![MEMORANDUM
FROM: Morris, Manning & Martin, LLP
DATE: December, 2011
RE: Georgia’s New Restrictive Covenants Act
On May 11, 2011, Georgia enacted House Bill 30 (the “New Act”), which
governs the enforcement of restrictive covenants against “employees” entered into on or
after May 11, 2011.1 The New Act is a significant departure from the existing body of
case 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 of
two years or less in duration are reasonable in time, and that restraints more than two
years in time are unreasonable); liberalizes prior rules (e.g., non-disclosure provisions no
longer require a time limitation; the non-solicitation of customers provision need not
expressly define the types of products or services considered to be competitive in order
for the non-solicit of customers to be enforceable); and, most significantly, permits courts
to “blue-pencil” (i.e., modify, or partially enforce) covenants that are otherwise
overbroad. Under prior Georgia law, these safeguards did not exist or, at best, were
unclear.
While the New Act is more employer-friendly, employers should nonetheless
exercise caution for four reasons:
(1) the New Act applies only to restrictive covenants entered into on or after May
11, 2011;
(2) the New Act permits, but does not require, Georgia courts to blue-pencil
overbroad restrictive covenants;
(3) the New Act applies only to “employees” (however, that term is broadly
defined 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 not
apply 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. §§ 13-8-50
et seq. See Murphree v. Yancey Brothers Company, 2011 WL 4375216, *4 fn.10 (Ga. App. Sept. 21,
2011).
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![(a) Based on the jury's verdict that Trotman violated the UDTPA, the trial court granted
an injunction against Trotman that (1) prohibited him from using a specified trial exhibit
containing Velociteach course materials, (2) required him to return all Velociteach
property and course materials, (3) forbade him from using Velociteach's 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 the
UDTPA, the only basis for the finding would be his failure to maintain his PMP
certification. And because he later remedied the lapse in his certification, he argues that
this 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 he
personally violated the UDTPA, regardless of whether the jury attributed his behavior to
CertiFi. 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, or
association with or certification by another; ․
(7) Represents that goods or services are of a particular standard, quality, or grade or that
goods 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 of
misunderstanding.
(b) In order to prevail in an action under this part, a complainant need not prove
competition between the parties or actual confusion or misunderstanding. 8
At trial, there was evidence that Trotman created a misleading advertisement stating that
CertiFi had developed course content over a four-year period, which would have referred
to the time Trotman was with Velociteach, not CertiFi. There was also evidence that
Trotman solicited former Velociteach students on behalf of CertiFi, referencing the
Velociteach course and falsely holding himself out as PMP certified. Velociteach also
introduced evidence that Trotman published a list of Velociteach customers and falsely
represented them to be CertiFi customers. Finally, there was evidence that Trotman used
nearly duplicate versions of certain Velociteach course materials without its consent. This
evidence supported the jury's finding that he violated the UDTPA, and the trial court did
not abuse its discretion by awarding equitable relief to Velociteach against Trotman
based on the jury's finding.9
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![(b) Trotman also argues that an injunction against future conduct is unwarranted because
his confidentiality agreement has expired, and his wrongful conduct took place in the past
and is not likely to recur. This argument is misplaced. There was evidence supporting a
finding that Trotman's conduct violated the UDTPA regardless of his confidentiality
agreement, and the nature of the wrongful behavior was not such that it could not be
repeated, i.e., by re-creating confusing or misleading marketing materials or re-using
Velociteach's proprietary course materials.10 Nor was the injunction's breadth an abuse of
the trial court's discretion. The injunction essentially pertained to the use of Velociteach
course materials and customer list, and it did not prohibit Trotman from engaging in other
PMP teaching activity. Nor was it an abuse of discretion to allow Velociteach five years
to monitor Trotman's courses, because the harm to Velociteach would not diminish over
time if Trotman unfairly competed with it. Accordingly, this enumeration provides no
basis for reversal.11
3. Trotman next challenges the trial court's failure to give his requested jury charge on the
UDTPA claim. “In order for a refusal to charge to be error, the request[ ] must be entirely
correct and accurate, and adjusted to the pleadings, law, and evidence, and not otherwise
covered in the general charge.”12 Trotman's requested charge was as follows:
Although a finding of actual confusion [in the marketplace] is not necessary to prove a
likelihood 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 of
actual confusion raises a presumption against a likelihood of confusion; however, the
presumption may be rebutted by evidence of other factors tending to support a finding of
a likelihood of confusion.
