grellas

In the days when law was more a "profession" than a business, blue-chip clients would pay the bills of blue-chip firms based on, e.g., a $50K invoice that said "For services rendered." In a typical case, no further explanation given and none requested. This probably was a vestige of the "old boy's network" by which top lawyers and top executives came from a similar elite pedigree and it was regarded as undignified to question professionals about the mysteries of how they worked their craft. (This goes back before my time but I have it on good authority from senior partners with whom I worked circa 1980 in prestige firms).

That represented billing at the elite level of law. In the mundane, everyday practice of law, the common practice in billing was indeed that of fixed-fee services. In pre-Silicon Valley days of Santa Clara County in the 1950s, for example, sole practitioners would bill for basic services based on a fee schedule put out by the local bar association (e.g., "Preparation of will - $400"). Those were the days when local bar associations held much more sway than they do today and, in order to practice, a local lawyer had to do such things as sign up to represent criminal defendants in murder cases as part of an obligatory process (these were the days before the Supreme Court rulings made the right to counsel in capital cases a much more involved process than it is was back then). In any case, it was the courts that caused time-based billing to be foisted on clients as a matter of routine when they struck down the local bar fee schedules as illegal price-fixing.

The pattern above is pretty evident: in all cases, lawyers as professionals were seen as part of a closed network by which they themselves set the rules that everyone else simply had to accept. In billing, that meant that lawyers billed as they deemed fit without much scrutiny and without much explanation.

The scale of law was also very different then: back in that day, a prestige law firm in San Francisco, for instance, might have 20 to 25 lawyers at the most. The work it did was sophisticated but a typical high-end practice might have included heavy doses of such things as personal injury, maritime practice, construction, and the like in addition to sophisticated commercial and contract work.

As litigation exploded in the 1960s and 1970s, as law came to fill social needs previously not considered within its province (e.g., non-discrimination laws), and as mechanisms were adopted to promote large-scale legal actions (e.g., class actions), law morphed from having been primarily a "profession" to being primarily a business. The McCutchen (now Bingham) firm that I worked for in the early 80s had about 250 lawyers then and was considered elite. In 1965, it has 20 lawyers, a level to which it had grown from its formation in the 1880s. Today, it has well over 1,000 lawyers and is part of a conglomerate firm with branches in many cities throughout the world. Along with this growth came the rise of hourly billing practices that were typically "aggressive." Demand was such that large companies sopped up the services and paid dearly for the privilege: high rates, team-based billing practices with multiple attorneys and paralegals typically staffing a matter while each billing every minute of all their interactions with one another in meetings, chats, intra-office communications, etc.

In the beginning, as this explosion in growth occurred, clients were reticent to question the resultant high billings. By the mid-1980s, however, the remnants of the old-style "profession" were rapidly fading and law was a big business. Firms such as Finley Kumble were suddenly formed out of nothing by defecting big-firm partners who saw large and fast profits as the primary goal of their business and the billing practices quickly became abusive (Finley became a poster child for this sort of thing and fell apart owing to client revulsion at such abuses).

Thereafter, large companies began to question billings much more closely. The rise of in-house lawyers was in part a reaction to the high cost of outside services but, in time, those lawyers were also used routinely to "manage" the outside firms by keeping their billings in line, among other things. After a while, as the go-go years of the 1980s and 1990s culminated eventually in the tech bubble of 2000, a funny pattern emerged by which a big-firm billing was almost in the nature of an "opening offer." It would routinely come in very high, the in-house people would demand it be reduced, and, after some back-and-forth, "adjustments" would be made and it would be paid.

The pattern lasted until the bust of 2008 and 2009, which bust sent the big firms reeling and has caused a further re-evaluation of billing practices. The reason for the further change was simply one of supply and demand. Pre-bust, no matter what the abuses, the law firms held ultimate sway because even the largest companies with the most sophisticated in-house staffs would be wary of switching firms easily or of wanting to alienate their main outside firms in any way. That changed with the bust. Suddenly, the large firms looked bloated, overstaffed, and inefficient. And clients, who came to hold the leverage, used it to demand billing concessions: lower rates, caps, fixed-fee arrangements, discounts, and the like. And the law firms had to adjust.

In the meantime, quite apart from the big firms, technology has changed law firm billing practices generally. Owing to the widespread availability of information today, clients are much more savvy about how legal billing works and are not hesitant to ask for arrangements that make sense for the client even while being fair to the lawyers providing the services. Thus, scrutiny of legal billing is taken as a given and we have indeed come around 180 degrees from where it all used to be.

What SimpleLegal is doing is thus very timely and interesting. Honest and fair billing should be the goal of both lawyers and clients and this seems like an excellent model for helping to promote this. I wish them well in their endeavors.

Of course, much of Silicon Valley is a living testament to the fact that options can have incredible value for the right cases. Every startup has a rhythm to it and, if you are holding .5% of a "hot" startup in the form of options having a low exercise price, it normally is worth the gamble of biding your time, taking reduced pay, and seeing if the big payday will come. Many founders think in these terms and, if their startup fails to galvanize and moves instead in only fits and starts, will seek to cut their losses and move on. In this sense, the perceived value of the options as seen at the entry point does not turn on what average returns may be for such options considered generically among the entire universe of startups. It turns on more subjective factors such as whether the startup is doing something exciting, whether its key people make up a strong team, whether it has attracted quality backing, and the like. If those factors are there, then founders do not really view it as a matter of average returns across a broad class of startup types but rather view it as a matter of the likelihood of a big outcome for the particular startup being considered.

That said, options can prove illusory in many cases and caution is definitely in order. It normally does not pay to hang in with an uneven venture in the vague hope that it can somehow turn things around and yield a great equity return for your small piece of the company. Among other things, if a venture goes through multiple rounds of funding, the liquidation preferences get to be so great that option holders may easily get a very reduced payout, or even no payout whatever, on acquisition. Also, if you hang around while all your options vest and then leave the company, you typically have only 90 days within which to exercise them or you lose them altogether. That means a cash payout that only increases your risk or, even worse than that, a large tax hit with no cash return if the stock price is high following a series of fundings. Of course, there are (as the author notes) many good reasons to be in a startup apart from equity payout and it may still be worthwhile to stick it out in a doubtful venture for a time owing to those other reasons. But don't stick with a dubious venture based primarily on the hoped-for equity payout in such cases because, in that case, the odds definitely are against you.

Here is an informed summing up by Dennis Crouch at PatentlyO: "What are the consequences [of the ruling]? My immediate reaction is that for most practical applications, the Court's holding means that even though the broadest possible biotechnology product claims (to the isolated DNA itself) aren't going to be patentable, the key elements in making and using a biotechnology-based invention are still going to be protectable via patents (Part III of the Court's opinion makes this especially clear). This will allow researchers and competitors a little bit of wiggle room to design around biotechnology patents because they can use the basic isolated sequence but there will still be substantial limitations on what they can do with that isolated sequence. For this reason, I'm skeptical that the Court's opinion will have a negative effect on the incentives for creating biotechnology-based applications. To the contrary: by affirming that cDNA can be patented, it may strengthen the incentives for investing in research in this area." (http://www.patentlyo.com/patent/2013/06/myriad-isolated-dna-...)

The U.S. system of government is deeply rooted in an English common law and constitutional framework. In its U.S. variant, it became a constitutional republic, with the broad idea being that power within the government is divided by design so as to help prevent its abuse. That means a federal system premised on the legal principle that governmental power resides by default elsewhere than with the centralized authority - meaning, the federal authority is strictly limited to the powers expressly granted to it by the constitution, as implemented through three branches of government (executive, legislative, judicial) that check and balance each other even with respect to the limited power resident within that federal authority. Any power not expressly granted to the federal authority belongs to the states and to the people. On top of it all, the very notion of government as a compact derived from the foundational principle that it is the individual, not the state, that has inalienable rights that cannot be impaired by any government, no matter how benign its stated motives or noble its stated goals. All in all, this began as a bottom-up system with a tremendous respect for the rights of the individual and a tremendous distrust for the power of the state.

