of the meetings of the Company’s Board of Directors, any committee of the Board of Directors and stockholders of the Company.
3. Written consents relating to actions by the Board of Directors, any committee of the Board of Directors, and stockholders of the Company since inception.
4. Stock ledgers and records of the Company.
5. Samples of stock certificates, option certificates and certificates representing any other outstanding securities.
6. A current list of all stockholders, warrantholders and optionholders showing name, address, amount held, price paid, date of purchase, name of seller (if other than the Company), exercise price and expiration date.

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The Act (H.R. 1249), co-sponsored by Senator Patrick Leahy (D-VT) and Rep. Lamar Smith (R-TX), was passed by the U.S. House of Representatives on June 23, 2011 by the Senate on September 8, 2011 by decisive bi-partisan votes in both chambers.

For more information on the America Invents Act, See our article, President Obama Signs into Law Most Comprehensive Patent Reform Act in 175 Years, in Barnhart Law PLC’s TechLawBits – Technology & Internet Law Updates Blog.

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The Act (H.R. 1249), co-sponsored by Senator Patrick Leahy (D-VT) and Rep. Lamar Smith (R-TX), was passed by the U.S. House of Representatives on June 23, 2011 by a vote of 304 to 117 (with 10 not voting), and it passed the Senate on September 8, 2011 by a vote of 89 to 9 (with 2 not voting). The Act received bi-partisan support in both chambers of Congress.

A full copy of the final Act as passed by Congress and signed by the President is provided by the U.S. Government Printing Office.

The Act makes many changes intended to streamline the U.S. patent process, which were advocated to Congress by the USPTO. Most significantly, it will change America’s patent protection system from a “first to invent” system to a “first to file” system. This will bring the U.S. into line with the patent systems of most of the rest of the world.

Under a “first to invent” system, like the U.S. historically has had, an inventor could challenge an issued patent in court years after its issuance and prevail if the inventor could prove that he or she actually invented the subject matter of the patent before the patent owner.

Under the “first to file” system ushered in by the new patent reform law, the first inventor to file a patent application covering an original invention is the presumed owner. New procedures are put in place to allow an administrative challenge and review of a newly issued patent before a newly created Patent Trial and Appeal Board (PTAB) for an extended period of up to a year after issuance of the patent in certain cases, however, the ability to challenge an issued patent in court is restrained.

Time Table for Implementation

The change to a first-inventor-to-file system made by the new law will become effective on March 16, 2013, 18 months after the Act was signed by the President. Most of the new post-grant review procedures will become effective September 16, 2012, one year after the law was signed by the President. Other important changes made by the law will become effective sooner.

The USPTO on its website provides information on the implementation of the Act, including a link to the final Act as signed into law, a Timeline for implementation of the various provisions of the Act, and a new Fee Schedule for filing and prosecution of patents that will be implemented starting on September 26, 2011 under the Act.

Some of the Significant Changes Made by the Act

Following is a general list and description of areas in which the Act makes changes to our current patent system:

1. Change from First To Invent to First To File System – See the discussion above, regarding this most significant change made by the Act. The Act will grant priority to the first inventor to file a patent application, subject to certain broader post-grant administrative review provisions, as referenced above and below.
2. New Post-Grant Review Procedures — The Act eliminates previous provisions that allowed so-called “interference” proceedings or “Inter Partes Reexamination” during the patent review process, but substitutes expanded allowance of pre-issuance petitions for third parties to challenge a patent application during prosecution and post-grant administrative review procedures in front of the newly created Patent Trial and Appeal Board (PTAB), as referenced above. Among the new administrative proceedings implemented during an expanded period immediately after grant of a patent will be the so-called “Derivation Proceedings,” “Supplemental Examination,” “Post-Grant Review,” and post-grant “Inter Partes Review” procedures.

   With these and other changes (e.g. in scope of “Prior Art”, as described below), the Act generally expands the scope of review during the patent application process intending to assure that patents are in fact granted to the first to invent, adds an administrative process immediately post-grant for others to challenge a patent, but limits the ability of others to challenge a patent in court thereafter.

3. Changes in “Prior Art” Provisions — The Act includes provisions that may in general broaden the scope of patent-defeating “prior art”. Section 102(a)(1) of the Act provides that:
    
   “A person shall be entitled to a patent unless–(1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention;”

   The bolded phrase has been added to the prior law. U.S. patents granted as well as published patent applications of other persons “effectively filed before the effective filing date of the claimed invention” are included in the prior art.