As support, Trotman relies on Ackerman Security Systems, Inc. v. Design Security
Systems, Inc.,13 which included the following language: “In the case at hand, the trial
court ․ incorrectly applied the likelihood of confusion test by requiring a showing of
actual confusion․ Although evidence of actual confusion is obviously the best evidence
of a likelihood of confusion, it is not necessary to a finding of likelihood of confusion.”14
The emphasized portion of this statement was dicta and not a statement of settled law;15
thus the requested charge was not entirely correct and accurate. Further, the trial court
correctly charged the jury as to the settled law stated in Ackerman, i.e., that actual
confusion in the marketplace need not be shown. We discern no reversible error here.16
Case No. A11A0403
4. CertiFi contends that the evidence was insufficient to support the jury's verdict on the
conversion claim, which was predicated on Trotman's use of Velociteach training
materials. Specifically, CertiFi argues that because Trotman's confidentiality agreement
required him to return or destroy any training materials, Velociteach had abandoned
them, which would preclude a conversion claim due to an absence of Velociteach's right
of possession.17 The confidentiality agreement does not evince an intent to abandon the
property, however; instead, it shows Velociteach's attempt to remain in exclusive control
and possession of its confidential information. This is wholly consistent with the
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![conversion claim because it shows that Trotman's retention and use of the materials was
unauthorized: “The very essence of conversion is that the [defendant's] act of dominion is
wrongfully asserted.”18
CertiFi 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 by
the evidence that the methodology and teaching concepts reflected in the Velociteach
course materials were originated by and exclusive to Velociteach. Accordingly, this
enumeration presents no basis for reversal.
5. CertiFi also challenges the sufficiency of the evidence as to the value element of
Velociteach's unjust enrichment claim. CertiFi relies on Phoenix Airline Svcs. v. Metro
Airlines,20 which is physical precedent only21 and states that if “an award of monetary
damages is made for unjust enrichment, it must, of course, be supported by evidence
from which it can be determined to a reasonable certainty that the defendants in fact
realized such a gain.”22 Here, there was evidence that Trotman had unsuccessfully
requested 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 cost
for each kit he used to teach CertiFi students. CertiFi does not dispute that Trotman
taught more than 300 students on its behalf. This evidence authorized the jury's damages
award.23
6. CertiFi also challenges the trial court's award of $30,000 in attorney fees under OCGA
§ 9–15–14(b) based on its finding that the defendants unnecessarily expanded the
proceeding. That Code section authorizes an attorney fee award based on conduct
“including, but not limited to, abuses of discovery procedures․”24 Here, the trial court
cited a series of orders granting Velociteach's motion to compel, prohibiting the use of
certain teaching slides, granting a motion for contempt, and ordering production of
documents—all of which were the product of Trotman's and CertiFi's resistance to
discovery and failure to cooperate with court orders.
