What Every Tech Company Needs to Know


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What Every Tech Company Needs to Know

  1. 1. TECHNOLOGY EXECUTIVES ROUNDTABLE 2012 LEGAL UPDATE: WHAT EVERY TECHNOLOGY COMPANY NEEDS TO KNOW JANUARY 17, 2012 MODERATOR: David M. Calhoun (Partner Morris, Manning & Martin, LLP) PANELISTS: Scott L. Allen and Christopher E. Maxwell Morris, Manning & Martin, LLP
  3. 3. David M. Calhoun Partner Phone: 404.504.7613 • Fax: 404.365.9532 • E-mail: dcalhoun@mmmlaw.com David M. Calhoun is a partner in the firm’s Corporate Securities, Mergers and Acquisitions, and Financial Technologies practices. Mr. Calhoun practices in the areas of corporate finance, securities, and mergers and acquisitions. He has significant experience in public and private securities and corporate finance, including representation of issuers, underwriters, and investors. Representative transactions include debt and equity offerings (public and private), going private transactions, venture capital financings, IPOs, secondary offerings of common and preferred securities, PIPEs (private investments in public equity), and tender offers. Mr. Calhoun has been active in mergers and acquisitions for public and private companies, including acting as counsel in transactions ranging in size from less than $100,000 to over $1 billion. Representative M&A transactionsPRACTICE AREAS: include representation of both buyers and sellers in mergers, asset sales, stock sales, international andCorporate Finance cross-border transactions, and leveraged buy-outs. He has represented companies in numerousSecurities industries, including technology, biotechnology, green tech, medical devices, business process outsourcing, manufacturing, real estate and financial institutions. Mr. Calhoun’s practice also includesMergers & general corporate counseling, corporate governance, audit and special committee representation, andAcquisitions securities law compliance matters.Financial InstitutionsClean Tech Education University of Tennessee at Knoxville, B.A., 1985 Mercer University, J.D., cum laude, 1988BAR ADMISSION: Brainerd Currie Honor SocietyState Bar of Phi Alpha DeltaGeorgia, Admitted Book Editor, Mercer University Law Review1988 Honors and Affiliations Listed, Legal 500, Venture Capital and Emerging Companies, 2010-2011 American Bar Association National Association of Real Estate Investment Trusts (NAREIT) Atlanta CEO Council, Board of Directors Venture Atlanta, Organizing Committee Recent Speeches “Overview Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010” “Non-Traditional Offering Structures: Pipes, Equity Lines and SPACs” “Corporate Governance for Public Companies” “Exit Strategies: M&A vs. Going Public” “Accounting, Tax and Legal Update: What Every Technology Company Needs to Know” – 2007, 2008 and 2009 “Tips for Due Diligence in Mergers & Acquisitions” “Practical Time and Work Management” “The Public REIT: What Can You Expect?” 2
  4. 4. “IMN Securities Law Conference: Blue Sky Update”“Raising Capital for Transaction Processing Companies” “Venture Capital for Southeastern Companies: How to Find It and What It Costs” “Sarbanes-Oxley Act of 2002 and Legal Compliance – 2008 Update” “Buying and Selling a Business – Mastering the Basics” “How to Create a Board of Directors or Advisory Board That Works” Recent Articles “Non-Traditional Offering Structures: Pipes, Equity Lines and SPACs” “Overview Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010” 3
  5. 5. Scott L. Allen Partner Phone: 404.504.7743 • Fax: 404.365.9532 • E-mail: sallen@mmmlaw.com Scott L. Allen is partner in the firm’s Corporate and Securities Practices. His practice focuses primarily on representing public and private companies, including private equity firms and their portfolio companies and family owned enterprises, in general corporate matters, mergers and acquisitions, venture capital and public securities offerings. Mr. Allen’s practice covers a wide variety of industries, with extensive experience representing clients in the information technology and telecommunications industries, as wells as business services companies, medical device companies and traditional light manufacturing and sales and distribution organizations. Mr. Allen routinely advises a range of clients, including start-up, middle market and large cap companies,PRACTICE AREAS: in complex mergers and acquisitions, venture capital, and corporate finance issues, involving both domestic and cross-border transactions.Corporate Mr. Allen has been recognized as a leading young attorney in the corporate practice area by beingMergers & selected as Georgia Super Lawyers Rising Star, as published by Law & Politics and Atlanta magazines onAcquisitions numerous occasions. Mr. Allen is also a frequent speaker on corporate law, M&A and private equitySecurities topics for continued legal education programs, trade association events and related conferences.Medical Device Honors & AffiliationsBAR ADMISSION: Association for Corporate Growth (Member)State Bar of Atlanta Venture Forum (Member)Georgia, Admitted2002 Technology Association of Georgia, Corporate Development Society (Board Member and Program Chair) Southeastern Medical Device Association (General Counsel and Member) Selected as Georgia Super Lawyers Rising Star by Law & Politics and Atlanta magazines, 2011 Representative Matters Representation of a leading “smart-grid” technology company in venture capital transactions in excess of $90 million received from national VC funds and strategic investors, joint venture transactions with Fortune 100 partners and general corporate matters. Representation of a technology based expedited delivery company in venture capital transactions in excess of $110 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of technology company in the loyalty card market in its $24 million recapitalization with a private equity sponsor and related roll-over of management equity. Representation of a leading clinical research organization based in the U.K. in its U.S. acquisitions and U.S. aspects of its senior and mezzanine credit facility. Representation of sellers in $32 million sale to a private equity sponsored competitor in the plastics manufacturing industry. Representation of a U.K.-based cable and telecommunications equipment provider in several U.S. acquisitions totaling in excess of $200 million. 4
  6. 6. Representation of firearm and ballistics company in its $18 million sale to private equity sponsored entity and continued corporate representation. Representation of private equity sponsored software company in the legal and accounting market in its U.S. acquisitions and general corporate matters. Representation of private equity sponsor and management in $27 million sale of full-service professional landscape joint venture to a new private equity sponsor. Representation of medical device company developing a product combining radiation therapy with MRI technology in a $25 million venture capital transaction. Representation of a “triple-play” telecommunications client in its $255 million acquisition of a regional broadband telecommunications company. Representation of venture capital fund in its Series A and Series B investment in a leading provider of endoscopy products. Representation of a leading provider of HR software in its $155 million sale to a Fortune 50 strategic partner. Representation of a public client providing call center and compliance monitoring solutions in a $100 million public offering. Representation of a public client in a $200 million PIPE (private investment in public equity) transaction. Representation of a leading international provider of billing software in the energy industry in its $90 million sale to a Fortune 100 company. Representation of a technology client providing mobile messaging and marketing services in a $25 million venture capital financing. Representation of a leading provider of audio and speech analysis technology in a venture capital and mezzanine debt transaction in excess of $15 million.EducationUniversity of Georgia, B.A., 1998Emory University School of Law, J.D., with honors (Order of the Coif), 2002 5
  7. 7. Christopher E. Maxwell Associate Phone: 404.364.7477 • Fax: 404.365.9532 • E-mail: cmaxwell@mmmlaw.com Christopher E. Maxwell is an associate in the Corporate Practice. Mr. Maxwell is active principally in the firms general corporate practice, concentrating in mergers and acquisitions and venture capital transactions. Mr. Maxwell has assisted many of the firms clients in structuring and consummating complex corporate transactions, including, mergers, acquisitions, debt facilities, financings, restructurings and corporate reorganizations. Mr. Maxwell’s practice covers a wide variety of industries, with experience representing clients in the information technology and telecommunications industries, as well as business services companies. Recent Experience Representation of Public Company in several PIPE (private investment in public equity) transactionsPRACTICE AREAS: and its regular securities filings.Corporate Representation of sellers in $32 million sale to a private equity sponsored competitor in the plasticsMergers & manufacturing industry.Acquisitions Representation of technology client providing payment processing services in a $5 million ventureSecurities capital financing. Representation of a telecom expense management Company in a $15 million business combination with a competitor in the telecom industry and related follow-on acquisitions of the combined entity.BAR ADMISSION: Representation of consulting company in reorganization of various subsidiaries and business lines.State Bar of Georgia,Admitted 2007 Representation of financial institutions bill processing company in its mezzanine credit facilities. Representation of software company in the foreign option exchange sector in a $6 million venture capital financing. Representation of a battery manufacturer in venture capital transactions in excess of $10 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of medical waste disposal company in its $32 million sale to a competitor in the waste disposal industry. Representation of a credentialing and compliance monitoring company in the healthcare industry in a $67 million sale to a private equity sponsored entity and related roll-over of management equity. Representation of telecommunications company in its acquisition of European telephone company and venture capital financings in excess of $10 million. Representation of software company focusing on compliance related industries in a series of VC transactions in excess of $10 million. Representation of a public company in the healthcare industry in several small strategic acquisitions. Representation of a technology based expedited delivery company in venture capital transactions in excess of $110 million received from national VC funds, its senior and mezzanine credit facilities and general corporate matters. Representation of firearm and ballistics company in its $18 million sale to private equity sponsored entity and continued corporate representation. Representation of private equity sponsor and management in $27 million sale of full-service professional landscape joint venture to a new private equity sponsor. Representation of a medical claims processing company in $28 million acquisition of competitor in medical claims processing sector. 6