   However, the applicant may be granted an exception (or grace period) from having the application defeated by prior art, based upon any “disclosures” of the invention published by the applicant himself or itself within 1 year before the “effective filing date” of the U.S. application (as well as based upon information derived from such disclosures). A further extended grace period is available in certain cases claiming foreign priorities and provisional applications.

4. “Prior User” Defense to Patent Infringement Claims Broadened — The “prior user” defense to patent infringement claims provided in 35 U.S.C. § 273 would be broadened to cover commercial use of the subject matter of a patent in the United States, without the restriction to business methods patent that existed under prior law. (Section 5).
5. Patent Applications by Assignees Permitted — Assignees of inventions will now be able to file a patent application for the invention, without naming the actual inventor as applicant. Under prior law, the actual inventor was required to be named as applicant in a patent application, even if he had assigned all of his rights to another person or entity.
6. Autonomy to USPTO to Set Self-Sustaining Fees — The USPTO is granted fee-setting authority, subject to administrative review procedures. The USPTO had argued for this, in order to make the agency self-sustaining and support changes needed to streamline U.S. patent procedures. Fees collected by the USPTO are to be solely for the use of the USPTO, with a caveat that certain excess funds may be placed in a “reserve fund.” See our previous article referencing this.
7. Prioritized Examination Fee — A Priority Examination Fee of $4,800 is established, to allow applicants to pay a higher fee for an expedited process.
8. Reduced Fees for Small Inventors — Currently those who qualify as “Small Entities” can qualify for a 50% reduction in fees. This will be continued, and in addition a new category of “Micro Entities” is added to help individual inventors with limited means. It will enable certain small applicants who qualify as “Micro Entities” to obtain a 75% reduction in patent fees. A summary of this provision is provided in a recent article published by CNET Business Tech News
9. Litigation-Related Changes — The Act will implement a number of changes affecting patent litigation, including jurisdictional and venue changes, changes related to defenses available in patent litigation, as well as a limitation on the ability of plaintiffs to join multiple parties as defendants in one patent infringement action based solely upon a broad claim that they all infringed a patent holder’s rights. The Act will allow joinder of parties as defendants in one action only if the claims against all of the named defendants relate to the same transaction or occurrence or the same accused product or process, and are based upon questions of fact common to all of the defendants. This later provision was meant to address perceived abuses in which some passive patent holders, apparently as a business model, were filing blanket lawsuits against dozens of companies in dissimilar industries. In addition, the Act will clarify that failure to obtain or present evidence of an opinion of counsel “may not be used to prove that the accused infringer willfully infringed the patent.”
10. Special Provisions – Certain Technologies — The Act (Sec. 25) establishes priority examination for certain technologies deemed important to the national economy or national competitiveness. Section 18 establishes a transitional program with an 8-year post-grant review period for certain business method patents. Section 33 of the Act bars patent claims directed at or encompassing a human organism.
11. Pro Bono Program to Assist Independent Inventors and Small Business — Section 32 of the Act establishes a pro bono ombudsman program to help certain small businesses and independent inventors with limited resources. See also paragraph 8 above as to reduced patent fees made applicable to “Small Entities” and “Micro Entities.”

The above is not a comprehensive list or description of the Act. The Act itself and a qualified patent attorney should be consulted for an understanding of the Act’s provisions.

Reactions

In our previous article, Biggest U.S. Patent Reform in 60 Years Poised to Become Law, we covered reactions for and against the America Invents Act. Some worry that the Act will favor big companies over individual inventors, while others, including the USPTO, tout the Act, saying that it “will foster innovation and spur job creation in the United States.”

In a message posted on the USPTO’s website, Director David Kappos, states:

The Act, which had strong bi-partisan support in Congress, was strongly supported by President Obama. In a White House blog post about the signing of the Act, the White House said, “This historic legislation will help American entrepreneurs and businesses get their inventions to the marketplace sooner so they can turn their ideas into new products and new jobs.”

“[The America Invents Act] will help companies and inventors avoid costly delays and unnecessary litigation, and let them focus instead on innovation and job creation. Many key industries in which the United States leads, such as biotechnology, medical devices, telecommunications, the Internet, and advanced manufacturing, depend on a strong and healthy intellectual property system,” the White House said.