Based on this behavior, the trial court did not abuse its discretion by awarding attorney
fees under OCGA § 9–14–15(b),25 but the trial court's order fails to show how it
apportioned its award to fees generated based on sanctionable behavior. “As we have
held in cases involving OCGA § 9–15–14(a) or (b), the trial court must limit the fees
award to those fees incurred because of the sanctionable conduct. [Thus,] ‘[l]ump sum’ or
unapportioned attorney fees awards are not permitted in Georgia.”26 Velociteach's
counsel submitted an affidavit with billing statements totaling $95,974.66. The trial
court's award of $30,000 may have been reasonable, but the trial court's order, “on its
face ․ fails to show the complex decision making process necessarily involved in
reaching 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 and
remand for appropriate fact finding with respect to the amount of attorney fees to be
assessed.28
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![7. (a) CertiFi contends that the trial court erred by failing to give its requested jury charge
on waiver with respect to the conversion claim. However, in light of our holding in
Division 4, that the confidentiality agreement did not evince Velociteach's abandonment
or waiver of its right to exclusively possess its course materials, this charge was not
authorized by the evidence.29
(b) CertiFi also asserts as error the trial court's failure to give its requested jury charge on
apportionment of damages under OCGA § 51–12–33, in light of evidence that Trotman
had another Velociteach employee help him make revisions to the Velociteach teaching
materials 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 court
does 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 At
trial, Trotman explained that he was personally responsible for the content of the
revisions to the teaching materials and he did not assign any blame to his fellow
employee or the marketing firm he hired. Further, the evidence is undisputed that he
alone was responsible for using the materials for teaching. Based on the record before us,
we discern no reversible error in the trial court's failure to give the requested charge.31
8. CertiFi challenges the trial court's exclusion of certain testimony that Crowe, the
founder of Velociteach, was motivated by racial bias when he terminated Trotman.
Specifically, CertiFi proffered testimony from a Velociteach employee who heard Crowe
use racially derogatory language in reference to Trotman.32 The trial court sustained
Velociteach's objection to the testimony on relevance grounds.
The decision to admit or exclude evidence is committed to the sound discretion of the
trial court and will not be disturbed on appeal absent a clear abuse of discretion. When an
issue is raised whether the probative value of evidence is outweighed by its tendency to
unduly arouse the jury's emotions of prejudice, hostility, or sympathy, a trial court's
decision regarding admissibility is a matter of discretion. Further, a trial court may
exclude relevant evidence if its probative value is substantially outweighed by the danger
of unfair prejudice, confusion of the issues, or misleading of the jury.33
Here, the issues at trial centered on the similarity between the teaching material used by
Trotman/CertiFi to that created by Crowe/Velociteach and Trotman's authority to use
them after his termination. The proffered witness stated that any derogatory statements
made by Crowe were not in connection with Crowe's termination of Trotman, who had
received favorable evaluations prior to the events leading up to his termination, i.e., the
lapse in Trotman's PMP credentials and his misuse of the company credit card. Based on
the record before us and the inflamatory nature of the proffered evidence, we discern no
clear abuse of the trial court's discretion.34
9. Finally, CertiFi attempts to incorporate by reference to its brief in the companion case
an argument challenging the sufficiency of the evidence to show that it tortiously
interfered with Velociteach's business relationships or contracts. This enumeration was
not otherwise supported by argument or citation to authority.35 Nevertheless, we note that
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What Every Tech Company Needs to Know
- 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
- 2. CONTENTS TAB 1 BIOGRAPHIES (DAVID CALHOUN, SCOTT ALLEN AND CHRIS MAXWELL) TAB 2 FREQUENTLY ASKED QUESTIONS -AMERICA INVENTS ACT TAB 3 GEORGIA’S NEW RESTRICTIVE COVENANTS ACT MEMORANDUM TAB 4 TROTMAN v. VELOCITEACH PROJECT MANAGEMENT, LLC TAB 5 PHONEDOG, LLC V. KRAVITZ (NY TIMES ARTICLE) TAB 6 GEORGIA CAPITAL ACCELERATION PROGRAM HOUSE BILL 718 TAB 7 IN RE: OPENLANE SHAREHOLDER LITIGATION TAB 8 VALUATION AND APPRAISAL MEMORANDUM
- 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 transactions PRACTICE AREAS: include representation of both buyers and sellers in mergers, asset sales, stock sales, international and Corporate Finance cross-border transactions, and leveraged buy-outs. He has represented companies in numerous Securities industries, including technology, biotechnology, green tech, medical devices, business process outsourcing, manufacturing, real estate and financial institutions. Mr. Calhoun’s practice also includes Mergers & general corporate counseling, corporate governance, audit and special committee representation, and Acquisitions securities law compliance matters. Financial Institutions Clean Tech Education University of Tennessee at Knoxville, B.A., 1985 Mercer University, J.D., cum laude, 1988 BAR ADMISSION: Brainerd Currie Honor Society State Bar of Phi Alpha Delta Georgia, Admitted Book Editor, Mercer University Law Review 1988 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. “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. 