  8. 8. EducationEmory University, B.A., 2004The University of Georgia School of Law, J.D., cum laude, 2007 Member, Student Bar Association Member, Georgia Law Review 7
  9. 9. MEMORANDUMTO: Clients and EntrepreneursFROM: Morris, Manning & MartinRE: Frequently Asked Questions (FAQs) about Patent Reform – TheLeahy-Smith America Invents Act of 2011 (“AIA”)DATE: January 2012________________________________________________________________________This Frequently Asked Question (FAQ) memorandum addresses typical questions regarding thenew Leahy-Smith America Invents Act of 2011 (enacted September 16, 2011), and its potentialimpact on patent application filing, patent enforcement, and patent litigation. This document isauthored by the Intellectual Property Group of Morris, Manning & Martin, LLP(www.mmmlaw.com). Please note that there are additional questions that will be relevant in thisarea and you should consult an IP attorney at MMM (contact information listed at the end of thismemorandum) with any other questions.1. What is the main impact of the AIA?Answer: The main impact of the America Invents Act (“AIA”) is expected to be an increasedurgency to file patent applications, due to the fact that the U.S. patent system will now grantpatents to the first inventor to file a patent application (“first to file”) instead of to the “first toinvent.”2. What should I be doing now as a result of the AIA?Answer: There are many potential effects of the AIA, but the most important effect on patentapplications is “file early, file often.” Because the AIA radically changes the priority rulesassociated with patent filings, it is now more important than ever to file patent applications assoon as possible. Also, because it is now potentially easier to challenge issued patents (andsubmit prior art in pending applications), it is also important to monitor the patent filings of yourcompetitors. 8
  10. 10. 3. Will the AIA improve the quality of U.S. patents?Answer: It is not known at this time if the AIA will improve the quality of patents. Patentquality is an elusive characteristic – what makes for a “quality” patent? There are no objectivemeasures as to the quality of a patent. The AIA is, however, supposed to improve patent qualitybecause of increased scrutiny of patent applications at the U.S. Patent and Trademark Office(USPTO) and new procedures for challenging patents outside of the courts.4. Will the AIA affect the patent lawsuits that are brought by patent “trolls” and non-practicing entities (NPEs)?Answer: It is not likely that the AIA will appreciably affect the incentives for NPEs (also knownas patent “trolls”) to bring lawsuits to enforce patents, at least for the immediate future. The AIAincludes a new joinder provision requiring that accused infringers in the same lawsuit must betied together by “the same accused product or process.” It is possible that, in the longer term(more than 5 years out), the likelihood of success of lawsuits by NPEs will decline due to adecreased number of patents that are issued. However, it will be a number of years before theeffects of the AIA on patent litigation will be fully felt and realized.5. Will the AIA make it any easier or less expensive to challenge patents outside of courts?Answer: Possibly. The AIA includes a number of reforms that are designed to provide new andimproved methods to challenge possibly invalid patents outside of the court system. The AIAprovides for new procedures in the USPTO for (a) Post-grant review, (b) PreissuanceSubmissions, and (c) Supplemental Examination. These new procedures will add to the USPTObureaucracy, but are supposedly designed to help challenge suspect patents more quickly andinexpensively.6. Will the AIA cut back on the large damages awards that have been awarded in manyrecent patent lawsuits?Answer: No. The AIA includes no provisions that affect patent damages or awards. A number oflobbyists had urged Congress to include patent damages limitations so that companies couldmore readily manage their exposure to patent infringement claims. However, for some reasonsnot completely understood, Congress failed to include the patent damages limitations provisionsthat some companies felt were needed.7. What is the biggest change to the U.S. patent system from the AIA?Answer: Clearly, the biggest change to the U.S. patent system is the change from “first toinvent” to “first to file.” The change required a complete revision to the definition of prior art.The revised definition greatly expands the nature of information and activities that bar the grantof a valid patent to a patent applicant. 9
  11. 11. 8. Did the AIA change the basic requirements for obtaining a patent?Answer: No. The primary requirements for patentability of (a) patentable subject matter, (b)novelty, (c) nonobviousness, (d) a complete and enabling written description, and (e) descriptionof the best mode of practicing the invention – did not fundamentally change. There are changesthat affect the best mode requirement, but those changes are not expected to have a major impact.A patent application under the AIA must still satisfy these basic requirements. The novelty andnonobviousness requirements relate to “prior art,” whose definition has been significantlyaltered.9. What is the definition of “prior art” under the AIA?Answer: The definition of prior art is fundamentally different under the AIA than under previouslaws. Prior art provides the evidentiary baseline for judging whether an invention is novel andnonobvious, and thus entitled to be patented. In particular, the one-year “grace period” has beeneliminated for many types of prior art (see subsequent questions for more details). This is aprofound change. Prior art is now defined as other patents, printed publications, on sale events,and public use events that predate a patent applicant’s effective filing date. Many more types ofinformation, both in the U.S. and in other countries, is now available to cite against a patentapplication as evidence that a patent should not be granted (or is invalid).10. Did the AIA make any changes to the definition of patentable subject matter?Answer: No. The primary categories of patentable subject matter are still (a) machines, (b)manufactures (articles), (c) composition of matter, and (d) processes or methods. No significantsubject matter-related cases were overruled, such as the 2010 Bilski v. Kappos decision, whichaffected business method and computer software patents.11. Does the AIA eliminate business method patents?Answer: No. There are no substantive provisions in the AIA that affect the way that the USPTOreceives or processes so-called “business method patents.” However, the AIA includes a new 8-year program to address the validity of business method patents, using a new procedure forchallenging such patents at the USPTO. There is still much complexity in determining whatexactly is a “business method” patent.12. Did the AIA affect the availability or desirability of filing a “provisional” patentapplication?Answer: No. Provisional patent applications (PPAs) are still available under the AIA. Therequirements for a useful PPA remain the same. Patent applicants must still file a completewritten description of any invention that is to be claimed, although there is no requirement toinclude any claims in a PPA. PPAs still present significant risks that a patent applicant will notdevote sufficient attention and work to providing a complete written description, so that thebenefits of a PPA may not be available.13. What is the impact of the AIA on the “best mode” requirement? 10
  12. 12. Answer: Under current laws, a patent applicant is required to describe in the patent applicationthe “best mode” for making and practicing the invention. The AIA abolishes the best moderequirement as a defense to patent infringement, but it requires that the best mode still bedescribed in patent applications. Specifically, the AIA amends the laws to eliminate the bestmode requirement as “a basis on which any claim of a patent may be canceled or held invalid orotherwise unenforceable.” The overall impact of this seemingly conflicting provision is notentirely clear.14. Will the USPTO be able to improve its operations and efficiency and speed ofprocessing patent applications?Answer: Probably, yes. The AIA included a provision that allows the USPTO to receiveincreased funding for its operations, of about $300 million per year at current rates of activity.However, Congress failed to grant the USPTO the right to retain all of the patent fees that itreceives to fund its operations, as many experts urged. Congress thus did not completely end feediversion – (a) the USPTO is appropriated funds to some extent by Congress each year, (b) theUSPTO can charge fees at increased rates, (c) collections in excess of the appropriation arecollected in a reserve fund, and (d) Congress could – perhaps – allocate additional amounts ofthe reserve fund for USPTO operations.15. What was the reason for changing from a “first to invent” system of granting patents to“first to file”?Answer: The reasons and policies for making this change are not clear. Since 1995, Congresshas attempted to make changes to the U.S. patent system so as to make our system consistentwith the patent systems of many other countries. This is called patent harmonization. This wasprimarily to promote a concept that patent applicants would receive the same treatment in thepatent systems of all the different countries that were elected for international patenting efforts. Itis far from clear that this change provides any benefits to U.S. patent applicants, as the patentsystems in most countries are less well developed and consistent than the U.S. patent system.16. What happened to the “grace period” under the old U.S. Patent Act?Answer: The Patent Act of 1952 provided a grace period for filing a patent application. Thisgrace period was provided to the inventor to provide additional time for the inventor to assess thevalue of the invention and workability of the technology before requiring significant investmentin the patent process. Specifically, this grace period provided the inventor with a one-year timeperiod from any public disclosure, offer for sale, or description in a publication of the invention.Some aspects of the grace period remain under the AIA (see next question), but they are morelimited in scope.17. What is the “modified grace period” under the AIA?Answer: Under the AIA, a one-year grace period still applies for certain public disclosures ofthe subject invention, so long as those disclosures were made by the inventor, or by someone to 11
