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MoFo Tech

A blog dedicated to information, trend spotting & analysis for science- & tech-based companies

Rooting Out Conflict Minerals

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If your company manufactures consumer electronics, avionics, or any product incorporating even trace amounts of gold, coltan, cassiterite, or wolframite— including their derivatives, tantalum, tin, and tungsten—you may need to ask how well you know your conflict minerals story.

Under Dodd-Frank, public companies may soon be required to report on their use of any of these minerals originating from the Democratic Republic of the Congo and nine other African nations. “The SEC adopted the rule, but it has been subject to a legal challenge to the validity of its rulemaking,” says Morrison & Foerster securities partner David Lynn. “A decision was reached in April holding that the statute and the SEC rule violate the First Amendment of the Constitution. If the rule ultimately requires reporting, the practical implication is to be ready to tell your sourcing story.”

Compliance could be potentially costly and complicated. Lynn suggests that companies know the country of origin; ensure that downstream suppliers (including mines, smelters, and refiners) are conflict free; review and revise sourcing policies and contracts as necessary; and raise awareness of this issue with your entire supply chain.

SEC: The New Cyber-Cop

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It seems scarcely a week goes by without a headline blaring news of a major cybersecurity breach. And with ongoing revelations about the data-tracking activities of the National Security Agency, the public isn’t growing less concerned about privacy. So it’s no surprise Congress has pressed the Securities and Exchange Commission on cybersecurity.

What does that mean for corporate disclosures? “The SEC continues to hear from Congress on cybersecurity disclosures, so it will continue to focus on the issue,” says David Lynn, a partner in Morrison & Foerster’s Washington office and co-chair of its Corporate Finance Practice. “That means companies need to be vigilant about their disclosures.”

The SEC last issued guidance on cybersecurity disclosures in 2011. Since then it has issued several dozen comment letters to companies that experienced a cybersecurity issue and failed to disclose it entirely to the SEC’s liking. Even if the agency doesn’t revisit its current guidance on cybersecurity disclosures, “[SEC Chair] Mary Jo White has told Congress the issue is important to the SEC,” says Tony Rodriguez, a partner in Morrison & Foerster’s San Francisco office whose experience includes representations in SEC matters.

The continuing SEC scrutiny also raises concerns about potential litigation. “While we haven’t necessarily seen an increase in cybersecurity cases, if a company is called out by a regulator on their disclosures, it could encourage plaintiffs to take legal action,” Rodriguez observes.

What should companies do? Besides taking appropriate steps to protect data from cyberattacks and remediate breaches that do occur, make sure you have a robust process in place to communicate potential problems to corporate leaders. “Executives responsible for disclosures need to become aware of cybersecurity issues promptly so they can make appropriate disclosure decisions,” Lynn advises.

Finally, approach disclosures in a thoughtful way and let the facts speak for themselves. Describe cybersecurity issues in an accurate, complete manner so as to minimize the possibility for SEC comments and potential litigation.

“Just because the last SEC guidance was issued in 2011 doesn’t mean the issue has gone away,” Lynn concludes. “Cybersecurity breaches will continue to happen to organizations across the board. So be vigilant about your disclosures.”

German Federal Government Plans Tax Exemption of INVEST – Subsidy for Venture Capital

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The German Federal Government has given an important insight to its plans and future measures regarding taxation of the start-up- and VC-ecosystem in Germany by officially answer to a parliamentary request by several members of parliament. These plans are not only important for young companies and their investors, but also for Germany’s attractiveness as a start-up destination itself. This is especially true considering that Berlin is becoming Europe’s top start-up destination and the call for governmental support for the German start-up scene increased recently.

One encouraging trend set out in the Government’s recent statements is the announced tax exemption of the so-called INVEST-Subsidy for Venture Capital (INVEST – Zuschuss für Wagniskapital). Under this program, business angels get 20 percent of their investment reimbursed from a special governmental fund if certain conditions are met. Whereas currently such subsidy triggers German income tax, in the future its incentive effect as a tax-exempt gain will be much higher. Another positive highlight is that the government announced to adhere to the concept of a lower taxation of “carried interest” received by VC-fund initiators (40% exemption from income tax).

Unfortunately, the government refuses to introduce a tax exemption for capital gains received by the disposition of shares in qualified startup businesses, which would be somehow comparable with certain tax incentives in the UK and USA (tax roll-over). The group of parliamentarians also asked the government about other important issues, such as the call for VAT exemption for VC fund management fees, the idea to privilege a start-up by extending the offsetting of profit against tax loss carry-forwards and suggestions for a definite fiscal transparency of VC funds. Unfortunately the answers to these queries remained evasive.

Overall, as far as the INVEST-Subsidy is concerned, an encouraging step into the right direction has been announced. In addition that gives rise to hope for the ongoing effort of the German government to support the start-up and VC scene in Germany and especially Berlin.     

This is an update to Europe’s Incubator Central.

Turning The Tide on “Trolls”

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When a non-practicing entity (NPE) accused 16,000 small businesses of violating its patent by merely emailing scanned documents, the New York attorney general cracked down, forcing a settlement. Then the FTC threatened to sue for deceptive trade practices—prompting the NPE to file a preemptive suit against the FTC. ¶ As NPEs (sometimes known as patent trolls) have grown more audacious, the drumbeat for action against them has grown, notes Scott Llewellyn, deputy chair of Morrison & Foerster’s IP Litigation Group. There’s been an onslaught of media coverage and a flurry of federal legislation, with one House bill passing by a large margin in December. In January, President Obama urged passage of a bill to reduce “needless litigation,” and the White House announced further executive actions. The House bill awaits a Senate counterpart. Regardless of whether any bill reaches Obama’s desk, this “sea change of opinion” could have a big impact on patent infringement cases, Llewellyn says, by “potentially changing how judges and juries look at these issues.” Meanwhile, Llewellyn warns, “Be careful what you wish for, because the devil is in the details.” Companies should think about the potential for unintended consequences before supporting any measure.

When Bosses Can’t Be “Friends”

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Modern Technology has increasingly blurred the line between business and personal lives, thanks in large part to social media that can broadcast employees’ views to friends and the public in a heartbeat. Companies are increasingly tempted to move into what may be considered “personal” domains in order to maintain their reputation or control over employees’ time. And that has translated into some serious debates in courtrooms and legislatures over the limits of corporate conduct.

For example, several states have passed laws restricting access to the social media accounts of employees and job applicants. Several federal bills with similar requirements are in the works. Typically, these laws forbid employers from requesting the passwords to personal social media accounts. But some states also forbid employers from attempting to access the non-public sections of these personal accounts.

“Something as simple as asking employees to make their profiles public or a manager sending a ‘friend’ request to an employee may run afoul of the laws in your state,” says Christine Lyon, a Morrison & Foerster partner who focuses on privacy and employment law. “Companies should consider the laws of the state where the employee is physically located.”

Another prevalent question is who “owns” the followers and related materials of an employee’s social media account when the employee leaves the company. Companies want to retain the loyalty of followers developed using company time and resources, while employees believe their following results from their own efforts and influence. One complicating factor: they may have used their personal devices when posting to the account. “Several lawsuits involved cases where it wasn’t clear if the account was for personal or business purposes, and the employee used the account for both,” says John Delaney, leader of Morrison & Foerster’s Social Media practice. Delaney recommends having employees sign a social media policy and structuring it to help prevent legal disputes down the road. For example, employers should outline a process for opening new social media accounts that require sign-off from an administrator, who can influence key decisions such as the account’s name.

Employers should also make sure the policy states that the company’s official social media accounts—those bearing the company’s name—cannot be used for personal business, he adds.