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 being Mergers & selected as Georgia Super Lawyers Rising Star, as published by Law & Politics and Atlanta magazines on Acquisitions numerous occasions. Mr. Allen is also a frequent speaker on corporate law, M&A and private equity Securities topics for continued legal education programs, trade association events and related conferences. Medical Device Honors & Affiliations BAR ADMISSION: Association for Corporate Growth (Member) State Bar of Atlanta Venture Forum (Member) Georgia, Admitted 2002 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. 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. Education University of Georgia, B.A., 1998 Emory University School of Law, J.D., with honors (Order of the Coif), 2002 5
- 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 firm's general corporate practice, concentrating in mergers and acquisitions and venture capital transactions. Mr. Maxwell has assisted many of the firm's 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) transactions PRACTICE AREAS: and its regular securities filings. Corporate Representation of sellers in $32 million sale to a private equity sponsored competitor in the plastics Mergers & manufacturing industry. Acquisitions Representation of technology client providing payment processing services in a $5 million venture Securities 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. Education Emory University, B.A., 2004 The University of Georgia School of Law, J.D., cum laude, 2007 Member, Student Bar Association Member, Georgia Law Review 7
- 9. MEMORANDUM TO: Clients and Entrepreneurs FROM: Morris, Manning & Martin RE: Frequently Asked Questions (FAQs) about Patent Reform – The Leahy-Smith America Invents Act of 2011 (“AIA”) DATE: January 2012 ________________________________________________________________________ This Frequently Asked Question (FAQ) memorandum addresses typical questions regarding the new Leahy-Smith America Invents Act of 2011 (enacted September 16, 2011), and its potential impact on patent application filing, patent enforcement, and patent litigation. This document is authored 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 this area and you should consult an IP attorney at MMM (contact information listed at the end of this memorandum) 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 increased urgency to file patent applications, due to the fact that the U.S. patent system will now grant patents to the first inventor to file a patent application (“first to file”) instead of to the “first to invent.” 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 patent applications is “file early, file often.” Because the AIA radically changes the priority rules associated with patent filings, it is now more important than ever to file patent applications as soon as possible. Also, because it is now potentially easier to challenge issued patents (and submit prior art in pending applications), it is also important to monitor the patent filings of your competitors. 8
- 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. Patent quality is an elusive characteristic – what makes for a “quality” patent? There are no objective measures as to the quality of a patent. The AIA is, however, supposed to improve patent quality because 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 known as patent “trolls”) to bring lawsuits to enforce patents, at least for the immediate future. The AIA includes a new joinder provision requiring that accused infringers in the same lawsuit must be tied 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 a decreased number of patents that are issued. However, it will be a number of years before the effects 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 and improved methods to challenge possibly invalid patents outside of the court system. The AIA provides for new procedures in the USPTO for (a) Post-grant review, (b) Preissuance Submissions, and (c) Supplemental Examination. These new procedures will add to the USPTO bureaucracy, but are supposedly designed to help challenge suspect patents more quickly and inexpensively. 6. Will the AIA cut back on the large damages awards that have been awarded in many recent patent lawsuits? Answer: No. The AIA includes no provisions that affect patent damages or awards. A number of lobbyists had urged Congress to include patent damages limitations so that companies could more readily manage their exposure to patent infringement claims. However, for some reasons not completely understood, Congress failed to include the patent damages limitations provisions that 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 to invent” 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 grant of a valid patent to a patent applicant. 9