  13. 13. whom the inventor disclosed the invention. Thus, disclosures by an inventor’s competitors orothers working on similar inventions could bar the inventor’s ability to obtain a patent, eventhough the inventor actually invented the technology first.18. When do the provisions of the AIA go into effect?Answer: The AIA includes numerous provisions that are slated to go into effect at variouspoints from the date of the AIA’s enactment (September 16, 2011) until the last provision goesinto effect on March 16, 2013. For example, provisions such as the false marking changes, new“best mode” requirements, prior user defense, and a 15% fee increase across the board went intoeffect as soon as the AIA was signed into law. Other provisions such as the new post-grantreview procedures, the ability to file on behalf of an assignee (instead of individual inventors),modifications to the inter-partes review proceedings, third party submissions, and otherprovisions go into effect one year after the enactment of the AIA (i.e., on September 16, 2012).The “first to file” provisions, changes to the prior art rules, and other significant provisions gointo effect 18 months after the enactment of the AIA (i.e., on March 16, 2013).19. What is the “prior commercial user” defense now available under the AIA?Answer: Prior “commercial use” of a patented method is recognized as a defense againstinfringement under current law if certain conditions are met, and the AIA expands this defense toinclude any “process, or consisting of a machine, manufacture, or composition of matter used ina manufacturing or other commercial process.” In order to rely on this defense, the accusedinfringer must have, “acting in good faith, commercially used the subject matter in the UnitedStates, either in connection with an internal commercial use or an actual arm’s length sale orother arm’s length commercial transfer of a useful end result of such commercial use.” Otherprovisions apply as well.20. Will it be easier to challenge a patent under the AIA once it has issued?Answer: Possibly. The AIA replaces the current “reexamination” process with a new “post¬grantreview” process that provides more grounds and opportunity for a patent to be challenged withina limited time from its issuance. The new post-grant review process is initiated by a petition tothe USPTO that must be filed within nine months after the date of patent grant or issuance of areissue patent. The petition does not need to satisfy the familiar “substantial new question ofpatentability requirement,” but rather must show that it is “more likely than not that at least 1 ofthe claims challenged in the petition is unpatentable. There are other aspects of this provisionthat expand the grounds for challenging an issued patent.21. Will it be possible to challenge a pending patent application?Answer: No, a third party cannot challenge a pending patent application. However, the AIAdoes expand the window and content available for third party submissions of information prior toissuance. These third party submissions will be considered by the USPTO in granting a patent.Specifically, third parties can now submit “prior art” to the USPTO before the earlier of either anotice of allowance of the pending application or the later of 1) 6 months after publication of the 12
  14. 14. patent application or 2) the date of the first rejection during examination. When submitting priorart, the third party must provide a description of the relevance of each document along with afee.22. What is “false marking” and how was it affected by the AIA?Answer: Generally, “false marking” relates to the concept of marking a product, machine, orother invention as “patented” (or providing a patent number) when in fact the product was neverpatented. Recently, some cases made it easier to sue for false marking offenses, even incircumstances in which a product was initially validly marked, but then the product continued tobe marked as patented even after the underlying patent had expired. The AIA has essentially putan end to these (sometimes frivolous and unfounded) lawsuits, by making it more difficult to suefor false marking.23. Is it now easier under the AIA to “mark” my products as patented?Answer: Yes. The AIA introduces “virtual marking” as a way to satisfy the public noticemarking requirement. Virtual marks are statements on products or product packaging that directthe reader to a publicly accessible website, where the patent numbers relevant to the product arelisted. Parties are exempt from liability for false marking after a patent expires if the product orpackage uses a virtual mark.24. Can a company now file a patent application in its own name instead of namingindividual inventors?Answer: Yes. If an inventor or inventors have assigned their rights in an invention to an assignee,then the assignee will now be able to file the patent application in its name only. This newprovision should make it easier in some respects for companies to file patent applications onbehalf of its employees.25. What is the “transitional program for covered business methods”?Answer: The AIA includes a new bureaucratic process designed to help challenge businessmethod patents, but it does not cover “technological” inventions (whatever those might be). Thisprocess is similar to the new post-grant review procedures, discussed above. It may not be clearfor some time what is a “technological” invention in the area of business methods patent.26. Will I receive any reduction in USPTO fees under the AIA?Answer: Possibly. Under the current laws, “small entities” (generally businesses with less than500 employees, or universities, individuals, etc.) are entitled to a 50% reduction in fees. TheAIA defines a new category of applicants called “micro entities” that receive a 75% reduction infiling fees, extension fees, maintenance fees, and the like. These micro entities generally includesmall entities that do not exceed some threshold requirements in terms of number of patentapplications filed, gross income, and other factors.27. Will the AIA speed up the patent examination process? 13
  15. 15. Answer: Yes, in some limited circumstances. The AIA allows for “prioritized examination” fora certain limited number of applicants that meet certain requirements. To qualify for prioritizedexamination, the applicant must pay greatly-increased filing fees ($4,800), there are limits on thetotal number of claims that can be submitted, the application must be complete as of the time offiling (i.e., all declaration and supporting documents must be present at the time of filing), andother requirements must be met. Final disposition of the application should occur within twelve(12) months of filing.28. Did the AIA change the standard for “willful infringement”?Answer: No. The AIA has codified the recent standard set forth in the In re Seagate opinion.Under Seagate (and now the AIA), a party cannot be held liable for willfully infringing a patent(and thus be subject to triple damages) simply because the party failed to obtain a legal opinionof non-infringement once the party became aware of the possible infringement. It is worthnoting, however, that although a party cannot be held liable for willful infringement, failure toseek an opinion of non-infringement can impact the overall damage award in a lawsuit.29. Did the AIA affect the way that patents are examined and granted by the USPTO?Answer: Not immediately, but eventually. The USPTO should have more resources (money)available under the AIA, and will likely hire more examiners, and will establish satellite offices,etc. But, the law included no substantive provisions on how the USPTO should conduct itsbusiness from a substantive perspective. A number of new regulations for patent processing andhandling will be issued in the upcoming months to implement various AIA provisions. Thesenew regulations will inevitably change some aspects of the patent process.*****For more information regarding any of the above-listed questions, or any others relating topatents or intellectual property, please contact one of the following attorneys in theMMM IP Group:John R. Harris - 404-504-7720 - jharris@mmmlaw.comTim T. Xia – 404-495-3678 - txia@mmmlaw.comChris Raimund – 202-216-4816 - craimund@mmmlaw.comDaniel Sineway - 404-364-7412 - dsineway@mmmlaw.com 14
  16. 16. MEMORANDUMFROM: Morris, Manning & Martin, LLPDATE: December, 2011RE: Georgia’s New Restrictive Covenants Act On May 11, 2011, Georgia enacted House Bill 30 (the “New Act”), whichgoverns the enforcement of restrictive covenants against “employees” entered into on orafter May 11, 2011.1 The New Act is a significant departure from the existing body ofcase law on the subject, which historically has been an unfavorable forum for employers.The New Act promulgates safe harbor rules (e.g., courts now presume that restraints oftwo years or less in duration are reasonable in time, and that restraints more than twoyears in time are unreasonable); liberalizes prior rules (e.g., non-disclosure provisions nolonger require a time limitation; the non-solicitation of customers provision need notexpressly define the types of products or services considered to be competitive in orderfor the non-solicit of customers to be enforceable); and, most significantly, permits courtsto “blue-pencil” (i.e., modify, or partially enforce) covenants that are otherwiseoverbroad. Under prior Georgia law, these safeguards did not exist or, at best, wereunclear. While the New Act is more employer-friendly, employers should nonethelessexercise caution for four reasons: (1) the New Act applies only to restrictive covenants entered into on or after May11, 2011; (2) the New Act permits, but does not require, Georgia courts to blue-penciloverbroad restrictive covenants; (3) the New Act applies only to “employees” (however, that term is broadlydefined and includes, but is not limited to, officers, directors, managers, franchisees,1 House Bill 30 only applies to “contracts entered into on and after [its effective date] and [it] shall notapply in actions determining the enforceability of restrictive covenants entered into before such date.” Ga.L. 2011, p. 399, § 5. House Bill 30 is codified at O.C.G.A. §§ 13-8-50et seq. See Murphree v. Yancey Brothers Company, 2011 WL 4375216, *4 fn.10 (Ga. App. Sept. 21,2011). 15