While that was the theory, the practice did not often match and major faults such as the slave system and the legally sanctioned taking of lands from the "pagan" residents who preceded the European migrants led to many convulsions by which, in time, the federal authority itself - which had often been the cause of the abuses - came to be seen as the cure for the problems and therefore came to be seen as an authority that should be given broad, largely unchecked, and very vague grants of power with which to accomplish its newly-defined goals. Couple this with the move from a formerly isolationist America (Monroe Doctrine, etc.) to one that saw its role in the world as that of an exporter of democracy and defender of a democratic system of government around the globe, and you perforce have a massive further expansion of centralized authority via the build up of a massive military, in contrast to the time of George Washington where even the very idea of having a standing army was hugely controversial and defense was handled mostly by loosely formed militias organized by the colonies and then the states.

And so, two-plus centuries later, you have a system in which modern conservatives ask for virtually unlimited authority by which to achieve largely military aims and by which modern liberals ask for virtually unlimited authority by which to achieve social aims. With that massive build up of federal power, we all wake up one day and find that the central government has become rather full of itself, arrogant, and unaccountable, with those in charge - of either of the major parties - now quite comfortable with the idea that the rights of the individual are far subservient to those of the state, at least as seen by those in charge. And we all wonder how this happened.

I see this as a system that is wildly out of control in its expansionist aims at the expense of the individual and, given the historical arc, don't hold out a lot of hope that the problem can be reversed unless people's thinking changes significantly.

Yes, by all means vote, but do vote with discernment and with a sharp eye to those who would protect the rights of the individual and not based on the cliches of the day regarding the modern political parties. Maybe that will in time help to turn it around. In any case, that is how I see it.

Of course, the question is whether this will catch on and stick, even during bad times. When markets are sunny for investors, it is not too hard to bend for the founder concerns. When things are tight, though, the pattern has always been one of merciless slaughter of the founder interest, as evidenced by any down round within memory. So too, in bad times such as the dot-bust period, atrocities like participating preferred and multiple-x liquidation preferences frequently reared their heads and would, I think do so again in any new time of debacle. While individual investors such as Mr. Altman may refrain from this sort of thing, I wonder whether such moderation would ever become the norm. I would tend to doubt it.

I also think that even this particular term sheet, though undoubtedly fair to founders in its overall sweep, would need to be adapted to avoid unfairness as it is applied to various cases. If a founder has built large value by the time of Series A, it is very non-standard to require that founder to put the entirety of his stake at risk of forfeiture all over again as a condition to getting funded. That, I assume, would be an obvious point of negotiation and one on which any investor would very likely yield when pressed.

These are mere quibbles, though. It is really the spirit of the thing that counts and not the legalese as such. Just as the best contract in the world will not really protect you if you happen to be dealing with a scoundrel, so too the flimsiest of contracts will likely not cause you too much trouble if you are dealing with someone of honesty and integrity. This term sheet reflects the right values that an investor should bring to a deal and, if you get that as a founder, you are 99% of the way there as long as your business interests can match. In the end, that is what counts most of all.

In this way, a lead investor investing, say, $4M in an A round with a $6M pre-money company valuation and paying $1/sh against a model of 10M authorized would own 40% of a $10M company (post-money valuation), would own 4M shares of Series A preferred stock valued at $1/sh, and would do so in a context where there may be, say, 4M common shares held by founders and 2M common shares held in a pool for equity incentives. When that same company goes to do its 409A valuation following that preferred round, it retains an outside independent valuation company to calculate the price of its common stock for purposes of valuing options granted to employees (409A is solely designed as a compliance provision requiring that options and other forms of deferred compensation granted to executives and other employees not be underpriced as of the date of grant). When it does that valuation, the outside company will measure the value of the common stock by looking at the arms-length deal done by the Series A investors by which they paid $1/sh that gave them each 1 share of preferred stock that is typically convertible 1:1 into common stock on the happening of certain events. As of the date of the Series A investment, that common stock clearly does not have the same value as the preferred stock because the preferred stock includes a series of valuable preferences that the common stock lacks (e.g., a liquidation preference giving it first preference in being paid the proceeds of any acquisition, subject to various limitations; a right to class approval of major corporate actions; a right to anti-dilution protection in the event of a down round, etc.). Any common stockholder who has been "wiped out" in a merger where the preferred holders take everything and the common holders get nothing can attest to the value of these preferences. This is why the stock is called "preferred" in the first place. In any case, in the days before 409A, a company's board of directors would routinely use a 10:1 ratio to value the preferred stock in relation to the common owing to the value of the preferences (that is, in our example above, the preferred stock would be priced at $1/sh and the common at $.10/sh). Since the enactment of 409A, that ratio has shrunk considerably and, today, the outside companies who do the valuations will at their most aggressive use a 5:1 ratio and will much more typically use more like a 3:1 ratio in accounting for the valuation difference (again, in our example, resulting in common stock prices of $.20/sh and $.33/sh respectively). The common stock valuation so determined will then be used by the company for valuing its stock options granted to employees. After such options are granted, should the company hit the skids and go down (or get acquired in a fire sale), the common stock holders would typically get nothing while the preferred holders may get some or all of their money back. On the other hand, if the company does very well and is ultimately acquired at a premium, then the preferred holders (in a typical case where the preferred stock is non-participating and only gets its money back on the liquidation preference without participating in any further payout) will convert to common in order to get the benefits of the acquisition and will share equally (in accordance with their percentage interest in the company) with all other common holders in those proceeds. In this way, in the end, the discounted value of the common stock as used for 409A purposes becomes irrelevant to the value of the company and what really counts is the arms-length price that someone will pay for the acquisition, as to which the common will share equally with the preferred. In other words, there was a reason for discounting the value of the common at the time of the A round but that reason goes away once the acquisition occurs and that event in turn establishes the pricing for common stock at the new premium price without regard to what the 409A price was in different circumstances.

This is why it is legitimate for company valuations to be based on the latest preferred pricing spread against the fully diluted capitalization of the company. It is not inconsistent to use that approach for the overall valuation of the company while using a discounted approach for 409A purposes. They are two different measures, each used for a distinct purpose, and are quite compatible with one another.

Hope this helps explain the technical points involved.

The farmer here knew of Monsanto's license by which you could buy their genetically-altered (patented) seeds for the purpose of planting one crop only and selling that crop, with the need each year to buy more of the patented seeds from Monsanto directly or from one of its authorized resellers and with a specific prohibition on any form of replanting. Each year, he routinely bought these seeds and planted them in accordance with the license restrictions for his primary crop. For his secondary crop each year for eight years running, though, he bought seeds generically on resale from a grain elevator, planted them in a such a way as to isolate which parts of the resulting crop were from the Monsanto seeds, and, through a continual culling process, regularly wound up planting these Monsanto seeds for an 8-year period so as to get the benefits of the patented seeds without having to buy them from Monsanto or a Monsanto dealer. When he got sued over this, he argued that the "bean did it" by claiming that he did not himself "make" or "create" an infringing product so as to infringe Monsanto's patent but rather forces of nature over which he had no control created the new product, thereby absolving him for any responsibility for infringement.

People often mock the law for its occasional absurdities and for its bone-crushing processes, and rightly so. But most U.S. law at its core is grounded in sound principles that make a lot of sense, and the case here represents one such instance.

Granting the premise of patent laws that an inventor is to have monopoly protection for a prescribed period in order to profit from his invention, it makes perfect sense that the patent exhaustion doctrine should not be interpreted such that, after but a single sale of the product that benefits the patent holder, others can simply make copies of the product for sale or use directly and without compensating the patent holder in any way. Now, some may support such an outcome in the name of sticking a thumb in the eye of patent holders but, given that U.S. courts do not have a mission to subvert the patent laws and instead seek to uphold them as the law of the land, those courts cannot really abide such a result. Instead, they will say that the farmer's argument here that the "bean did it" is pure sophistry and a way of subverting the plain purpose of the law. That is exactly what the U.S. Supreme Court did here. And that is why it was unanimous. By legal standards, it really was not a close call.

In the words of the Court: "In the case at hand, Bowman planted Monsanto’s patented soybeans solely to make and market replicas of them, thus depriving the company of the reward patent law provides for the sale of each article. Patent exhaustion provides no haven for that conduct."