- 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) description of the best mode of practicing the invention – did not fundamentally change. There are changes that 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 and nonobviousness requirements relate to “prior art,” whose definition has been significantly altered. 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 previous laws. Prior art provides the evidentiary baseline for judging whether an invention is novel and nonobvious, and thus entitled to be patented. In particular, the one-year “grace period” has been eliminated for many types of prior art (see subsequent questions for more details). This is a profound 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 of information, both in the U.S. and in other countries, is now available to cite against a patent application 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 significant subject matter-related cases were overruled, such as the 2010 Bilski v. Kappos decision, which affected 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 USPTO receives 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 for challenging such patents at the USPTO. There is still much complexity in determining what exactly is a “business method” patent. 12. Did the AIA affect the availability or desirability of filing a “provisional” patent application? Answer: No. Provisional patent applications (PPAs) are still available under the AIA. The requirements for a useful PPA remain the same. Patent applicants must still file a complete written description of any invention that is to be claimed, although there is no requirement to include any claims in a PPA. PPAs still present significant risks that a patent applicant will not devote sufficient attention and work to providing a complete written description, so that the benefits of a PPA may not be available. 13. What is the impact of the AIA on the “best mode” requirement? 10
- 12. Answer: Under current laws, a patent applicant is required to describe in the patent application the “best mode” for making and practicing the invention. The AIA abolishes the best mode requirement as a defense to patent infringement, but it requires that the best mode still be described in patent applications. Specifically, the AIA amends the laws to eliminate the best mode requirement as “a basis on which any claim of a patent may be canceled or held invalid or otherwise unenforceable.” The overall impact of this seemingly conflicting provision is not entirely clear. 14. Will the USPTO be able to improve its operations and efficiency and speed of processing patent applications? Answer: Probably, yes. The AIA included a provision that allows the USPTO to receive increased 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 it receives to fund its operations, as many experts urged. Congress thus did not completely end fee diversion – (a) the USPTO is appropriated funds to some extent by Congress each year, (b) the USPTO can charge fees at increased rates, (c) collections in excess of the appropriation are collected in a reserve fund, and (d) Congress could – perhaps – allocate additional amounts of the 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, Congress has attempted to make changes to the U.S. patent system so as to make our system consistent with the patent systems of many other countries. This is called patent harmonization. This was primarily to promote a concept that patent applicants would receive the same treatment in the patent systems of all the different countries that were elected for international patenting efforts. It is far from clear that this change provides any benefits to U.S. patent applicants, as the patent systems 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. This grace period was provided to the inventor to provide additional time for the inventor to assess the value of the invention and workability of the technology before requiring significant investment in the patent process. Specifically, this grace period provided the inventor with a one-year time period 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 more limited 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 of the subject invention, so long as those disclosures were made by the inventor, or by someone to 11
- 13. whom the inventor disclosed the invention. Thus, disclosures by an inventor’s competitors or others working on similar inventions could bar the inventor’s ability to obtain a patent, even though 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 various points from the date of the AIA’s enactment (September 16, 2011) until the last provision goes into 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 into effect as soon as the AIA was signed into law. Other provisions such as the new post-grant review 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 other provisions 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 go into 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 against infringement under current law if certain conditions are met, and the AIA expands this defense to include any “process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process.” In order to rely on this defense, the accused infringer must have, “acting in good faith, commercially used the subject matter in the United States, either in connection with an internal commercial use or an actual arm’s length sale or other arm’s length commercial transfer of a useful end result of such commercial use.” Other provisions 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¬grant review” process that provides more grounds and opportunity for a patent to be challenged within a limited time from its issuance. The new post-grant review process is initiated by a petition to the USPTO that must be filed within nine months after the date of patent grant or issuance of a reissue patent. The petition does not need to satisfy the familiar “substantial new question of patentability requirement,” but rather must show that it is “more likely than not that at least 1 of the claims challenged in the petition is unpatentable. There are other aspects of this provision that 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 AIA does expand the window and content available for third party submissions of information prior to issuance. 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 a notice of allowance of the pending application or the later of 1) 6 months after publication of the 12