  17. 17. distributors, lessees, licensees, parties to a partnership agreement, sales agents, andbrokers)2; and (4) few courts have yet to apply the New Act, and, therefore, there is a certaindegree of uncertainty surrounding the interpretation of the New Act. For example, in Pointenorth Insurance Group v. Zander, 2011 WL 4601028 * 3(N.D. Ga. Sept. 30, 2011), the defendant, a licensed insurance broker who had signedrestrictive covenants after the New Act went into effect, the court held the covenants atissue overbroad, but that the New Act permitted the court to “blue pencil any overbroador otherwise offensive passages.” Specifically, the court held that it “may” remedy thebroad prohibition against contacting “any of the Employer’s clients” by “blue pencilingthat provision to only apply to customers that the Defendant contacted and assisted withinsurance.” On its face, the Zander decision appears to be a boon for employers because ittakes a broadly drafted provision and seemingly authorizes a court to rewrite it.However, the court decided Zander in the context of a preliminary injunction, not on themerits of the case. Therefore, the court did not actually blue pencil the covenants, insteadholding that a court “may” do so (and, if so, it is unclear to what extent a court actuallywould modify the covenants or the facts and circumstances that it would deem importantin that context). In addition, the New Act explicitly states that a court may “modify” an overbroadrestrictive covenant, which is defined as "severing or removing" a part of a restrictivecovenant that would otherwise make the covenant unenforceable. However, the New Actis silent whether a court may rewrite or otherwise add to a covenant, which the Zandercourt appears to authorize. Thus, it is unclear if Zander’s holding is accurate. The practical effect of the New Act is that employers can be cautiously aggressivein drafting the scope and territorial limitations of their restrictive covenant agreements,but they should be aware of the limitations of the New Act and draft their covenantsaccordingly. In addition, employers may want to consider strategies to implement newrestrictive covenants agreements with their workforce to provide enhanced protection oftheir business interests under the New Act. -------------------------------2 Under pre-existing Georgia law, an employer could enter into a non-compete agreement with any type ofemployee (e.g., janitor, manager, salesman, etc.). However, under the New Act, a non-compete may onlybe enforced against an “employee” who: 1) customarily and regularly solicits customers or prospectivecustomers; 2) customarily and regularly engages in making sales; 3) has a primary duty of managing acompany, or one of its departments or subdivisions, directs the work of two or more employees and has theauthority to hire or fire other employees; or 4) performs the duties of a "key employee" or a "professional"as defined by the New Act. 16
  18. 18. Note: On November 2, 2010, Georgia voters approved an amendment to the constitutionauthorizing a new restrictive covenants law (the “Prior Act”) substantially similar to theNew Act; however, due to a technical flaw, there is a substantial question whether thePrior Act is valid, and this question has not yet been litigated. Because of the uncertaintysurrounding the Prior Act, on May 11, 2011, the New Act was signed into law.Accordingly, restrictive covenant agreements entered into between November 3, 2010and May 10, 2011 may not be subject to the Prior Act and, therefore, the enforceability ofbroadly-drafted covenants entered into between an employer and an employee during thistime period is subject to a substantial amount of risk. 17
  19. 19. TROTMAN v. VELOCITEACH PROJECT MANAGEMENT LLC TROTMAN v. VELOCITEACH PROJECT MANAGEMENT, LLC. CertiFi Project Management Certification Training, LLC v. Velociteach Project Management, LLC. Nos. A11A0402, A11A0403. July 13, 2011SUMMARY:A recent decision by the Georgia Court of Appeals addressed the issue of an employer’srights when a former employee, upon leaving, uses the company’s proprietary materialsto establish a new competing business.In the case of Trotman v. Velociteach Project Management LLC, the trial court awardedproject management training company, Velociteach, $147,750 from former employeeFloyd Trotman and his new company, CertiFi, based on breach of contract, fraud, tortiousinterference with a business relationship, conversion, and misappropriation of tradesecrets. The court also ordered Trotman to return all VelociTeach materials and barredhim from using Velociteach’s customer lists. On appeal, the Georgia Court of Appealsaffirmed the trial court’s decision.CASE:Following a jury trial, Floyd Trotman III (in Case No. A11A0402) and CertiFi ProjectManagement Certification Training, LLC (“CertiFi”) (in Case No. A11A0403) appealfrom a judgment and other orders entered against them in a dispute arising fromTrotmans continued use of training materials he obtained as a former instructor forVelociteach Project Management, LLC (“Velociteach”). We have consolidated the casesfor review, and for the reasons that follow, we affirm in part, vacate the award of attorneyfees, and remand.1Viewed in favor of the jurys verdict,2 the record shows that from 2003 to 2006, Trotmanworked as an instructor for Velociteach, a company founded by Andy Crowe, whichoffered project management training courses to students seeking a Project ManagementProfessional (“PMP”) credential. When Trotmans relationship with the company faltereddue to a lapse in his own credentials and his unauthorized use of a company credit card,his employment was terminated, and he left the company pursuant to a confidentialityagreement in February 2006. The confidentiality agreement required Trotman to return ordelete all course materials and electronic presentation slides, and it prohibited him from 18
  20. 20. soliciting Velocitech customers for a period of three years. In an exit meeting, Trotmanassured Velociteach staff that he had returned or deleted any Velociteach teachingmaterials.3 Soon thereafter, Trotman asked Velociteach if he could buy instruction kits toteach PMP classes on his own, and Velociteach declined.In early 2006, Trotman formed his own company, CertiFi, and began teaching trainingcourses on his own. In early 2007, after seeing Trotman in an airport, Crowe decided tosearch for information about Trotman on the Internet. Crowe discovered a CertiFiwebsite listing Velociteach customers and containing marketing copy that Crowe hadwritten for Velociteach. Crowe then enrolled a student in one of Trotmans classes toobserve the course content and materials. Based on the similarities between Trotmanscourse materials and those he had used previously at Velociteach, Velociteach demandedthat CertiFi cease operating in violation of Trotmans confidentiality agreement. Trotmanrefused, and Velociteach sued him and CertiFi, alleging claims for breach of contract,Uniform Deceptive Trade Practices Act4 (“UDTPA”) violations, fraud, tortiousinterference with a business relationship, conversion, and misappropriation of tradesecrets.After discovery and the denial of the parties cross-motions for summary judgment, theaction was eventually tried by a jury, which awarded Velociteach $13,750 (fromTrotman) and $134,000 (from CertiFi). The trial court also awarded Velociteach $30,000in attorney fees and entered a permanent injunction requiring Trotman to, inter alia,return all Velociteach materials and abstain from using Velociteachs customer lists.Trotman appeals in A11A0402, and CertiFi appeals in A11A0403.5Case No. A11A04021. During the litigation, Velociteach obtained an interlocutory injunction that prohibitedTrotman and CertiFi from using any instructional slides contained in a certain exhibit.Based on Trotmans subsequent reformulation and use of a prohibited slide, the trial courtfound that Trotman had violated the injunction and held him in contempt, orderingTrotman and CertiFi to provide a copy of its teaching materials to Velociteach and pay$1,012.50 in attorney fees incurred by Velociteach while pursuing the contempt motion.On appeal, Trotman enumerates as error the trial courts interlocutory injunction, but hedoes not challenge the $1,012.50 attorney fee award, and the only other remedy,disclosure of his teaching materials, was permissible as part of the pending litigation. AsTrotman points to no other remedy affecting him or CertiFi resulting from the contemptfinding itself, this enumeration presents nothing for review.62. Trotman argues that the evidence and verdict did not authorize the trial court to issue apermanent injunction against him based on a violation of the UDTPA. We disagree.“Equitable relief is generally a matter within the sound discretion of the trial court. Theaction of the trial court should be sustained on review where such discretion has not beenabused.”7 19
  21. 21. (a) Based on the jurys verdict that Trotman violated the UDTPA, the trial court grantedan injunction against Trotman that (1) prohibited him from using a specified trial exhibitcontaining Velociteach course materials, (2) required him to return all Velociteachproperty and course materials, (3) forbade him from using Velociteachs customer lists,and (4) required disclosure of each person to whom he had shown the enjoined materials.Trotman argues that because only he, and not CertiFi, was found to have violated theUDTPA, the only basis for the finding would be his failure to maintain his PMPcertification. And because he later remedied the lapse in his certification, he argues thatthis lapse in certification could not support the injunctive relief granted by the trial court.This argument ignores the fact that the trial evidence supported a finding that hepersonally violated the UDTPA, regardless of whether the jury attributed his behavior toCertiFi. The UDTPA provides as follows, in relevant part:(a) A person engages in a deceptive trade practice when, in the course of his business,vocation, or occupation, he: ․(2) Causes likelihood of confusion or of misunderstanding as to the source, sponsorship,approval, or certification of goods or services;(3) Causes likelihood of confusion or of misunderstanding as to affiliation, connection, orassociation with or certification by another; ․(7) Represents that goods or services are of a particular standard, quality, or grade or thatgoods are of a particular style or model, if they are of another; ․(9) Advertises goods or services with intent not to sell them as advertised; ․ [or](12) Engages in any other conduct which similarly creates a likelihood of confusion or ofmisunderstanding.(b) In order to prevail in an action under this part, a complainant need not provecompetition between the parties or actual confusion or misunderstanding. 8At trial, there was evidence that Trotman created a misleading advertisement stating thatCertiFi had developed course content over a four-year period, which would have referredto the time Trotman was with Velociteach, not CertiFi. There was also evidence thatTrotman solicited former Velociteach students on behalf of CertiFi, referencing theVelociteach course and falsely holding himself out as PMP certified. Velociteach alsointroduced evidence that Trotman published a list of Velociteach customers and falselyrepresented them to be CertiFi customers. Finally, there was evidence that Trotman usednearly duplicate versions of certain Velociteach course materials without its consent. Thisevidence supported the jurys finding that he violated the UDTPA, and the trial court didnot abuse its discretion by awarding equitable relief to Velociteach against Trotmanbased on the jurys finding.9 20