All that said, the court was very careful to note that its ruling does not in any way apply to all forms of self-replicating product: "We recognize that such inventions are becoming ever more prevalent, complex, and diverse. In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be a necessary but incidental step in using the item for another purpose." Thus, the ruling was not a knee-jerk upholding of maximum protection for the patent laws. The court seems more than ready to keep an open mind when it comes to changing technology. It simply was not ready to give sanction to a clever interpretation of law that would have undercut the very fundamentals of why the law existed in the first place.

That said, it is very significant in that the Federal Circuit has elected not to go wildly back in the direction of upholding loose patents and in mitigating the damage that would have been caused by a potentially pernicious approach to upholding software patents that had been adopted by the panel whose decision it reviewed. The result is basically an uncertain hodge-podge that will not in itself work to kill off software patents.

To give some legal context to those who may be interested, my technical analysis from 7 months ago follows:

"1. The CLS Bank v. Alice case, though raising an issue of vital importance, is not about 'whether software is patentable.'

2. Over the years, the Federal Circuit has notoriously broadened the scope of patent eligibility, most conspicuously in its 1998 State Street decision which essentially opened the floodgates to the modern rush of business method patents by holding that virtually any business method was patentable so long as 'it produces a useful, concrete and tangible result.' In 2010, the U.S. Supreme Court, in the Bilski case, repudiated the State Street test for patent eligibility and, though upholding software and business method patents generally, directed courts to be much more vigilant to ensure that no one gain patent rights to what are mere 'abstract ideas,' however much they may incidentally be tied to some computer mechanism in their implementation. In a follow on decision (Prometheus), the U.S. Supreme Court similarly cut back sharply on the permissible scope of patent eligibility for claimed inventions that constituted nothing more than laws of nature.

3. In this CLS Bank case, the claimed patent involves a method for eliminating certain types of risk associated with an escrow closing and used a technological process by which to mimic a phantom version of the closing as a security check before allowing the real transaction to close. In essence, the technological aspect of this 'invention' is routine and so the question is whether anything beyond that is simply another way of trying to patent nothing more than an abstract idea. If so, it should fail under Bilski; if not, it would potentially pass the test for patent eligibility.

4. The lower court in CLS Bank held as a matter of law that the 'invention' was nothing more than an abstract idea and held it invalid as being ineligible for patent protection. On appeal, a divided panel of the Federal Circuit reversed and reinstated the patent. It did so, however, by setting out a brand new procedural rule whose effect would be to gut much of Bilski and reopen the floodgates to huge numbers of business method patents under a very loose standard - to wit, by holding, that, if it 'is not manifestly evident [my emphasis] that a claim is directed to a patent ineligible abstract idea,' then the court essentially treat the claim as eligible. What the Federal Circuit panel did, then, was to take the Supreme Court's directive for lower courts to be much stricter in evaluating dubious business method patents for patent eligibility and recast that directive in a form that said, if you as a court see that something is obviously nothing more than an abstract idea, then go ahead and reject it but you are otherwise to treat as being eligible for patent protection. In other words, the new strictness found in Bilski for evaluating such claims was once again to be transformed by the Federal Circuit into a loose standard that would let such claims coast by unimpeded.

5. Of course, this has set off alarm bells because, in effect, it represents yet one more revolt by the Federal Circuit against attempts by the Supreme Court to rein it in by bringing patent issues back to some semi-sane state. Following the panel decision (which was rendered over a sharp and stinging dissent), the losing party petitioned for a rehearing en banc (meaning by the full panoply of Federal Circuit judges as opposed to merely a 3-judge panel) and this was granted. Thus, we shall see whether the Federal Circuit is prepared once again to stick its thumb in the eye of the Supreme Court or whether it will temper its extreme pro-patent proclivities and follow the law as it has been directed.

So, this is a very important case affecting the trend of patent enforcement in a profound way but does nothing to challenge the idea of software or business methods being patentable in a general sense. For anything to change in that regard, Congress must act."

In that section, the plaintiff, Think Computer Corporation, "respectfully requests that Civil Local Rule 3-9(b) be retired, or that Plaintiff be exempted from the Rule given its particular ownership [i.e., owned 100% by one individual] and tax structure [i.e., status as a Sub S corporation]."

The Civil Local Rules are the rules used by the federal court in the Northern District of California to regulate its proceedings procedurally, specifying who needs to do what in connection with the filing and prosecution of lawsuits in this court. These rules have the force of law and litigants who ignore them do so at their peril.

Rule 3-9(b), which the plaintiff asks be "retired," states that a "corporation . . . or other such entity may appear only through a member of the bar of this Court."

In other words, a corporation cannot represent itself in a lawsuit of this type and Think Computer Corporation has filed this action without an attorney representing it while purporting to represent itself in obvious violation of this rule.

A few comments about what I think this signifies:

1. The plaintiff's principal is a spirited individual who has very definite ideas about the money transmission laws and who feels highly aggrieved by the impact that California's 2010 law has had on his company.

2. Those ideas about these laws are, in my view, quirky ones that take significant liberties in interpreting how laws work. In other words, without detailing particulars, I believe that Mr. Greenspan's views of these laws will likely not hold up when tested formally in a court of law.

3. Point 2 above, coupled with the complaint's wild swinging out at multiple parties on dubious theories of liability, is the most probable explanation of why there is no lawyer representing the plaintiff in this action.

4. To sue investors basically for having chosen to fund high-profile startups that the plaintiff deems "unlicensed money service businesses" is flaky and will never hold up. If the action is not bounced for violation of Rule 3-9(b), it will be out the gate as to these defendants on grounds that it does not state a cognizable claim for legal relief.

5. To sue the startups themselves for allegedly providing unlicensed money services is also quite dubious. The money transmitter laws are basically laws that give state governments the authority to require that bonds be provided, that minimum capitalization requirements be met, and that other precautions taken, to ensure that whoever handles escrowed monies takes prudent steps to protect those whose funds are entrusted to them. If these laws are violated, the state authorities have the power to take legal actions to enforce them. Nowhere is there any express private right of action that gives any private citizen the right to file suit complaining about alleged violations of these laws. Therefore, it is a stretch for any private party such as Think Computer to seek damages, injunctive relief, or any other form of legal remedy owing to alleged violations of the money transmitter laws.

6. There are conceivably some legal remedies that might work if the facts support them, one of them being for false advertising claims under the Lanham Act (which is one of the claims asserted here). One competitor can indeed sue another competitor for private damages and other relief if the other competitor is gaining an unfair competitive advantage by falsely advertising that its products or services do something that is material to the customer's decision to use that product or service. Here, the result would turn on the ability to show that the parties sued are in fact engaged in false or deceptive advertising. Even here, however, the case is likely sketchy, in my view, from a quick review of the allegations made.

All in all, this is a most unusual case filed by an unrepresented party that cannot legally represent itself in the forum chosen and resting on legal theories that are a real stretch in most cases. I believe Mr. Greenspan is both sincere and passionate about what he believes but what he asserts is really a case to be made to the legislative policy-makers, not to the courts. There may indeed be incredible unfairness in the way in which these laws are framed and applied. But that does not mean a private party should be able to indiscriminately sue anyone around who happens to be offering services that involve some form of money handling, or their investors, for the results of the existing system. That in itself in not only a stretch but an abuse. Wrong parties, wrong framing. The action should therefore be dismissed forthwith by the plaintiff as having been ill-considered. If it is not, it will be dismissed by the court in fairly short order.