- 14. patent application or 2) the date of the first rejection during examination. When submitting prior art, the third party must provide a description of the relevance of each document along with a fee. 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, or other invention as “patented” (or providing a patent number) when in fact the product was never patented. Recently, some cases made it easier to sue for false marking offenses, even in circumstances in which a product was initially validly marked, but then the product continued to be marked as patented even after the underlying patent had expired. The AIA has essentially put an end to these (sometimes frivolous and unfounded) lawsuits, by making it more difficult to sue for 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 notice marking requirement. Virtual marks are statements on products or product packaging that direct the reader to a publicly accessible website, where the patent numbers relevant to the product are listed. Parties are exempt from liability for false marking after a patent expires if the product or package uses a virtual mark. 24. Can a company now file a patent application in its own name instead of naming individual 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 new provision should make it easier in some respects for companies to file patent applications on behalf 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 business method patents, but it does not cover “technological” inventions (whatever those might be). This process is similar to the new post-grant review procedures, discussed above. It may not be clear for 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 than 500 employees, or universities, individuals, etc.) are entitled to a 50% reduction in fees. The AIA defines a new category of applicants called “micro entities” that receive a 75% reduction in filing fees, extension fees, maintenance fees, and the like. These micro entities generally include small entities that do not exceed some threshold requirements in terms of number of patent applications filed, gross income, and other factors. 27. Will the AIA speed up the patent examination process? 13
- 15. Answer: Yes, in some limited circumstances. The AIA allows for “prioritized examination” for a certain limited number of applicants that meet certain requirements. To qualify for prioritized examination, the applicant must pay greatly-increased filing fees ($4,800), there are limits on the total number of claims that can be submitted, the application must be complete as of the time of filing (i.e., all declaration and supporting documents must be present at the time of filing), and other 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 opinion of non-infringement once the party became aware of the possible infringement. It is worth noting, however, that although a party cannot be held liable for willful infringement, failure to seek 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 its business from a substantive perspective. A number of new regulations for patent processing and handling will be issued in the upcoming months to implement various AIA provisions. These new regulations will inevitably change some aspects of the patent process. ***** For more information regarding any of the above-listed questions, or any others relating to patents or intellectual property, please contact one of the following attorneys in the MMM IP Group: John R. Harris - 404-504-7720 - jharris@mmmlaw.com Tim T. Xia – 404-495-3678 - txia@mmmlaw.com Chris Raimund – 202-216-4816 - craimund@mmmlaw.com Daniel Sineway - 404-364-7412 - dsineway@mmmlaw.com 14
- 16. MEMORANDUM FROM: Morris, Manning & Martin, LLP DATE: December, 2011 RE: Georgia’s New Restrictive Covenants Act On May 11, 2011, Georgia enacted House Bill 30 (the “New Act”), which governs the enforcement of restrictive covenants against “employees” entered into on or after May 11, 2011.1 The New Act is a significant departure from the existing body of case 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 of two years or less in duration are reasonable in time, and that restraints more than two years in time are unreasonable); liberalizes prior rules (e.g., non-disclosure provisions no longer require a time limitation; the non-solicitation of customers provision need not expressly define the types of products or services considered to be competitive in order for the non-solicit of customers to be enforceable); and, most significantly, permits courts to “blue-pencil” (i.e., modify, or partially enforce) covenants that are otherwise overbroad. Under prior Georgia law, these safeguards did not exist or, at best, were unclear. While the New Act is more employer-friendly, employers should nonetheless exercise caution for four reasons: (1) the New Act applies only to restrictive covenants entered into on or after May 11, 2011; (2) the New Act permits, but does not require, Georgia courts to blue-pencil overbroad restrictive covenants; (3) the New Act applies only to “employees” (however, that term is broadly defined 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 not apply 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. §§ 13-8-50 et seq. See Murphree v. Yancey Brothers Company, 2011 WL 4375216, *4 fn.10 (Ga. App. Sept. 21, 2011). 15