Highlighting some of the provisions in the Act and related initiatives, The White House explained:

According to a press release issued on September 16, 2011 by the White House, “The America Invents Act will help businesses, inventors, and entrepreneurs in five immediate ways:

• “A fast track option for Patent Processing within 12 Months: Instead of an average wait time of almost three years, the Patent and Trademark Office will be able to offer startups growing companies an opportunity to have important patents reviewed in one-third the time – with a new fast track option that has a guaranteed 12-month turnaround. Patent ownership is a critical factor venture capital companies consider when investing in entrepreneurs hoping to grow their business.
• Reducing the current patent backlog: Under the Obama Administration, the patent backlog has already been reduced from over 750,000 patent applications to 680,000, despite a 4% increase in filings. The additional resources provided in the law will allow the Patent and Trademark Office to continue to combat the backlog of nearly 700,000 patent applications and will significantly reduce wait times.
• Reducing litigation: The Patent and Trademark Office will offer entrepreneurs new ways to avoid litigation regarding patent validity, at costs significantly less expensive than going to court.
• Increasing patent quality: The Patent and Trademark Office has re-engineered its quality management processes to increase the quality of the examinations and has issued guidelines that clarify and tighten its standards for the issuance of patents. The legislation gives the USPTO additional tools and resources to further improve patent quality, and allows patent challenges to be resolved in-house through expedited post-grant processes.
• Increasing the ability of American Inventors to protect their IP abroad: The new law will harmonize the American patent process with the rest of the world to make it more efficient and predictable, and make it easier for entrepreneurs to simultaneously market products in the U.S. and for exporting abroad. The Patent and Trademark Office has also expanded work-sharing with other patent offices around the world to increase efficiency and speed patent processing for applicants seeking protection in multiple jurisdictions.”

More Information

For more information on the America Invents Act and its implementation, see the website of the U.S. Patent & Trademark Office (USPTO).

See a Video posted on the White House website of the President’s address and signing of the Act at Thomas Jefferson High School for Science & Technology in Alexandria, Virginia »

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A. Agency or Distributorship Relationship Appropriate?

B. Consider Applicable laws in the Agent’s or Distributor’s Country

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1. Next Step to Expand International Operations? Licensing of patent rights, trade secrets, know how, copyrighted software or other technology, and trademark rights (collectively referred to hereafter as “Technology”) to overseas party for exploitation (manufacture, use and sale) abroad is often a next step (after exporting) to expand international operations – whether by companies around the world into the U.S. market, or by U.S. companies abroad.

2. License defined: A conveyance of a right under a patent, trademark or copyright which confers less than the grantor’s entire bundle of rights is a license rather than a sale or assignment. A license may grant rights to use, manufacture and sell. The licensee does not acquire legal title to the intellectual property, only a temporary right to use it, and only to the extent provided in the License Agreement. A purchaser/ assignee of the rights takes subject to all prior outstanding licenses (unless license is terminated pursuant to terms of license agreement or by negotiation prior to sale).

3. Some Advantages:

4. Some Disadvantages:

5. Types of license agreements

6. Important to investigate prospective foreign licensees carefully before entering into agreement

7. Important to consult qualified attorney experienced in international transactions, before you agree to license your Technology abroad. The experienced international attorney will consult with local counsel (with whom he or she may have a working relationship) in the licensee’s country, to become informed of and assure compliance with requirements of the national and state or local laws of that country.

E.g. Some countries require pre-registration and government approval of license agreements, limit or require certain terms in license agreements, regulate and specially tax royalties, or prohibit royalty payments exceeding a certain rate. Note: The E.U., in particular, has issued detailed regulations governing patent and know-how licensing.

Check also E.g. any bi-lateral treaties in effect between the licensor’s country and the prospective Licensee’s country; the foreign country’s product liability laws, exchange controls, antitrust and tax laws, laws affecting or prohibiting re-patriation of royalties and dividends

8. Enforcement; breach; importance of injunctive relief

9. Antitrust concerns. Consult counsel.

10. Tax concerns. Consult counsel.

11. For U.S. Licensors: U.S. Export License required from Department of Commerce? Especially important to check in cases of advanced technology.

B. Basic Checklist of Terms to be Included in a License Agreement (Note: This checklist is not exhaustive. There may be other terms to be included, depending on your particular technology and factual situation. You must consult a competent attorney with experience in intellectual property licensing.)

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Commentators including the Wall Street Journal have indicated that President Barack Obama is expected to sign the bill, if passed by Congress, and have predicted it could be passed by the Senate and sent to the President for signature as early as next week.