Think about how he characterizes the lawyers and their conduct: (1) they were lawyers with failed practices; (2) they figured a way to shake down victims out of an aggregate of millions of dollars; (3) they did this by threatening to expose them as downloaders of pornographic material via the filing of lawsuits ostensibly asserting copyright violations; (4) yet, the people asserting the claims did not have any good evidence actually proving any form of violation in any given case; (5) and, when someone offered any real resistance, the case was dropped; (6) and when the ostensible holders of the claims needed to be real holders of the copyrights in question, shell entities were set up (controlled and dominated by the lawyers) in order to create a false appearance that this requirement was met; (7) and when the federal court's procedural rules specifically required the lawyer bringing the case to identify all known related cases so that the court can understand the true party relationships, the lawyer suppresses all the known facts about the relationships in order to deceive the court; (8) and when a formal assignment of copyright is needed to meet the legal requirement of standing, the lawyers set up a dummy name and forge the person's signature in order to meet the requirement; (9) and when the scheme turns on a fishing expedition by which the lawyers hunt out a list of IP addresses and then ask the court for the right to subpoena the ISP to get the names associated with those addresses, and the judge issues a discovery order saying, in effect, "hold on, you can't do this here," and yet the lawyers still proceed to serve the subpoenas on the ISPs in order to keep generating opportunities to extort settlements from even more victims; (10) and when the court finds out that the lawyers are deliberately flouting the court's orders and authority, the lawyers refuse to appear until forced to and, when they do appear, refuse to account honestly for their conduct.

Summing up and paraphrasing what the judge concluded based on these findings: This is not lawyering. It is naked extortion covered by a thin veneer of lawyering. Rules don't matter. Honesty doesn't matter. Decency doesn't matter. Whatever it takes to keep the scheme going, right or wrong, fair or foul, justified or not.

The result: not a severe money sanction, which would have been but a slap on the wrist when many millions had been gathered under the lawyers' scheme, and apparently gathered tax free to boot. Instead, something much worse, to wit, a clear conclusion that the lawyers had engaged in acts of moral turpitude, justifying referral to the state bar of every jurisdiction in which they are authorized to practice, and likely eventual disbarment; a criminal referral to the U.S. attorneys' office for possible RICO violations; a referral to the tax authorities; and an order that this devastating order be served and filed in every single legal action that has been filed by these attorneys anywhere in the nation.

This, to put it mildly, amounts to evisceration. This judge got mad. This judge had guts. This judge is smart. And that, for these lawyers, is a lethal combination.

I see it as a remote risk that any such exchange would be treated as a legally binding contract. Too many essential terms would be missing, as for example in the case of a bridge note such things as time to maturity, interest rate, size of equity raise triggering mandatory conversion, etc. While the otherwise missing essential terms might be supplied by a term sheet used by the startup as a basis of discussion, such term sheets invariably make clear that they do not become legally binding until definitive documents are signed. To say, then, that one is "in" on such a term sheet would signify no more than what one signifies by actually signing it: that is, the investor becomes morally bound to negotiate in good faith until the documentation is prepared and signed and also morally bound to participate when such documentation is prepared in good faith and along customary lines. Of course, beyond the legal hurdles, there is the not insignificant issue of how either an investor or a startup would be treated in a tight-knit community such as YC if the person becomes known as being "sue happy." Could such lawsuits ever come about? Yes, and there may be unusual cases where the parties had had a true meeting of the minds, or where one party relied to his detriment on the other's statements and conduct such that a court might find an enforceable contract, but the practical risk of this happening would be near zero for almost all such cases - enough so, I think, that it may be effectively disregarded.

What the protocol does do is help prevent misunderstandings, inadvertent outcomes, and the occasional deliberately weasly overreaching that can occur with informal verbal exchanges. It says to the investor: do I really have a commitment from you such that, should you back out, your reputation will take a hit? It says to the startup: pin your investors down to the point where you can't be double-dealt but also make sure the commitment you think you have is real and not a product of your own wishful thinking.

I can see this working beautifully as a first step within YC. Beyond that, it will work as people come to terms with its existence and see it as useful. For its purpose, it is really an elegant solution to a knotty problem and therefore worthwhile.

The short-term aim of Clerky appears to be to tame the process by which founders take the legal steps to traverse the path from launch to first funding by giving founders and their lawyers the tools to do it all more efficiently and cost-effectively. I would think that is a worthy goal and a worthy market to target. How many founders over the years have given up as much as a percent or two of their equity just to get fee deferrals from law firms that would enable them to get to first funding? And paid sizable fees to boot? Credible founders do not begrudge a lawyer his hire they also do not want the legal part to take more than its fair share of the budget or the equity.

Clerky offers as a first step a standardized Delaware C-corp approach to startup launch, and a skillfully done one at that. Its site suggests that it will targeting as well the remaining steps on the standardized path, right down to ones that will facilitate efficient and low-cost handling of all the important steps leading to first funding. This is not a modest goal - it is huge.

In law, there are strict limits to how far anything "standardized" can go - law is simply too big and complex to be reduced to simple recurring steps in any important area. For this reason, the role of the lawyer (even as to the standardized aspects) will not soon be displaced. Indeed, traps and issues abound for founders in setting up their companies, in funding them, and in dealing with a whole host of legal issues that will crop up. It always has been, and remains, foolhardy for founders to wing it in this area once they get beyond the very early positioning parts of their ventures. The beauty of what Clerky seeks to do, however, lies in providing ways to make it all easier both for founders and for lawyers and thereby setting up ways of doing collaborative relationships by which all concerned will benefit. I am a lawyer. I have done this stuff for years. But I have no stake in wanting to do any of this the clunky way if there is a simple and elegant way at hand. I welcome what Clerky is trying to do and look forward to its benefits as they roll out their services. The fact that founders can save on fees is not a threat but instead an opportunity for me to focus on the parts I do best rather than the repetitive parts.

The beauty of Clerky, as I see it, is that the founders, having worked extensively as superb startup lawyers in their own right, have a keen sense of how all this works and are aiming to develop a service that truly deals with the issues that have burdened clients and lawyers alike. It is a tall challenge but, if anyone can do it, this is the right team, especially working within the innovative framework provided by YC and the startup community. It will be fascinating to see how it all unfolds.

I have no special connection with this organization except that, having struggled to learn Latin on my own for some years, my breakthrough came via the Cursus Linguae Latinae Vivae (Course in the Living Latin Language) offered by that organization, as taught by Fr. Suitbertus Siedl entirely in Latin (for a rich set of Latin-only materials offered by FSH, see http://www.hieronymus.us.com/Venalia/IndLatin.htm, with English translation of the offerings here: http://www.hieronymus.us.com/Venalia/IndEngl.htm).

The premise of the Cursus is that language is primarily an aural experience - hence, trying to learn Latin by translating words and sentences into another language such as English is a fundamentally poorer way to learn than by simply hearing and repeating it in the Latin itself even as one learns the grammatical rules and syntax. Asculte et alta voce legere (listen, and repeat out loud) is the command one hears throughout, along with Repetitio est mater studiorum. In each segment, there is a teaching from the ancient Latin of Rome, from historic Catholic Church materials, and from daily life. And you will hear Fr. Siedl vigorously proclaiming: "Lingua Latina non mortua est sed viva."

Take it for what it is worth. But clearly there are pockets within today's world where people take seriously the idea that Latin should survive as a spoken tongue and where their gatherings are held entirely in Latin. For anyone who wants to learn the language, it is well worth dipping into that world. A pretty fascinating place for those with an inclination to learn about it.

I don't think one can meaningfully say that the "best" entrepreneurs come in one type or another. Certainly the YC juggernaut tends to confirm that young entrepreneurs can be extremely able and can lead ventures to spectacular forms of success.

But the statement above emphasizes for me what has always seemed obvious and yet has often been brushed aside in, let us say, the impetuousness of youth: that is, that experience can and often does make a huge difference for entrepreneurs and it is a mistake to ignore its value in assessing startup prospects.

Someone, somewhere, somehow needs to have "been there before" for a startup to work in a big, complex, and disruptive field such as those targeted by the most promising startups. If it is not the founders themselves, it is those with whom the founders surround themselves. If those persons are not there, it has been my experience (having represented countless founders) that the founders will tend to stumble around to their detriment. I believe the main value of the YC network, for example, is that it gives young entrepreneurs precisely the sort of connections and guidance by which they can connect up with and be guided or even mentored by those with solid experience in their respective domains. Without that, their chances of flubbing it are magnified by a lot. A VC with deep domain experience can add similar value, with or without YC, but of course its connections with key VCs is one of the ways that YC links its entrepreneurs with seasoned hands in a given field.