  22. 22. (b) Trotman also argues that an injunction against future conduct is unwarranted becausehis confidentiality agreement has expired, and his wrongful conduct took place in the pastand is not likely to recur. This argument is misplaced. There was evidence supporting afinding that Trotmans conduct violated the UDTPA regardless of his confidentialityagreement, and the nature of the wrongful behavior was not such that it could not berepeated, i.e., by re-creating confusing or misleading marketing materials or re-usingVelociteachs proprietary course materials.10 Nor was the injunctions breadth an abuse ofthe trial courts discretion. The injunction essentially pertained to the use of Velociteachcourse materials and customer list, and it did not prohibit Trotman from engaging in otherPMP teaching activity. Nor was it an abuse of discretion to allow Velociteach five yearsto monitor Trotmans courses, because the harm to Velociteach would not diminish overtime if Trotman unfairly competed with it. Accordingly, this enumeration provides nobasis for reversal.113. Trotman next challenges the trial courts failure to give his requested jury charge on theUDTPA claim. “In order for a refusal to charge to be error, the request[ ] must be entirelycorrect and accurate, and adjusted to the pleadings, law, and evidence, and not otherwisecovered in the general charge.”12 Trotmans requested charge was as follows:Although a finding of actual confusion [in the marketplace] is not necessary to prove alikelihood of confusion, it is nevertheless the best evidence of a likelihood of confusion.Coexistence in the marketplace over a significant period of time with no evidence ofactual confusion raises a presumption against a likelihood of confusion; however, thepresumption may be rebutted by evidence of other factors tending to support a finding ofa likelihood of confusion.As support, Trotman relies on Ackerman Security Systems, Inc. v. Design SecuritySystems, Inc.,13 which included the following language: “In the case at hand, the trialcourt ․ incorrectly applied the likelihood of confusion test by requiring a showing ofactual confusion․ Although evidence of actual confusion is obviously the best evidenceof a likelihood of confusion, it is not necessary to a finding of likelihood of confusion.”14The emphasized portion of this statement was dicta and not a statement of settled law;15thus the requested charge was not entirely correct and accurate. Further, the trial courtcorrectly charged the jury as to the settled law stated in Ackerman, i.e., that actualconfusion in the marketplace need not be shown. We discern no reversible error here.16Case No. A11A04034. CertiFi contends that the evidence was insufficient to support the jurys verdict on theconversion claim, which was predicated on Trotmans use of Velociteach trainingmaterials. Specifically, CertiFi argues that because Trotmans confidentiality agreementrequired him to return or destroy any training materials, Velociteach had abandonedthem, which would preclude a conversion claim due to an absence of Velociteachs rightof possession.17 The confidentiality agreement does not evince an intent to abandon theproperty, however; instead, it shows Velociteachs attempt to remain in exclusive controland possession of its confidential information. This is wholly consistent with the 21
  23. 23. conversion claim because it shows that Trotmans retention and use of the materials wasunauthorized: “The very essence of conversion is that the [defendants] act of dominion iswrongfully asserted.”18CertiFi also argues that the intangible teaching materials on the laptop were not “novel”and therefore not subject to a conversion claim.19 Nevertheless, this argument is belied bythe evidence that the methodology and teaching concepts reflected in the Velociteachcourse materials were originated by and exclusive to Velociteach. Accordingly, thisenumeration presents no basis for reversal.5. CertiFi also challenges the sufficiency of the evidence as to the value element ofVelociteachs unjust enrichment claim. CertiFi relies on Phoenix Airline Svcs. v. MetroAirlines,20 which is physical precedent only21 and states that if “an award of monetarydamages is made for unjust enrichment, it must, of course, be supported by evidencefrom which it can be determined to a reasonable certainty that the defendants in factrealized such a gain.”22 Here, there was evidence that Trotman had unsuccessfullyrequested to purchase instruction kits from Velociteach, and that the kits were valued at$1,000 each. Thus, the jury could conclude that Trotman avoided paying $1,000 in costfor each kit he used to teach CertiFi students. CertiFi does not dispute that Trotmantaught more than 300 students on its behalf. This evidence authorized the jurys damagesaward.236. CertiFi also challenges the trial courts award of $30,000 in attorney fees under OCGA§ 9–15–14(b) based on its finding that the defendants unnecessarily expanded theproceeding. That Code section authorizes an attorney fee award based on conduct“including, but not limited to, abuses of discovery procedures․”24 Here, the trial courtcited a series of orders granting Velociteachs motion to compel, prohibiting the use ofcertain teaching slides, granting a motion for contempt, and ordering production ofdocuments—all of which were the product of Trotmans and CertiFis resistance todiscovery and failure to cooperate with court orders.Based on this behavior, the trial court did not abuse its discretion by awarding attorneyfees under OCGA § 9–14–15(b),25 but the trial courts order fails to show how itapportioned its award to fees generated based on sanctionable behavior. “As we haveheld in cases involving OCGA § 9–15–14(a) or (b), the trial court must limit the feesaward to those fees incurred because of the sanctionable conduct. [Thus,] ‘[l]ump sum’ orunapportioned attorney fees awards are not permitted in Georgia.”26 Velociteachscounsel submitted an affidavit with billing statements totaling $95,974.66. The trialcourts award of $30,000 may have been reasonable, but the trial courts order, “on itsface ․ fails to show the complex decision making process necessarily involved inreaching a particular dollar figure and fails to articulate why the amount awarded was$[3]0,000 as opposed to any other amount.”27 Accordingly, we must vacate the award andremand for appropriate fact finding with respect to the amount of attorney fees to beassessed.28 22
  24. 24. 7. (a) CertiFi contends that the trial court erred by failing to give its requested jury chargeon waiver with respect to the conversion claim. However, in light of our holding inDivision 4, that the confidentiality agreement did not evince Velociteachs abandonmentor waiver of its right to exclusively possess its course materials, this charge was notauthorized by the evidence.29(b) CertiFi also asserts as error the trial courts failure to give its requested jury charge onapportionment of damages under OCGA § 51–12–33, in light of evidence that Trotmanhad another Velociteach employee help him make revisions to the Velociteach teachingmaterials and that he hired a marketing firm to edit Velociteach presentation slides and“put some lipstick on” a chart in a Velociteach workbook. Nevertheless, “[a] trial courtdoes not err in refusing to give a requested charge which is confusing, misleading, inapt,not precisely tailored or adjusted to the evidence, or not authorized by the evidence.”30 Attrial, Trotman explained that he was personally responsible for the content of therevisions to the teaching materials and he did not assign any blame to his fellowemployee or the marketing firm he hired. Further, the evidence is undisputed that healone was responsible for using the materials for teaching. Based on the record before us,we discern no reversible error in the trial courts failure to give the requested charge.318. CertiFi challenges the trial courts exclusion of certain testimony that Crowe, thefounder of Velociteach, was motivated by racial bias when he terminated Trotman.Specifically, CertiFi proffered testimony from a Velociteach employee who heard Croweuse racially derogatory language in reference to Trotman.32 The trial court sustainedVelociteachs objection to the testimony on relevance grounds.The decision to admit or exclude evidence is committed to the sound discretion of thetrial court and will not be disturbed on appeal absent a clear abuse of discretion. When anissue is raised whether the probative value of evidence is outweighed by its tendency tounduly arouse the jurys emotions of prejudice, hostility, or sympathy, a trial courtsdecision regarding admissibility is a matter of discretion. Further, a trial court mayexclude relevant evidence if its probative value is substantially outweighed by the dangerof unfair prejudice, confusion of the issues, or misleading of the jury.33Here, the issues at trial centered on the similarity between the teaching material used byTrotman/CertiFi to that created by Crowe/Velociteach and Trotmans authority to usethem after his termination. The proffered witness stated that any derogatory statementsmade by Crowe were not in connection with Crowes termination of Trotman, who hadreceived favorable evaluations prior to the events leading up to his termination, i.e., thelapse in Trotmans PMP credentials and his misuse of the company credit card. Based onthe record before us and the inflamatory nature of the proffered evidence, we discern noclear abuse of the trial courts discretion.349. Finally, CertiFi attempts to incorporate by reference to its brief in the companion casean argument challenging the sufficiency of the evidence to show that it tortiouslyinterfered with Velociteachs business relationships or contracts. This enumeration wasnot otherwise supported by argument or citation to authority.35 Nevertheless, we note that 23
  25. 25. during his tenure at Velociteach, Trotman had taught classes to students from a companycalled Axiom, including one class shortly before his termination. Shortly after histermination, Trotman solicited Axiom on behalf of CertiFi based on his prior contact withthem, and Axiom employed CertiFi and declined to employ Velociteach. Crowe,Velociteachs founder testified as to the loss of Axiom as a paying client. Thus, thisenumeration is without merit.3610. CertiFi and Trotmans remaining enumerations are moot. 24