The proposed bill would change the U.S. patent system from a “first to invent” system from a “first to file” system. Most of the countries in the rest of the world currently have “first to file” systems.

Proponents of the bill, including many large pharmaceutical and other companies, argue that changing to a first to file system will provide greater certainty and lead to less costly patent litigation in the U.S.

Opponents have questioned whether the new system will favor big companies and discourage invention by private individuals, who may not be able to afford the lengthy and costly process of filing a patent application before seeking backers and financing from others. Yet under a “first to file” system, disclosing their inventions to others before filing a patent application could allow others to steal their ideas and file patent applications for them first.

One study by Professors at the University of Pennsylvania Law School found that after a similar change in Canada’s patent system in 1989, fewer individual inventors have filed patent applications in Canada, according to the Wall Street Journal’s report.

Among the other changes that would be created by the proposed Leahy-Smith America Invents Act:

• A new procedure would be implemented, allowing anyone to challenge a newly granted patent, short of bringing litigation;
• The U.S. Patent & Trademark Office would be given the right to set its own fees and hire more examiners, to expedite the patent application process;
• “Another provision would make it harder for patent holders to file blanket suits against dozens of companies in dissimilar industries,” according to the Wall Street Journal’s report;
• An ombudsman program would be established to help start-ups and small businesses in the patent application process;
• New discounts in patent filing fees would be implemented for small companies; and
• Rather than allowing the Patent Office to keep any excess patent fees it may collect, a reserve fund would be established for any such excess fees. It remains unclear whether this fund could be used for other governmental purposes.

An earlier version of the patent reform bill was passed by the Senate in March by a 95-5 vote. The House of Representatives passed the current version, which is now being considered by the Senate, by a 304-117 vote in June.

The full text of the currently proposed bill, H.R. 1249: Leahy-Smith America Invents Act, as submitted to the Senate from the House, along with its procedural history, can be found on the website GovTrack.us.

A. Patents

1. U.S. Patents are granted upon application to United States Patent and Trademark Office (“PTO”), for new, useful, and non-obvious inventions, determined to meet the statutory criteria, after examination, by U.S. PTO.

A U.S. Patent grants to patent owner the exclusive right to practice his invention, to manufacture, use and sell goods thereunder, and to exclude others (or license such rights, in whole or in part, to others for compensation). Under current U.S. law, patents are granted for a period of 20 years from date of application (Was 17 years from the date the patent is issued under previous law).

2. In the U.S., there is no Common Law or State patent protection — Protection of Federally Registered patents derives from the U.S. Constitution — Article I, Section 8, Clause 8:

“The Congress shall have Power … To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;”

Federal Patent Act of 1952, 35 U.S.C. §§ 1 et seq., passed by Congress pursuant to the above Constitutional authority, delineates patent rights in the U.S.

3. A Patent protects, and grants exclusive rights in, the actual invention — the idea itself — and all expressions thereof, as opposed to Copyright, which protects only a particular expression of an idea. (This is why owners of computer software increasingly seek patent protection, rather than copyright protection. Copyright protection does not prevent “reverse engineering” to discover, copy and re-write source code, altering its expression slightly, but using the idea of the copyrighted code to perform the same function.)

4. The Patent application process is highly technical. A Patent Attorney, specially licensed before the PTO, is required to prosecute a patent application.

5. Until passage of the new America Invents Act, which was signed into law by President Obama on September 16, 2011, U.S. Patent law had differed from patents granted in most of the rest of the world as follows:

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The bill, HR 2167, named The Private Company Flexibility and Growth Act, would amend Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) to trigger public company registration and reporting only at 1000 shareholders of record.

Under the proposed law, the definition of `held of record’ would not include securities held by persons who qualify as accredited investors or securities that are held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act. Likewise, beneficial owners behind the “record owners” would continue not to be counted, just as they are not counted under the current SEC Rule imposing the public company registration and reporting requirement upon companies with 500 shareholders and $10 Million in assets.

The proposed legislation would direct the SEC to revise the definition of “held of record’’ pursuant to section 12(g)(5) of the Exchange Act to implement these changes. It would also require the SEC to adopt safe harbor provisions that issuers can follow when determining whether holders of their securities are accredited investors or that holders of their securities received the securities pursuant to employee compensation plans in exempt transactions, for purposes of this provision.

Enacted in 1964, Section 12(g) of the Exchange Act, as interpreted in rules issued by the SEC, requires companies with more than 500 shareholders of record and more than $10 million in assets to register with the SEC and file annual and other periodic reports which are then available to the public. Under current rules adopted by the SEC under Section 12(g), ultimate beneficial owners of the record holders are not counted in determining whether a company has reached the 500 shareholder threshold.