It follows ipso facto that entrepreneurs who are older and can bring direct experience to a venture will also often have it over younger, inexperienced ones. The opposite may be true as well and that the value of such experience in any given case may be limited or worthless. My point is that having key experience, when it is authentic and coupled with the right level of talent, is extremely valuable and should be eagerly welcomed when brought to the venture by older entrepreneurs.

We learn from our mistakes. That is a recurring theme on this forum. Those lessons don't simply take the form of "fail fast, fail often" because the virtue is not in the failing as such but in the lessons learned from the process - and that same virtue attaches to any quality experience by talented people who have tilled the soil in their areas of expertise for lengthy periods. That group may or may not be the "best" entrepreneurs but there will certainly be large numbers of them who will wind up being among the best by virtue of the depth and expertise that only quality experience can bring.

The problem is that all the refined nuances of this law turn on facts and circumstances, most of which depend on the word of the parties involved.

Lessons and risks to founders:

1. Absurd as it may seem (because it is natural that attachments may be formed by those working together), from the standpoint of protecting your stake in your venture, it should be a categorical rule for a founder never to have any form of sexual or romantic interaction with a co-worker in your venture and this applies especially if you are an officer or director of the company. Why? Because it is a certainty that you can be "set up" by the other party at any time after the company begins to prosper. Accusations can be made from any direction, real or fabricated. All they need is some fragment of verifiable support and you can be guaranteed that you will be on the hot seat for all allegations made, whether true or not.

2. Among the risks, say, if you are an officer, a VC-controlled board will almost certainly demand that you "resign" or, if you do not, will fire you. This may be because the board members do not want to fool with defending potentially indefensible facts or it may be that they simply want to consolidate investor control of the company by using the event as a reason to get rid of an otherwise dominant founder.

3. Which leads to a further risk: when your employment gets terminated in this way (or you are forced to resign), you will very typically forfeit all of your unvested stock and options, usually meaning that your founder stake will get cut to less than half of what you could have gotten upon earning it out. Of course, your value to the company may be such that a board will prefer to defend you and allow you to continue to vest but the point is that, through this set of events, you are vulnerable to the whims of whatever investors happen to control the board. This is a huge vulnerability and (from an economic standpoint) a risk never worth taking in exchange for a few moments of fun.

4. You will also be sued personally if a lawsuit ensues and that lawsuit will typically be ugly, both financially and emotionally. Of course, the company would get sued as well and this is the justification for your being terminated in the first place - your actions as an officer would be seen as irresponsible at best and you would have caused some serious harm to the company as a result of subjecting the company to the risks of a multi-million dollar lawsuit. Worse than that, the company may or may not choose to indemnify you for your personal costs in defending the lawsuit or in paying any resulting judgment. Even with an indemnity agreement in place, there is a strong incentive here for the company to claim that your conduct falls outside its parameters. You may win on this point in the end but, even if you do, who wants to have a huge liability threat looming over him for the duration of such a lawsuit.

5. Even if you manage to keep a half-decent financial stake, you can lose further once you are bounced from the company in this. For example, if the company later has a down round, resulting in a huge dilutive hit for all original shareholders, it may continue to incentivize its then current employees (including your co-founders) with a "refresh" on option grants so that they keep some form of parity with the new equity structure, but you will be left holding only a severely diluted equity piece in the end. Your apparently secure "vested" stake will be worth very little.

The above is based on real-world experiences that I have gone through with startups and the risks are very real. When this sort of thing happens, you will get no sympathy from those on whom you counted. In effect, you become tainted and those around you will either attack you or will keep distance in order to play safe. What is worse, common sense does not prevail in these situations. The company lawyers will work to ensure that all emphasis is placed on the worst legal risks imaginable, even if there is another side of the story. This may not be as true in Forture 1000 companies where the positions are more entrenched, but it is true in startups and is therefore murder for founders who get caught up in such a mess.

So, beware - when doing that international travel for conferences, when doing those late-night sessions with co-workers, etc., etc. - don't leave yourself in situations where you can be second-guessed. Remember too that the other party need not be some high-up person in the company and, indeed, usually is not. Keep it clean, then, for sure. But also keep the appearances clean.

If the above sounds too much like a lawyer's perspective, it's because it is. I realize that people place value on real-life affections that have nothing whatever to do with money and these may be enough to trump the legal risks. In my experience, though, in the startup context for founders, the mixture is too lethal in its consequences to make it worthwhile. That is a personal judgment for every founder to make. Do so with open eyes, however, for once you start down this road, you will be completely at the mercy of the person with whom you are flirting or whatever else you may be doing. Should it go bad, you will have little to fall back on.

In this sense, the crowdfunding forum gives a focal point for thousands of not only backers but also spectators to debate a continuing thumbs-up/thumbs-down narrative over whether something is great/viable/the-hope-of-the-future/flaky/scammy or whatever. By definition, such a forum will invite submissions from promoters who are, variously, supremely gifted, naive and unrealistic, crafty and conniving, or just hopeful founders who see this is their best funding mechanism, whether it turns out to be good, bad, or mediocre at it plays out. For any given project, who can tell exactly who the promoters are apart from the reputations they manage to build as they do various things in the development community or otherwise in the startup world. If they were doing a true securities offering by which they were selling equity in their ventures, they would be liable if they raised funds through intentional misrepresentations or other forms of fraud (which can include making specific promises without ever having any intention of performing them). But where is the liability when no equity is being sold and instead you have commitments that backers will receive only little perks associated with a completed development effort? There are all kinds of startup ventures that never manage to bring their development efforts to completion because of unforeseen technical issues, bad market conditions, lack of funds, and all sorts of other reasons having nothing to do with fraud or other actionable wrongdoing. If this is true where a venture sells equity interests that are true securities subject to the protections of securities laws, it is doubly true where the only thing being offered is a small perk tied to a development effort that is not guaranteed to be brought to completion or at least that is not guaranteed to be brought to completion within any specified time period. In such cases, you might conceive of cases where actionable wrongdoing might be proven, e.g., if a promoter raised the funds and immediately absconded with them, having made no effort toward development whatever. In almost every case but that extreme one, though, it is pretty hard to prove that a promoter never had any intention of making some good-faith effort to do the development, even if the promoter is flaky or uses bad business judgment in how funds are spent. In front of a jury, that one is a long shot by any measure and very likely a loser.

Which brings us to the economics of a federal class action case. Only specialty lawyers handle such cases. They are procedurally complex, take years to process, and are worth doing (usually) only against defendants with deep pockets where the remedy sought is (a) damages in a sufficient sum to make the case economically worthwhile for the lawyers or (b) an injunctive or other specific performance remedy aimed at curbing some abusive, recurring practice by a large company or important player in some key market.

Those conditions, by definition, do not exist here. A lawyer billing hourly would easily bill a six-figure sum in a typical class action case just to get through the class certification phase. Of course, such cases are not billed hourly precisely because the whole point of a class action is to allow the courts to aggregate a bunch of little claims to allow for a practical remedy for cases that would not be economically worthwhile to pursue separately. Thus, the class action vehicle requires that one or more "class representatives" appear in the action as named plaintiffs to represent the innumerable small claimants. But the claims of the class representatives have to be typical of the claims of the others, meaning that they are small claims as well. Because of this, no named plaintiff will be fronting hundreds of thousands in legal fees on behalf of the class and so, by definition, such cases are always done on contingency. That means that, for the lawyer, the case has to make sense as a business matter: it must involve the prospect of getting a recovery that will be large enough so that a 20% or 25% (or whatever percent) cut of such recovery will make the case attractive to the lawyer for the likely thousands of hours that will need to be poured into it (in cases where there is no money recovery, you still need defendants who, as part of a settlement, will be able to pay what is usually millions in fees to compensate the lawyers for their efforts in effecting the settlement). Of course, it is possible that a lawyer may be willing to take on the case, at substantial cost, just to get publicity or for some other non-monetary motive. That too would make little sense here. Class action lawyers are highly specialized and very busy. They will occasionally do something that is the equivalent of a loss leader but not in an area for which there is no long-term practice advantage. Since, for the reasons just mentioned, I don't see any long-term future for class action lawyers pursuing smallish claims over failed crowdfunding ventures, I can't see a lawyer doing it for that reason either.