  26. 26. A Dispute Over Who Owns a Twitter Account Goes toCourt (NEW YORK TIMES)By JOHN BIGGSPublished: December 25, 2011How much is a tweet worth? And how much does a Twitter follower cost?Enlarge This ImageIn base economic terms, the value of individual Twitter updates seems to benegligible; after all, what is a Twitter post but a few bits of data sent caromingthrough the Internet? But in a world where social media’s influence can mean thedifference between a lucrative sale and another fruitless cold call, social mediaaccounts at companies have taken on added significance.The question is: Can a company cash in on, and claim ownership of, an employee’ssocial media account, and if so, what does that mean for workers who areincreasingly posting to Twitter, Facebook and Google Plus during work hours?A lawsuit filed in July could provide some answers.In October 2010, Noah Kravitz, a writer who lives in Oakland, Calif., quit his job at apopular mobile phone site, Phonedog.com, after nearly four years. The site has twoparts — an e-commerce wing, which sells phones, and a blog.While at the company, Mr. Kravitz, 38, began writing on Twitter under the namePhonedog_Noah, and over time, had amassed 17,000 followers. When he left, hesaid, PhoneDog told him he could keep his Twitter account in exchange for postingoccasionally.The company asked him to “tweet on their behalf from time to time and I said sure,as we were parting on good terms,” Mr. Kravitz said by telephone.And so he began writing as NoahKravitz, keeping all his followers under that newhandle. But eight months after Mr. Kravitz left the company, PhoneDog sued, sayingthe Twitter list was a customer list, and seeking damages of $2.50 a month perfollower for eight months, for a total of $340,000. 25
  27. 27. PhoneDog Media declined to comment for this article except for this statement: “Thecosts and resources invested by PhoneDog Media into growing its followers, fans andgeneral brand awareness through social media are substantial and are consideredproperty of PhoneDog Media L.L.C. We intend to aggressively protect our customerlists and confidential information, intellectual property, trademark and brands.”Mr. Kravitz said the lawsuit, filed in the United States District Court in the NorthernDistrict of California, was in retaliation for his claim to 15 percent of the site’s grossadvertising revenue because of his position as a vested partner, as well as back payrelated to his position as a video reviewer and blogger for the site.The lawsuit, though, could have broader ramifications than its effect on Mr. Kravitzand the company.“This will establish precedent in the online world, as it relates to ownership of socialmedia accounts,” said Henry J. Cittone, a lawyer in New York who litigatesintellectual property disputes. “We’ve actually been waiting to see such a case asmany of our clients are concerned about the ownership of social media accounts vis-á-vis their branding.”Mr. Cittone added that a particularly important wrinkle is what value the court mightset on the worth of one Twitter follower to a media company, saying the price setcould affect future cases involving ownership of social media.“It all hinges on why the account was opened,” he said.“If it was to communicate with PhoneDog’s customers or build up new customers orprospects, then the account was opened on behalf of PhoneDog, not Mr. Kravitz. Anadded complexity is that PhoneDog contends Mr. Kravitz was just a contractor in therelated partnership/employment case, thus weakening their trade secrets case,unless they can show he was contracted to create the feed.”These situations are likely to arise more often as social media tools like Twitter,Google Plus and Facebook continue to become a way for company representativesand customer service employees to interact with fans and irate customers.JetBlue, for example, often answers customer queries via Twitter, although its officialpolicy is to not respond to “formal complaints” on Twitter. 26
  28. 28. Other issues may arise when companies hire popular Twitter users partly because oftheir social media presence. For example, Samsung Electronics hired the outspokenblogger Philip Berne to review phones for the company internally.Mr. Berne uses his personal Twitter account but often posts explicitly about Samsungproducts and his opinions on the phones he has tested. He cleared his Twitteraccount with the Samsung public relations department, he said, and he owns it.“Their stance was that I am entitled to have and express an opinion, but I am not aSamsung representative, and I should make it clear that any opinions are my ownand not those of my employer,” Mr. Berne said. In general, social media expertsadvise companies to tread with caution when it comes to account ownership.Sree Sreenivasan, a professor at the Columbia Journalism School and the author ofSree’s Social Media Guide, said smart companies let social media blossom where itmay.“It’s a terrible thing to say you have to leave your Twitter followers behind,” he said,talking specifically about media companies that may employ popular Twitter writers.“It sends a terrible signal to reporters and journalists who care about this, and thiswill make it less attractive to recruit the next round of people.”He said that many industries had policies that required sales staff to leave theirRolodexes behind, but that these policies were as relevant to social media asRolodexes are to the modern office. After all, social media accounts are, almost bydefinition, personal.He also said that the average Twitter account had less clout than many might think.“The value of the individual users is very hard to quantify,” he said. “It’s dangerous tooverestimate the value of an account to an organization and underestimate what itmeans for an individual.”Mr. Kravitz said he was confused.“They’re suing me for over a quarter of a million dollars,” he said. “From where I’msitting I held up my end of the bargain.” 27
  29. 29. 28
  30. 30. House Bill 718 By: Representatives Peake of the 137th, Lindsey of the 54th, Sheldon of the 105th, Stephens of the 164th, Williamson of the 111th, and othersA BILL TO BE ENTITLED AN ACT1 To amend Chapter 7 of Title 50 of the Official Code of Georgia Annotated,relating to the2 Department of Economic Development, so as to create the Georgia CapitalAcceleration3 Authority; so as to provide for legislative findings; to provide for definitions; toprovide for4 a program administrator; to provide for the issuance of premium tax credits toinsurance5 companies or holding companies that purchase such credits to offset liability forstate6 insurance premium taxes; to provide for reports; to provide for related matters;to provide for7 an effective date; to repeal conflicting laws; and for other purposes.8 BE IT ENACTED BY THE GENERAL ASSEMBLY OF GEORGIA:9 SECTION 1.10 Chapter 7 of Title 50 of the Official Code of Georgia Annotated, relating to theDepartment11 of Economic Development, is amended by adding a new article, to read asfollows:12 "ARTICLE 813 50-7-90.14 The General Assembly declares that its purpose in enacting this legislation is toincrease15 the amount of private investment capital available in this state for Georgiabased business16 enterprises in the seed, early, or growth stages of business development andrequiring17 funding, as well as established Georgia based business enterprises developingnew methods18 or technologies, including the promotion of research and developmentpurposes, thereby 29
  31. 31. 19 increasing employment, creating additional wealth, and otherwise benefitingthe economic20 welfare of the people of this state. Accordingly, it is the intention of theGeneral Assembly21 that the Georgia Capital Acceleration Authority make investments in support ofGeorgia22 based business enterprises in accordance with the investment policy authorizedand23 required under this article and focus its investment policy principally onventure capital24 funds and private equity organizations investing in Georgia based businessenterprises.25 50-7-91.26 As used in this article, the term:27 (1) Affiliate means:28 (A) A person who, directly or indirectly, beneficially owns, controls, or holdspower29 to vote any outstanding voting securities or other voting ownership interests ofa30 venture firm or an insurance company; or31 (B) A person whose outstanding voting securities or other voting ownershipinterests32 are directly or indirectly beneficially owned, controlled, or held with power tovote by33 a venture firm or an insurance company.34 The term does not include an insurance company that becomes a purchaser inaccordance35 with an allocation of investment tax credits under this article solely by reasonof the36 allocation.37 (2) Authority means the Georgia Capital Acceleration Authority created underCode38 Section 50-7-92.39 (3) Contributed capital means the amount of money contributed to the GeorgiaCapital40 Acceleration Fund for the purchase of insurance premium tax credits.41 (4) Department means the Department of Economic Development.42 (5) Designated capital means the amount of money committed and invested bythe43 Georgia Capital Acceleration Fund into individual early stage venture capitalfunds or 30
  32. 32. 44 growth stage venture capital funds.45 (6) Early stage venture capital fund means:46 (A) A fund that has at least one principal employed to direct the investment ofthe47 designated capital;48 (B) A fund whose principals have at least five years of experience in theventure49 capital, angel capital, or private equity sector by investing primarily in Georgia50 domiciled companies or a fund whose managers have been based, as defined byhaving51 a principal office, in the State of Georgia for at least five years prior to theeffective52 date of this article;53 (C) At the discretion of the program administrator and the authority, one ormore early54 stage venture capital funds that are first-time Georgia based funds, so long asthe fund55 managers have at least five years of experience in venture capital or angelcapital56 investing in Georgia based business enterprises; and57 (D) A fund of which the primary investment strategy must be the achievementof58 transformational economic development outcomes through focusedinvestments of59 capital in seed or early stage businesses with high growth potential. The fundprincipals60 must have demonstrated the ability to lead investment rounds, advise andmentor61 entrepreneurs, and facilitate follow-on investments. A minimum of 10 percentof the62 committed capital of the fund must be committed by the institutional investors,fund63 principals, or other accredited investors.64 (7) Growth stage venture capital fund means:65 (A) A fund having its principal office and a majority of its employees inGeorgia that66 has at least two principals employed to direct the investment of the designatedcapital:67 (B) A fund whose principals have at least five years of experience in theventure68 capital, angel capital, or private equity sector by investing primarily in Georgia69 domiciled companies or a fund whose principals have been based, as definedby having 31