HR 2167 has been referred to the House Financial Services Committee for review. This means the bill is in the first step in the legislative process. “Introduced bills and resolutions first go to committees that deliberate, investigate, and revise them before they go to general debate. The majority of bills and resolutions never make it out of committee,” according to the legislative tracking service, GovTrack.us.

Meanwhile, as announced by SEC Chairman Mary Schapiro in May, 2011, the SEC is engaged in an ongoing review of current rules relating to public company reporting under Section 12(g) and related regulations relating to private offerings. See our previous report on the SEC’s announcement of its pending review: SEC Reviewing 500 Shareholder Threshold for Requiring Registration as a Public Company.

As we reported, the SEC has formed a committee to review these rules, and we are currently awaiting the SEC’s report.

The announcement was made by SEC Chairman Mary Schapiro in testimony at a hearing on “the Future of Capital Formation” before the U.S. House of Representatives Committee on Oversight and Government Reform on May 10, 2011. Here is a link to a full transcript of Ms. Schapiro’s testimony.

According to a May 10 report in Bloomberg News, the catalyst for the review may have been complaints that the current 500 shareholder limit for private companies is hindering capital for growth of closely held companies, which followed Goldman Sach’s pulling its planned $1.5 billion private funding of Facebook Inc. in the face of intense media attention to questions whether this planned private offering by a public company may violate SEC rules limiting marketing of private securities.

Given that the funds for the proposed Facebook investment would ultimately have come from thousands of public investors in Goldman, a public company, questions were raised whether keeping the offering private and allowing Facebook to continue to operate as a private company, simply by counting Goldman Sachs as a single investor, may violate the spirit of the 500 shareholder rule and the full disclosure policy it was intended to serve. Under these circumstances, many argued that the full disclosure of a public offering and registration of Facebook as a public company should be required.

The current rule requiring companies with more than 500 shareholders and more than $10 million in assets ro register as public companies, was created to ensure that shareholders receive sufficient information about their investments. Currently, the rule counts owners of record toward the 500 shareholder threshold, but does not count the ultimate beneficial owners, the people who invest in the fund making a “private placement” investment.

Others in the securities industry complained that enforcing the requirements of costly and fully transparent public company registration in instances like Facebook is hindering capital raising for private companies, especially since most of the large banks on Wall Street have become public entities with thousands of shareholders. Is the ultimate number of shareholders of such investors are counted toward the 500 shareholder limit, forcing public registrations of all such financings, they argue, this may impede other private company financings like Facebook.

Daryl Issa, Chairman of the House Committee on Oversight and Government Reform that held the May hearing on “The Future of Capital Formation,” voiced these concerns in a statement he published giving his rationale for holding the hearing.

Barry Silbert, chief executive officer of SecondMarket Inc., urged that the 500 shareholder limit be significantly increased or eliminated altogether. In remarks prepared for the House Oversight and Government Reform Committee hearing in May, he said that the shareholder limit “has created a disincentive for private companies to hire new employees, or acquire other businesses for stock, as these private companies are fearful of taking on too many shareholders.”

Silbert’s company bills itself as the largest secondary market for trading alternative investments, which would benefit from an increase in the number of permitted non-public offerings of securities. He said that public markets have become “inhospitable” to smaller firms, because of increased regulatory costs of being a public company following enactment of the Sarbannes Oxley Act of 2002, and also because online brokerages led to reduced demand for research and thereby reduced analyst coverage of smaller issuers.

In a further statement issued in May, Mary Schapiro, Chairman of the SEC, announced that she has asked the SEC staff to review both the number of shareholders that should trigger registration and how those holders are counted, as well as other restrictions on how private firms can solicit investors. She announced that the SEC was forming a committee on small and emerging firms to contribute to the review.

“Companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations,” Ms. Schapiro said in her statement. “At the same time, while we have an important responsibility to facilitate growing companies’ access to America’s investment capital, we must balance that responsibility with our obligation to protect investors and our markets.”

We are awaiting the SEC’s further report and recommendations.

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A. Appointment and Products

B. Prices and Terms of Sale

C. Insurance Provisions

D. Force Majeure

E. Warranties; limitation of liability

F. Returns

G. Special Rights and Duties of Distributor

H. Compliance with Foreign Corrupt Practices Act

I. Compliance with U.S. Export Control Laws

J. Intellectual Property Rights

K. Independent Contractor Provisions

L. Term of Agreement and Renewal and Termination provisions (what happens to unfilled orders, goods shipped on credit, etc. after termination of the agreement?)