To sum up: dubious liability, no deep-pocket defendant, a very small amount at stake, no economic or other normal motive for a lawyer to do this = no ingredients for federal class action.

Therefore (and conceding that I know little about the particulars here), I would imagine that the "class action preparation" here is mostly a rhetorical device by which to call out the promoter involved in this venture and, by the measure of those questioning his motives, to expose the fact that he allegedly took advantage of innocent backers in a way that went beyond the pale of what is legitimate. This may be a worthwhile debate but it will never see the light of day in a courtroom as a class action unless it defies all odds of how such cases work.

A while back, I posted my analysis on why the CLS case is important (http://news.ycombinator.com/item?id=4633950), which I repeat here for convenience:

"1. The CLS Bank v. Alice case, though raising an issue of vital importance, is not about 'whether software is patentable.'

2. Over the years, the Federal Circuit has notoriously broadened the scope of patent eligibility, most conspicuously in its 1998 State Street decision which essentially opened the floodgates to the modern rush of business method patents by holding that virtually any business method was patentable so long as 'it produces a useful, concrete and tangible result.' In 2010, the U.S. Supreme Court, in the Bilski case, repudiated the State Street test for patent eligibility and, though upholding software and business method patents generally, directed courts to be much more vigilant to ensure that no one gain patent rights to what are mere 'abstract ideas,' however much they may incidentally be tied to some computer mechanism in their implementation. In a follow-on decision (Prometheus), the U.S. Supreme Court similarly cut back sharply on the permissible scope of patent eligibility for claimed inventions that constituted nothing more than laws of nature.

3. In this CLS Bank case, the claimed patent involves a method for eliminating certain types of risk associated with an escrow closing and used a technological process by which to mimic a phantom version of the closing as a security check before allowing the real transaction to close. In essence, the technological aspect of this 'invention' is routine and so the question is whether anything beyond that is simply another way of trying to patent nothing more than an abstract idea. If so, it should fail under Bilski; if not, it would potentially pass the test for patent eligibility.

4. The lower court in CLS Bank held as a matter of law that the 'invention' was nothing more than an abstract idea and held it invalid as being ineligible for patent protection. On appeal, a divided panel of the Federal Circuit reversed and reinstated the patent. It did so, however, by setting out a brand new procedural rule whose effect would be to gut much of Bilski and reopen the floodgates to huge numbers of business method patents under a very loose standard - to wit, by holding, that, if it 'is not manifestly evident [my emphasis] that a claim is directed to a patent ineligible abstract idea,' then the court essentially treat the claim as eligible. What the Federal Circuit panel did, then, was to take the Supreme Court's directive for lower courts to be much stricter in evaluating dubious business method patents for patent eligibility and recast that directive in a form that said, if you as a court see that something is obviously nothing more than an abstract idea, then go ahead and reject it but you are otherwise to treat as being eligible for patent protection. In other words, the new strictness found in Bilski for evaluating such claims was once again to be transformed by the Federal Circuit into a loose standard that would let such claims coast by unimpeded.

5. Of course, this has set off alarm bells because, in effect, it represents yet one more revolt by the Federal Circuit against attempts by the Supreme Court to rein it in by bringing patent issues back to some semi-sane state. Following the panel decision (which was rendered over a sharp and stinging dissent), the losing party petitioned for a rehearing en banc (meaning by the full panoply of Federal Circuit judges as opposed to merely a 3-judge panel) and this was granted. Thus, we shall see whether the Federal Circuit is prepared once again to stick its thumb in the eye of the Supreme Court or whether it will temper its extreme pro-patent proclivities and follow the law as it has been directed.

So, this is a very important case affecting the trend of patent enforcement in a profound way but does nothing to challenge the idea of software or business methods being patentable in a general sense. For anything to change in that regard, Congress must act." [end of repost comments]

In filing this amicus brief, Google, et al. are waving the Prometheus decision up and down before the full en banc Federal Circuit and imploring it not to repeat the mistakes of the past. If they are successful, all U.S. courts will be in a much stronger position to strike down these sorts of "abstract idea" patents as invalid. The question, then, is a procedural one of how courts should go about making this determination but the results could go a long way toward tightening up standards if this is rightly decided. We shall see.

1. It is always perilous for a startup to put all its eggs in one BigCorp basket. In most cases, even when success ensues, the startup will get squeezed on things like pricing and they will continually face the risk of termination of the arrangement, leaving them vulnerable if the company's survival is tied to that deal. What is unusual here - and what so seriously increased the risk to this startup even much more than the norm - is the unusually blatant way in which Best Buy connived to steal the trade secrets. It is blatant in what was done because even by the low standards of much of corporate America it is pretty depraved to knowingly scheme to trick a young company into giving over its valuable company jewels while planning along to steal them. It is also blatant in how it was done because only really small-minded executives lack the good sense to refrain from implementing a plan to use contract assurances as a ruse by which to "take a peek under the hood" of the startup's technology, to promise to put up a "brick wall" between the team evaluating the technology and others simultaneously working on a comparable internal development effort only to wind up sending the trade secret information "across the wall" within a week of receiving it, to make a record of acknowledging an extremely high risk of litigation after doing a crude termination of the relationship, and then to use the trade secret information wholesale while simply deleting the name of the startup from it.

2. The founders may or may not have come out OK but they certainly did better given that the VCs stepped up to take the added risk of pursuing the suit than they would have otherwise. Without the VC action, the best they would have had a right to get would have been their pro rata share of whatever might have been left after the likely scant proceeds raised from a distress sale of the company's assets were applied to satisfy the VC's liquidation preferences (in other words, very likely zero). With the VC action, however, after the company sold its assets, its capitalization structure would have remained intact and the $27M from the lawsuit would go to pay remaining liquidation preferences, likely leaving a decent sum to be paid out pro rata to all shareholders, including founders (or, if the liquidation preferences were non-participating and the value of the VC's participation interest exceeded the value of any liquidation preference, then all of the $27M would be distributed pro rata to the shareholders, meaning that the founders would have gotten even more). The only question here is how the litigation funding was handled. If the VC's inserted some unfair mechanism by which the litigation funding was done so as to severely dilute the interests of the founders (akin to a down round), then the founders might have gotten a bad result. From all appearances, however, this did not happen and the founders should therefore be pretty happy with the result. It is a rare case where investors go out and hire Kirkland & Ellis and take the risk of paying them "hundreds of thousands of dollars," all for the purpose of trying to salvage a terrible situation. I would say 99% of VCs I know would have simply walked away from this and that it truly did take guts to take the hard path.

3. I was struck by the comment that, slow and plodding as the U.S. court system is, it generally works well when it plays out as it should. This is very true and is for me borne out by over three decades of experience with the courts. Litigation is frustrating beyond belief and one has to be almost insane to step gratuitously into it: it is costly, slow, unpredictable, and it is guaranteed only of one thing, to rob you of your peace of mind as you endure the process. Yet the adversarial process, when handled skillfully, tends to ferret out the truth and judges and juries do normally want to try to do right. This means that a wanton malefactor such as Best Buy here had better watch out if it meets a determined adversary who is willing to play out the fight and expose its wrongs. I call this "slamming it to them" and it works more often than not if the process plays out in full. It is only sad that the overwhelming number of litigants cannot afford to take the huge risks needed to be incurred to bring it to that state. In this sense, the system is robust and excellent but only for the relatively few who can manage its pitfalls.

4. The Latin-derived word "insidious" best captures the spirit of the wrongs committed here. This derives from a word meaning "to sit" and connotes "lying in wait" to harm the innocent. We can all succumb to temptations to do wrong on this or that occasion but it takes someone really loathsome to do what Best Buy's executives did here. And not just the wrongs but the utter failures to acknowledge them once caught red-handed. This can only mean that Best Buy was animated by a "might makes right" approach to this whole episode. Yes, large corporations do get away with this sort of thing all too often but it remains morally repulsive and it is inordinately refreshing when the day of comeuppance does arrive as it did here. Something to cheer about indeed.

Is this good or fair when it does happen? No.

Is it illegal? Sometimes, but making formal proof is daunting at best and usually not possible.