  33. 33. 70 a principal office, in the State of Georgia for at least five years prior to theeffective71 date of this article; and72 (C) A fund which has as its primary investment strategy the achievement of73 transformational economic development outcomes through focusedinvestments of74 capital in growth stage businesses with high return potential. The fundprincipals must75 have demonstrated the ability to lead investment rounds, advise and mentor76 entrepreneurs, and facilitate follow-on investments. A minimum of 50 percentof the77 committed capital of the fund must be committed by the institutional investors,fund78 principals, or other accredited investors.79 (8) Insurance premium tax credit means a credit against insurance premiumtax liability80 offered to a purchaser under Code Section 50-7-98.81 (9) Insurance premium tax liability means any liability incurred under CodeSections82 33-3-26 and 33-8-4; provided, however, that any insurance premium taxliability incurred83 under the provisions of Code Section 47-7-61, relating to fire, lightning, orextended84 coverage, inland marine or allied lines, or windstorm coverage, shall not beoffset by any85 insurance premium tax credits issued under this article.86 (10) Program administrator means a state appointed investment advisory firmconsisting87 of experienced investment professionals that will actively pursue investment88 opportunities for the State of Georgia. The investment advisory firm willevaluate and89 select Georgia based venture capital funds, in conjunction with the GeorgiaCapital90 Acceleration Authority, through a rigorous due diligence process.91 (11) Purchaser means:92 (A) An insurance company that:93 (i) Is authorized to do business in Georgia;94 (ii) Has insurance premium tax liability; and95 (iii) Pays contributed capital to purchase an allocation of premium tax creditsunder96 this article; or97 (B) A holding company that:98 (i) Has at least one insurance company subsidiary authorized to do business in 32
  34. 34. 99 Georgia; and100 (ii) Pays contributed capital on behalf of one or more of these subsidiaries.101 (12) Qualified distribution means any distribution or payment by the GeorgiaCapital102 Acceleration Fund in connection with any of the following:103 (A) Costs and expenses of forming, syndicating, and organizing the GeorgiaCapital104 Acceleration Fund, including fees paid for professional services, and the costsof105 financing and insuring the obligations of the Georgia Capital AccelerationFund,106 provided such payments are not made to a participating investor;107 (B) An annual management fee in accordance with a funds partnershipagreement and108 consistent with the funds other private investors, to offset the costs andexpenses of109 managing and operating the Georgia Capital Acceleration Fund; or110 (C) Reasonable and necessary fees in accordance with industry custom forongoing111 professional services, including, but not limited to, legal and accountingservices related112 to the operation of the Georgia Capital Acceleration Fund, but not includingany113 lobbying or governmental relations.114 (13) Qualified early stage or seed business means a business that, at the timeof the115 first investment in the business by a venture firm:116 (A) Has its headquarters located in the State of Georgia;117 (B) Has its principal business operations located in the State of Georgia andintends to118 maintain its principal business operations in the state after receiving aninvestment from119 the venture capital firm. In order to discourage the business from relocatingoutside120 Georgia within three years from the date of an initial investment, theinvestment in the121 business shall be subject to redemption by the venture capital firm within oneyear from122 the time the business relocates its principal business operations outside thestate, unless123 the business maintains a significant presence in Georgia as determined byrelative 33
  35. 35. 124 number of employees or relative assets remaining in Georgia following therelocation;125 (C) Has 20 or fewer employees;126 (D) Has a current gross annual revenue run rate of less than $1 million;127 (E) Has not obtained during its existence more than $2 million in aggregatecash128 proceeds from the issuance of its equity or debt investments, not includingcommercial129 loans from chartered banks or savings and loan institutions; and130 (F) Does not engage substantially in:131 (i) Retail sales;132 (ii) Real estate development or construction;133 (iii) Entertainment, amusement, recreation, or athletic or fitness activity forwhich an134 admission is charged;135 (iv) The business of insurance, banking, lending, financial, brokerage, orinvestment136 activities;137 (v) Natural resource extraction, including but not limited to oil, gas, orbiomass; or138 (vi) The provision of professional services by accountants, attorneys, orphysicians.139 A business classified as a qualified early stage business at the time of the firstqualified140 investment in the business will remain classified as a qualified early stagebusiness and141 may receive continuing qualified investments from venture capital firmsparticipating in142 the Georgia Capital Acceleration Fund. Continuing investments will constitutequalified143 investments even though the business may not meet the definition of aqualified early144 stage business at the time of such continuing investments.145 (14) Qualified growth stage business means a business that, at the time of thefirst146 investment in the business by a venture firm:147 (A) Has its headquarters located in the State of Georgia;148 (B) Is either a corporation, limited liability company, or a general or limited149 partnership located in this state;150 (C) Has its principal business operations located in the State of Georgia andintends to151 maintain its principal business operations in the state after receiving aninvestment from 34
  36. 36. 152 the venture capital firm. In order to discourage the business from relocatingoutside153 Georgia within three years from the date of initial investment, the investmentin the154 business shall be subject to redemption by the venture capital firm within oneyear from155 the time the business relocates its principal business operations outside thestate, unless156 the business maintains a significant presence in Georgia as determined byrelative157 number of employees or relative assets remaining in Georgia;158 (D) Has 100 or fewer employees;159 (E) Has a current gross annual revenue run rate of greater than $1 million; and160 (F) Does not engage substantially in:161 (i) Retail sales;162 (ii) Real estate development or construction;163 (iii) Entertainment, amusement, recreation, or athletic or fitness activity forwhich an164 admission is charged;165 (iv) The business of insurance, banking, lending, financial, brokerage, orinvestment166 activities;167 (v) Natural resource extraction, including but not limited to oil, gas, orbiomass; or168 (vi) The provision of professional services by accountants, attorneys, orphysicians.169 A business classified as a qualified growth stage business at the time of thefirst qualified170 investment in the business will remain classified as a qualified growth stagebusiness and171 may receive continuing qualified investments from venture capital fundsparticipating in172 the Georgia Capital Acceleration Fund. Continuing investments will constitutequalified173 investments even though the business may not meet the definition of aqualified growth174 stage business at the time of such continuing investments.175 (15) Qualified investment means the investment of money by the GeorgiaCapital176 Acceleration Fund in each early or growth stage venture capital fund selectedby the177 program administrator. 35
  37. 37. 178 50-7-92.179 (a) There is hereby created the Georgia Capital Acceleration Authority, whichshall180 exercise the powers and perform the duties prescribed by this article. Theexercise by the181 authority of its powers and duties is hereby declared to be an essential stategovernmental182 function. The authority is subject to all laws generally applicable to stateagencies and183 public officials, to the extent those laws do not conflict with the provisions ofthis article.184 (b) The authority shall consist of three members appointed by the Governor,one member185 appointed by the Lieutenant Governor, and one member appointed by theSpeaker of the186 House of Representatives. Each appointed member shall be a resident ofGeorgia and shall187 have experience in at least one of the following areas:188 (1) Early stage, angel, or venture capital investing;189 (2) Growth stage venture capital investing;190 (3) Fund of funds management; or191 (4) Entrepreneurship.192 No member of the authority shall be affiliated in any way with any venturecapital fund that193 is selected to perform services for the authority.194 (c) The commissioner of economic development, revenue commissioner, andInsurance195 Commissioner or their designees shall serve as nonvoting members of theauthority.196 (d) Initial appointees to the authority shall serve staggered terms, with all ofthe initial197 terms beginning on January 1, 2013. The terms of one member appointed bythe Governor198 and the members appointed by the Lieutenant Governor and the Speaker ofthe House of199 Representatives shall expire on December 31, 2015. The terms of the othertwo initial200 appointments by the Governor shall expire on December 31, 2017. Thereafter,terms of201 office for all appointees shall be for four years, with each term ending on thesame day of 36
  38. 38. 202 the same month as did the term that it succeeds. A vacancy on the authorityshall be filled203 in the same manner as the original appointment, except that a personappointed to fill a204 vacancy shall be appointed to the remainder of the unexpired term. Anyappointed member205 of the authority is eligible for reappointment.206 (e) A member of the authority may be removed by the members appointingofficial for207 misfeasance, willful neglect of duty, or other cause, after notice and a publichearing,208 unless the notice and hearing are waived in writing by the member.209 (f) Members of the authority shall serve without compensation, The Governorshall210 designate a member of the authority to serve as chairperson. A majority of thevoting211 members of the authority constitutes a quorum, and the affirmative vote of amajority of212 the voting members present is necessary for any action taken by the authority.A vacancy213 in the membership of the authority does not impair the right of a quorum toexercise all214 rights and perform all duties of the authority.215 (g) The authority shall have the power:216 (1) To have a seal and alter the same at its pleasure;217 (2) To acquire by purchase, lease, or otherwise, including acquisition of landfrom the218 state government, and to hold, lease, and dispose of real and personal propertyof every219 kind and character for its corporate purpose and to enter into any contracts,leases, or220 other charges for the use of property or services of the authority and collectand use the221 same as necessary to operate the authority; and to accomplish any of thepurposes of this222 article and make any purchases or sales necessary for such purposes;223 (3) To acquire in its own name by purchase, on such terms and conditions andin such224 manner as it may deem proper, real property, or rights or easements therein, orfranchises225 necessary or convenient for its corporate purpose, and to use the same so longas its 37