M. Dispute Resolution provisions – - typically arbitration under ICC or similar internationally recognized arbitration rules

N. Miscellaneous Provisions

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© 2010 by Constance R. Barnhart, Attorney At Law, Managing Member

BARNHART LAW PLC │ Law Offices
Tel 954-545-4994 │ Cell 954 232 5378 │ Fax 954 941 1334
CBarnhart@BarnhartLawPLC.com │ www.BarnhartLawPLC.Com

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As tentative news of incipient financial recovery begins to unthaw stock markets and credit markets, there are reports of increasing interest in IPO’s in Europe and India and we see early signs of a re-awakening of interest in mergers & acquisitions activity in the U.S. This early prospecting for acquisition targets is fueled by the availability of bargains presented by a plethora of troubled companies left by the Great Recession which we are struggling to overcome.

Favorable exchange rates, relatively favorable macro-economic economic indicators just reported by the U.S. Government for the second quarter this year, and federal Stimulus monies (particularly for the renewable energy and medical IT sectors) available under President Obama’s American Recovery and Reinvestment Act of 2009, all combine to provide incentives for acquisition investments in the U.S. over the next several months and next year.

We currently are seeing increasing interest among our Scandinavian and European clients in investing in U.S. assets, acquiring or partnering with U.S. companies, or entering the U.S. market to raise money or start up operations to tap U.S. markets — particularly in the renewable energy and information and communications technology sectors.

Following are ten tips or pointers on how attention to “legal terms” can enhance the economic value to the Buyer of a deal acquiring a business in the U.S. Based on our more than 30 years of experience in this area, we believe that consideration of these points may be helpful to Scandinavian, European or other Non-U.S. – as well as to U.S. – companies contemplating the acquisition of a business in the U.S. in the near future. Read more »

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2008: The United States wind energy generation market is booming, attracting more and more foreign investors. In 2007, for the second year in a row, more new megawatts of wind generation capacity were installed in the U.S. than in any other country in the world.(1) The American Wind Energy Association and the Global Wind Energy Council have confirmed that a record 5,244 Megawatts were installed in the U.S. in 2007, more than double the 2006 number, meaning that U.S. wind power generating capacity grew some 45% in 2007.(2) This was the third consecutive year of record-setting growth in U.S. wind energy, with remarkable and accelerating growth continuing in 2008. The European Wind Energy Association projects that the U.S. will overtake Germany as the world leader in installed wind energy capacity by the end of 2009.(3)

International wind energy investors and industry players are flocking to the U.S. They see that the U.S. is the fastest-growing market in the world for wind power, with greater potential for future growth than European markets, given that wind energy projects still provide only 1% of installed generating capacity in the U.S., as opposed to as high as 10% in some European countries.(4) In addition, the U.S. has more large open spaces with high winds, allowing the installation of larger and more efficient projects than possible in much of Europe.(5)

Several factors are now encouraging this remarkable growth in U.S. wind energy development and investment: Read more….

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As discussed in Part I of this series, similar trends currently characterize the private equity (“PE”) and mergers and acquisitions (M&A) environments in the U.S., Sweden and Norway:

• increasing M&A buyout activity by PE firms,
• sales of companies through competitive controlled auctions,
• less negotiation of purchase agreements, with fewer representations and warranties, almost no conditions to closing, and weaker indemnities from sellers,
• a shifting of risk to buyers, as more PE capital chases acquisition opportunities, and
• a consequent upward tendency in price; basically a seller’s market.

On a recent business trip, I discussed this subject with partners at seven major law firms in Stockholm and four major law firms in Oslo, with whom we work.

My Swedish and Norwegian colleagues acknowledged developments like those above, but pointed out important differences in their markets. These differences present opportunities in Scandinavia for U.S. strategic or PE buyers, looking to acquire new technology or make negotiated strategic acquisitions. Read more …

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The international business world is shrinking and converging. But, trends still differ across borders, and out of the differences come opportunities. On a recent business trip, I discussed the subject of this article with partners at seven major law firms in Stockholm and four major law firms in Oslo, with whom we work. We compared current trends in private equity (“PE”), mergers & acquisitions (“M&A”), and public market activity in our countries.

We found similar trends in our three markets: Read more….