Thus, it comes down to this: treat others as you yourself would want to be treated. If a workplace reflects that ethic, it will be a place where old and young alike will want to work and where older workers will receive their due as befits their experience, skills, and performance, good or bad; if it does not reflect that ethic, it is a place to avoid if at all possible.

While Silicon Valley may represent the ageism problem in a particularly acute way owing to its youth culture, it really is no different from anywhere else. There is the good and the bad, and we each need to do what we can to uphold a high standard of common decency for ourselves and to make sure others do the same. It may not be a complete answer but it can help a lot in our immediate work environments and that will go a lot farther toward solving the problem than the law ever can.

Still, the practical issues remain daunting. What becomes of existing software patents, for example? Purists may say these are not "property" but massive dollars have been paid for the rights to own them and there will be huge resistance, not to mention constitutional objections, over any idea that these suddenly should be rendered worthless by legislative action. If these stay intact for the next 20+ years, what good does a safe harbor do in applying only prospectively? More important, those with a stake in the game - even relatively benign players such as Google - want to hedge and trim on the issues in order to protect their investments, and this means that inordinate pressure will be put on Congress not to single out software patents for elimination, emphasizing instead more limited measures to help fight trolls and so on.

With so much resistance, and with an apathetic public, how to build sufficient momentum to push Congress toward a true solution? Developers might lead this charge but I wonder. Founders are mostly not directly affected by software patents and neither are employees at bigger companies who are conscripted to keep churning them out. And those most directly hit in the patent wars resist reform to protect their own investments.

So Mr. Stallman finds himself alone in his position at this conference: not because his solution is bad but because of inordinately difficult practical barriers. At least we see in this conference that persons of influence in this area are finally willing to begin seeking incremental reform. If the worst of the abuses can be fixed (e.g., the troll issue), that at least is a start. And, who knows, maybe radical changes can occur after initial progress is made. Time will tell.

The opinion is not only compelling, it is a brilliant example of law at its best, for it shows how a wonderful legal mind wrestles with a knotty problem that can be summed up with the question, "Should courts apply a badly drafted piece of legislation to lead to the absurd result of criminalizing a whole host of minor misdeeds committed by individuals every day in using the web and their computers?" Judge Kozinski answered this question with a resounding "no."

He did so by applying the "rule of lenity," which requires "penal laws . . . to be construed strictly." (at p. 3872) "The rule of lenity not only ensures that citizens will have fair notice of the criminal laws, but also that Congress will have fair notice of what conduct its laws criminalize. We construe criminal statutes narrowly so that Congress will not unintentionally turn ordinary citizens into criminals." Applying this rule, he held as follows: "Therefore, we hold that 'exceeds authorized access' in the CFAA is limited to violations of restrictions on access to information, and not restrictions on its use." (emphasis in original)

In other words, though the CFAA is so badly worded that one might potentially give it an absurd and unconstitutional interpretation so as to criminalize things one would think shocking for Congress to have criminalized, the courts have the power to apply well-established rules of statutory construction so as to avoid such an absurdity. Here, the Ninth Circuit did so by construing the CFAA to criminalize violations of access restrictions (i.e., hacking) and not violations of use restrictions (terms of use on website and the like).

Now, there is a split in the federal circuits on this issue and it will either be resolved by an amendment to the statute or it will eventually find its way to the Supreme Court for resolution. But, even granting the split, the most extreme cases in which the CFAA has been applied criminally have involved things such as employees misappropriating trade secrets and other items that go far beyond innocuous things such as violating an employer's computer use policies by surfing the internet on company time.

In other words, no court has gone so far as to adopt anything close to the absurd outcomes suggested in this piece. Even the government in its arguments to Judge Kozinski strongly stated that it would never consider prosecuting such items as crimes. ("The government assures us that, whatever the scope of the CFAA, it won't prosecute minor violations. But we shouldn't have to live at the mercy of the local prosecutor." at p. 3870)

Thus, it is fit and proper to call out the alarmist tone of this piece as being wildly outside the mainstream of where the courts have gone with the CFAA and of where they are likely to go. Is it badly drafted legislation? Yes, it is a mess (if you want to lose your mind, try reading through the text of the statute here: http://www.law.cornell.edu/uscode/text/18/1030). Can it be interpreted to criminalize things that Congress might not have intended to criminalize? Yes, including acts by employees that, though wrongful, may not have been within the contemplation of Congress when it passed the statute. But, that said, is there a risk that the CFAA can be applied to criminalize our daily interaction with computers and the web? No, not unless normal, sound principles of law are wholly disregarded by the courts, which they won't be.

On a technical legal note, U.S. overtime laws have long since institutionalized the 40-hour week for non-exempt (generally lower skilled) employees and that remains the overwhelming norm in the economy. In that sense, there is no need to "bring back" the 40-hour week. It never went away.

If, as the author seems to espouse, the goal is to impose a strict weekly limit on the higher-skilled employees as well (in the case of Silicon Valley, tech professionals), it takes laws to do that and laws restrict freedom. Granted that efficiency studies might cause some employers to adopt strict hourly limits as a matter of company policy, or that individual lifestyle choices might cause a given employee to run in horror from the idea of slave-like work hours, do tech professionals really want to be prohibited from making such choices for themselves? It is one thing to say that laws are needed to protect those who cannot protect themselves. It is quite another to impose the force of law on what really is a lifestyle choice to be made by those who are equipped and smart enough to make it for themselves. Trying to "bring back" the 40-hour week from this perspective is, in my view, a very bad idea that would seriously harm the tech-driven companies that populate the startup world.

In spite of this, Apple continued to assert, broadly and widely, that Samsung's tablet computers did in fact constitute blatant copying of Apple's design and was therefore wrongful.

Therefore, Samsung went to the court trying to get an injunction barring Apple from making such claims because the claims were causing commercial harm to Samsung within the UK and thereby were negating the effect of the judgment won by Samsung.

Alternatively, Samsung sought a publication order requiring Apple to publicize the fact of the judgment on a long list of Apple websites as well as in certain financial publications. The idea of this order was to clear the confusion created by Apple's continued claims of illegal copying notwithstanding that it had lost on this issue in the UK courts.

The judge hearing the follow-up proceeding issued a very thoughtful ruling (found here: http://www.bailii.org/ew/cases/EWHC/Patents/2012/2049.html) that in fact denied Samsung's request for an injunction against Apple's being able to claim illegal copying. The judge acknowledged the inherent unfairness of barring a party that had lost in a court proceeding from contesting the ruling and from publicly claiming that the ruling was wrong. It thus agreed with Apple that Apple should not be muzzled in asserting its legal right to speak.

The judge then turned to the more limited request made by Samsung for the publication order and described it as follows: "Samsung say that, notwithstanding the fact that Apple have lost this case, they continue to assert that Samsung infringes and that the damage that was caused and has been described there continues to apply. Accordingly, Samsung seek orders that I should require Apple to put on their websites and to put in certain newspapers references to this judgment and a statement that the court has found that the Samsung Galaxy tablets do not infringe." The judge went on to say that he believed "there is a useful purpose in a clear public statement that a product alleged by a rights holder to infringe those rights does not infringe," reasoning that "[t]he more frequently and the more loudly a rights holder has asserted infringement, the more useful it is to have a clear public statement to the contrary."

So, the whole point of the order was to ensure that Apple made a clear public statement to the effect that a UK court had ruled that the Galaxy Tab did not infringe Apple's registered design. Nothing in the order prevented Apple from continuing to assert that it was right and that the UK decision was wrong. Apple had full scope to make these assertions as and when it wanted and has obviously been making them freely.

At the same time, Apple was required to make the clear public statement called for by the follow-on order. Apple appealed this follow-on order and lost. It therefore had exhausted its remedies within the relevant court system and was left with the requirement that it comply.

That is when it purportedly complied by placing a teeny link buried at the bottom of its UK home page that linked to a text that, within the disclosure itself, bombarded the reader with all the reasons why Samsung really did infringe notwithstanding the UK judgment that had been rendered against Apple.