  39. 39. 226 corporate existence shall continue, and to lease or make contracts with respectto the use227 of such property, or dispose of the same in any manner it deems to be to thebest228 advantage of the authority;229 (4) To appoint, select, and employ officers, agents, and employees, includingreal estate,230 environmental, engineering, architectural, and construction experts, fiscalagents, and231 attorneys, and to fix their respective compensations;232 (5) To make contracts and leases and to execute all instruments necessary orconvenient.233 Any and all persons, firms, and corporations and any and all politicalsubdivisions,234 departments, institutions, or agencies of the state and federal government areauthorized235 to enter into contracts, leases, or agreements with the authority upon suchterms and for236 such purposes as they deem advisable; and, without limiting the generality ofthe237 foregoing, authority is specifically granted to municipal corporations,counties, political238 subdivisions, and to the authority relative to entering into contracts, leaseagreements, or239 other undertakings authorized between the authority and private corporations,both inside240 and outside this state, and between the authority and public bodies, includingcounties241 and cities outside this state and the federal government;242 (6) To accept loans and grants of money or materials or property of any kindfrom the243 United States of America or any agency or instrumentality thereof upon suchterms and244 conditions as the United States of America or such agency or instrumentalitymay245 require;246 (7) To accept loans and grants of money or materials or property of any kindfrom the247 State of Georgia or any agency or instrumentality or political subdivisionthereof upon248 such terms and conditions as the State of Georgia or such agency orinstrumentality or249 political subdivision may require; 38
  40. 40. 250 (8) To exercise any power usually possessed by private corporationsperforming similar251 functions, provided that no such power is in conflict with the Constitution orgeneral laws252 of this state; and253 (9) To do all things necessary or convenient to carry out the powers expresslygiven in254 this article.255 (h) The department shall provide the authority with office space and suchtechnical256 assistance as the authority requires and the authority shall be attached to thedepartment for257 administrative purposes. The department shall also consult with the authorityin connection258 with the administration of the Georgia Capital Acceleration Program createdunder this259 article.260 50-7-93.261 The authoritys primary responsibilities include:262 (1) Establishing an investment policy for the selection of a programadministrator;263 (2) Selecting a program administrator to administer the provisions of thisarticle;264 (3) Giving final approval to allocations of designated capital to the venturecapital funds265 selected by the program administrator;266 (4) Executing and overseeing the contract of the program administrator inorder to assure267 compliance with this article; and268 (5) Establishing a policy with respect to use of capital and profits returned tothe state269 pursuant to the provisions of Code Section 50-7-102.270 50-7-94.271 (a) The program administrator will be selected by the authority through atransparent open272 bid process and will be responsible for administering the Georgia CapitalAcceleration273 Fund and for making all venture capital fund selections in accordance with theinvestment274 policies developed by the authority or contained in this article. 39
  41. 41. 275 (b) The program administrator will be responsible for selecting a group ofGeorgia based276 venture capital funds in two categories, early or seed stage venture capitalfunds and277 growth stage venture capital funds.278 (c) The early stage venture capital funds shall invest primarily in early or seedstage279 businesses and shall be selected using a transparent open bid process pursuantto guidelines280 developed by the authority. The program administrator shall ensure that adiverse281 cross-section of industry sectors is represented by the selected funds,including technology,282 health care, life sciences, agribusiness, logistics, energy, and advancedmanufacturing.283 (d) The growth stage venture capital funds shall be selected using atransparent open bid284 process pursuant to guidelines developed by the authority. The programadministrator shall285 ensure that a diverse cross-section of industry sectors is represented by theselected funds,286 including technology, health care, life sciences, agribusiness, logistics,energy, and287 advanced manufacturing.288 (e) In the selection of the early stage venture capital funds and the growthstage venture289 capital funds the program administrator shall consider the following factors:290 (1) The management structure of the fund, including:291 (A) The investment experience of the principals;292 (B) The applicants reputation in the venture firm industry and the applicantsability293 to attract coinvestment capital and syndicate investments in qualifiedbusinesses in294 Georgia;295 (C) The knowledge, experience, and capabilities of the applicant in subjectareas296 relevant to venture stage businesses in Georgia; and297 (D) The tenure and turnover history of principals and senior investmentprofessionals298 of the fund;299 (2) The funds investment strategy, including:300 (A) The applicants record of performance in investing in early and growthstage 40
  42. 42. 301 businesses;302 (B) The applicants history of attracting coinvestment capital and syndicate303 investments;304 (C) The soundness of the applicants investment strategy and the compatibilityof that305 strategy with business opportunities in Georgia; and306 (D) The applicants history of job creation through investment;307 (3) The funds commitment to making investments, that to the fullest extentpossible:308 (A) Create employment opportunities in Georgia;309 (B) Lead to the growth of the Georgia economy and qualified businesses inGeorgia;310 (C) Complement the research and development projects of Georgia academic311 institutions; and312 (D) Foster the development of technologies and industries that presentopportunities313 for the growth of qualified businesses in Georgia; and314 (4) The funds commitment to Georgia, including:315 (A) The applicants presence in Georgia through permanent local offices oraffiliation316 with local investment firms;317 (B) The local presence of senior investment professionals;318 (C) The applicants history of investing in early and growth stage businessesin319 Georgia;320 (D) The applicants ability to identify investment opportunities throughworking321 relationships with Georgia research and development institutions and Georgiabased322 businesses; and323 (E) The applicants commitment to investing an amount that matches orexceeds the324 amount of the applicants designated capital received under this article, inGeorgia325 based qualified early stage businesses and qualified growth stage businesses.326 (f) A venture capital fund shall file an application with the authority in theform required327 by the program administrator. The authority shall begin accepting applicationson or328 before September 1, 2012.329 50-7-95. 41
  43. 43. 330 (a) The Georgia Capital Acceleration Fund will be capitalized through stateinsurance331 premium tax credits. The State of Georgia will sell tax credits to purchasers,pursuant to332 the provisions of this article, and the tax credits shall be used to offset thepurchasers state333 insurance premium tax liability.334 (b) The capital raised through the auction of insurance premium tax creditswill be335 periodically distributed to the venture capital funds selected by the programadministrator336 pursuant to Code Section 50-7-94.337 (c) Each year the purchasers shall be issued a tax credit certificate by theauthority.338 (d) Purchasers will be able to claim their tax credits pursuant to the provisionsof Code339 Section 50-7-98.340 50-7-96.341 (a) The State of Georgia will sell a maximum of $200 million in insurancepremium tax342 credits over a three-year period through an auction process administered bythe program343 administrator pursuant to guidelines developed by the authority. The $200million in344 insurance premium tax credits will be auctioned in the first year of theGeorgia Capital345 Acceleration Program, and the purchasers will be obligated to pay thepurchase amount to346 the authority for deposit in the Georgia Capital Acceleration Fund in threeequal amounts347 over the three-year period.348 (b) The program administrator shall obtain the services of an independentthird party to349 conduct the bidding process to secure purchasers for the capital accelerationprogram.350 (c) Using the procedures adopted by the independent third party, eachpotential purchaser351 shall make a timely and irrevocable offer, subject only to the authoritysissuance to the352 purchaser of tax credit certificates, to make specified contributions ofdesignated capital353 to the authority on the dates specified in Code Section 50-7-98. 42
  44. 44. 354 (d) The offer shall include:355 (1) The requested amount of tax credits, which may not be less than $5million;356 (2) The potential purchasers specified contribution for each tax credit dollarrequested,357 which may not be less than the greater of:358 (A) Eighty-five percent of the requested dollar amount of tax credits; or359 (B) The percentage of the requested dollar amount of tax credits that theprogram360 administrator, on the recommendation of the independent third party,determines to be361 consistent with market conditions as of the offer date; and362 (3) Any other information the independent third party requires.363 (e)(1) The deadline for submission of applications for tax credits is February1, 2013.364 (2) Each potential purchaser shall receive a written notice from the program365 administrator not later than May 1, 2013, indicating whether or not it has beenapproved366 as a purchaser and, if so, the amount of tax credits allocated.367 50-7-97.368 (a) As soon as practicable after the authority receives each installment ofcontributed369 capital, the authority and each selected venture capital fund that has beenallocated370 designated capital shall enter into a contract under which the allocated amountof371 designated capital will be committed by the authority to the selected venturecapital funds372 for investment pursuant to this article.373 (b) The authority shall allocate designated capital as follows:374 (1) Early stage venture capital funds: Thirty percent of the contributed capitalin the375 Georgia Capital Acceleration Fund shall be allocated among the early stageventure376 capital funds, in accordance with the following eligibility and requirements:377 (A) Each early stage venture capital fund shall be eligible for a minimum $10million378 allocation of designated capital and a maximum $15 million allocation to becontributed379 to the funds over a three-year period coinciding with the sale of the tax creditsor in 43