A few thoughts:

1. This conduct by Apple did not merely violate the "spirit" of the order. It clearly violated the order itself. Where Apple had been ordered to make a clear public statement publicizing the fact of the UK judgment, Apple had in fact offered up an obscure link to a statement full of argumentative statements aimed at creating obvious doubt about the question of non-infringement.

2. Apple did this in a context where the order had given it free scope to argue all it liked about its free speech rights to contest the original judgment and to continue claiming infringement on grounds that it disagreed with that judgment. Instead of accepting the order on its terms, Apple went way out of its way to undercut the limited disclosure that it had been required to make.

3. Lawyers say, "pigs get fat, hogs get slaughtered," meaning that when a litigant gets too greedy, it risks having its legal proceeding go badly wrong. Apple had been given a reasonable accommodation by the court addressing its legitimate concerns but it was not content to settle for that. It wanted to do nothing that might acknowledge that Samsung had legitimate issues as well - issues that had been found valid by a UK court and affirmed on appeal. Therefore, Apple decided to respond in a way it deemed clever, in effect defying the judicial authorities who had ruled against it.

4. We can each judge for ourselves whether this was smart or not. My view is that it is conduct unbecoming of lawyers (and of Apple as the principal in the case) and, indeed, is an outrageous affront to judicial authority. Courts and judges are not always right but, when they rule against you and you exhaust your appeals, you had better comply. If you think you are above the law in the sense that you need not comply, you will regret it. Those of us who are mere mortals need to live by these rules. So too does Apple.

Social may be shallow but it has its place and, as long as we have freedom, you can use it or not according to taste. One can find fault with it but that does not mean it has a "horrible future." Criticism of this sort is thus misplaced, in my view, in spite of the limitations of the venue.

Still, it is bad judgment, as I see it, to take on a high-profile representation of a guy with one conviction already under his belt on what would seem to be a very opportunistic claim ("Yeah, I know innocent investors put in millions, and the company is now worth billions, but I am a ghost from six years’ past who can pull out a piece of paper saying I own more than half of it because of my $1,000 investment.") If you are going to step into this pile of whatever as a law firm, you had better do some strong due diligence to make sure it holds together. I suspect that wasn't done here, much to the firm's ultimate regret.

That said, DLA has a great reputation and the bad effects of this will prove ephemeral, especially since it high-tailed it out of there once forensics showed it had been caught with its pants down. Highly embarrassing, but nothing more.

1. When Ceglia first filed his claims, I called it a "lawsuit full of holes [that was] built up by sensationalist reporting into a supposed major threat to Facebook and to Mr. Zuckerberg" and concluded that, "in the courts, this thing is going nowhere." (http://news.ycombinator.com/item?id=1537158) My sense of this had nothing to do with any fraudulent tampering with evidence as alleged now in the criminal prosecution but instead with the whole smell of the thing: a flaky 2-page contract with basically incoherent terms used as a basis for a lawsuit brought by a backwater lawyer who drafted a complaint that would have been an embarrassment to a first-year law student. It looked like a joke on the face of it, notwithstanding that a small-town judge had initially entered a TRO based on the filing.

2. Then, in April, 2011, this case looked like it had taken a major turn: Ceglia had dumped his original lawyer and retained the prestigious firm of DLA Piper; he also produced a mountain of emails "documenting" that he and Mr. Zuckerberg had, in effect, entered into a legal partnership giving him a major ownership piece in the FB venture; he also (via the lawyers) put together a compelling story in his complaint making it appear that FB and Mr. Zuckerberg were in deep legal trouble concerning his claims. (Here is my comment at the time: http://news.ycombinator.com/item?id=2438063) Once again, there was a sensationalist wave of reporting across the web rejoicing about how Mark Zuckerberg was about to get his comeuppance.

3. Since that time, through the work of very able lawyers for Facebook, the Ceglia case has been progressively torn to shreds in the federal court to which it had been removed and, as the case has disintegrated, it has drawn progressively less interest (the DLA firm withdrew at the first sign of serious trouble). Indeed, without the dramatic turn of a federal criminal indictment, I doubt that it would done more than draw a few yawns as it eventually headed to the judicial graveyard where most flaky cases ultimately find their rest.

4. The lesson here is how prejudice and crowd-think can dramatically affect and distort perceptions. When someone takes on the role of villain (as Mr. Zuckerberg has in some circles), there are those who so desperately want to see him torn down that they will suspend their better judgment just to see it happen, whether he was right or wrong in what he had done. This is not to excuse him in things he may have done wrong in other contexts, but he had done nothing wrong here and it is just amazing to me how many people were willing to take it as a given that he had even with little or no evidence to back it up.

5. The other (major) lesson here is that there are serious limits to playing fast and loose with the courts. It is true that there is much abusive litigation but there is obviously a line that cannot be crossed without inviting horrific consequences. It doesn't happen often enough that abusive litigants get what they deserve but, when it does occasionally happen, it is very nice to see. At least it sets an outer bound on what people can do to abuse one another in the courts.

1. The CLS Bank v. Alice case, though raising an issue of vital importance, is not about "whether software is patentable."

2. Over the years, the Federal Circuit has notoriously broadened the scope of patent eligibility, most conspicuously in its 1998 State Street decision which essentially opened the floodgates to the modern rush of business method patents by holding that virtually any business method was patentable so long as "it produces a useful, concrete and tangible result." In 2010, the U.S. Supreme Court, in the Bilski case, repudiated the State Street test for patent eligibility and, though upholding software and business method patents generally, directed courts to be much more vigilant to ensure that no one gain patent rights to what are mere "abstract ideas," however much they may incidentally be tied to some computer mechanism in their implementation. In a follow on decision (Prometheus), the U.S. Supreme Court similarly cut back sharply on the permissible scope of patent eligibility for claimed inventions that constituted nothing more than laws of nature.

3. In this CLS Bank case, the claimed patent involves a method for eliminating certain types of risk associated with an escrow closing and used a technological process by which to mimic a phantom version of the closing as a security check before allowing the real transaction to close. In essence, the technological aspect of this "invention" is routine and so the question is whether anything beyond that is simply another way of trying to patent nothing more than an abstract idea. If so, it should fail under Bilski; if not, it would potentially pass the test for patent eligibility.

4. The lower court in CLS Bank held as a matter of law that the "invention" was nothing more than an abstract idea and held it invalid as being ineligible for patent protection. On appeal, a divided panel of the Federal Circuit reversed and reinstated the patent. It did so, however, by setting out a brand new procedural rule whose effect would be to gut much of Bilski and reopen the floodgates to huge numbers of business method patents under a very loose standard - to wit, by holding, that, if it "is not manifestly evident [my emphasis] that a claim is directed to a patent ineligible abstract idea," then the court essentially treat the claim as eligible. What the Federal Circuit panel did, then, was to take the Supreme Court's directive for lower courts to be much stricter in evaluating dubious business method patents for patent eligibility and recast that directive in a form that said, if you as a court see that something is obviously nothing more than an abstract idea, then go ahead and reject it but you are otherwise to treat as being eligible for patent protection. In other words, the new strictness found in Bilski for evaluating such claims was once again to be transformed by the Federal Circuit into a loose standard that would let such claims coast by unimpeded.

5. Of course, this has set off alarm bells because, in effect, it represents yet one more revolt by the Federal Circuit against attempts by the Supreme Court to rein it in by bringing patent issues back to some semi-sane state. Following the panel decision (which was rendered over a sharp and stinging dissent), the losing party petitioned for a rehearing en banc (meaning by the full panoply of Federal Circuit judges as opposed to merely a 3-judge panel) and this was granted. Thus, we shall see whether the Federal Circuit is prepared once again to stick its thumb in the eye of the Supreme Court or whether it will temper its extreme pro-patent proclivities and follow the law as it has been directed.

So, this is a very important case affecting the trend of patent enforcement in a profound way but does nothing to challenge the idea of software or business methods being patentable in a general sense. For anything to change in that regard, Congress must act.

Having lived through all this, I can tell you, the City is what it has always been: an amazing collection of high life, low life, and tempered life of every kind imaginable. Today, it has lots of character, just as it always has. It is vain and fruitless to try to glamorize a pickled version of the things of a bygone era, as the author here does. We just need to appreciate it on its own terms.