- 17. distributors, lessees, licensees, parties to a partnership agreement, sales agents, and brokers)2; and (4) few courts have yet to apply the New Act, and, therefore, there is a certain degree 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 signed restrictive covenants after the New Act went into effect, the court held the covenants at issue overbroad, but that the New Act permitted the court to “blue pencil any overbroad or otherwise offensive passages.” Specifically, the court held that it “may” remedy the broad prohibition against contacting “any of the Employer’s clients” by “blue penciling that provision to only apply to customers that the Defendant contacted and assisted with insurance.” On its face, the Zander decision appears to be a boon for employers because it takes 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 the merits of the case. Therefore, the court did not actually blue pencil the covenants, instead holding that a court “may” do so (and, if so, it is unclear to what extent a court actually would modify the covenants or the facts and circumstances that it would deem important in that context). In addition, the New Act explicitly states that a court may “modify” an overbroad restrictive covenant, which is defined as "severing or removing" a part of a restrictive covenant that would otherwise make the covenant unenforceable. However, the New Act is silent whether a court may rewrite or otherwise add to a covenant, which the Zander court 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 aggressive in 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 covenants accordingly. In addition, employers may want to consider strategies to implement new restrictive covenants agreements with their workforce to provide enhanced protection of their business interests under the New Act. ------------------------------- 2 Under pre-existing Georgia law, an employer could enter into a non-compete agreement with any type of employee (e.g., janitor, manager, salesman, etc.). However, under the New Act, a non-compete may only be enforced against an “employee” who: 1) customarily and regularly solicits customers or prospective customers; 2) customarily and regularly engages in making sales; 3) has a primary duty of managing a company, or one of its departments or subdivisions, directs the work of two or more employees and has the authority 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. Note: On November 2, 2010, Georgia voters approved an amendment to the constitution authorizing a new restrictive covenants law (the “Prior Act”) substantially similar to the New Act; however, due to a technical flaw, there is a substantial question whether the Prior Act is valid, and this question has not yet been litigated. Because of the uncertainty surrounding the Prior Act, on May 11, 2011, the New Act was signed into law. Accordingly, restrictive covenant agreements entered into between November 3, 2010 and May 10, 2011 may not be subject to the Prior Act and, therefore, the enforceability of broadly-drafted covenants entered into between an employer and an employee during this time period is subject to a substantial amount of risk. 17
- 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, 2011 SUMMARY: A recent decision by the Georgia Court of Appeals addressed the issue of an employer’s rights when a former employee, upon leaving, uses the company’s proprietary materials to establish a new competing business. In the case of Trotman v. Velociteach Project Management LLC, the trial court awarded project management training company, Velociteach, $147,750 from former employee Floyd Trotman and his new company, CertiFi, based on breach of contract, fraud, tortious interference with a business relationship, conversion, and misappropriation of trade secrets. The court also ordered Trotman to return all VelociTeach materials and barred him from using Velociteach’s customer lists. On appeal, the Georgia Court of Appeals affirmed the trial court’s decision. CASE: Following a jury trial, Floyd Trotman III (in Case No. A11A0402) and CertiFi Project Management Certification Training, LLC (“CertiFi”) (in Case No. A11A0403) appeal from a judgment and other orders entered against them in a dispute arising from Trotman's continued use of training materials he obtained as a former instructor for Velociteach Project Management, LLC (“Velociteach”). We have consolidated the cases for review, and for the reasons that follow, we affirm in part, vacate the award of attorney fees, and remand.1 Viewed in favor of the jury's verdict,2 the record shows that from 2003 to 2006, Trotman worked as an instructor for Velociteach, a company founded by Andy Crowe, which offered project management training courses to students seeking a Project Management Professional (“PMP”) credential. When Trotman's relationship with the company faltered due 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 confidentiality agreement in February 2006. The confidentiality agreement required Trotman to return or delete all course materials and electronic presentation slides, and it prohibited him from 18
- 20. soliciting Velocitech customers for a period of three years. In an exit meeting, Trotman assured Velociteach staff that he had returned or deleted any Velociteach teaching materials.3 Soon thereafter, Trotman asked Velociteach if he could buy instruction kits to teach PMP classes on his own, and Velociteach declined. In early 2006, Trotman formed his own company, CertiFi, and began teaching training courses on his own. In early 2007, after seeing Trotman in an airport, Crowe decided to search for information about Trotman on the Internet. Crowe discovered a CertiFi website listing Velociteach customers and containing marketing copy that Crowe had written for Velociteach. Crowe then enrolled a student in one of Trotman's classes to observe the course content and materials. Based on the similarities between Trotman's course materials and those he had used previously at Velociteach, Velociteach demanded that CertiFi cease operating in violation of Trotman's confidentiality agreement. Trotman refused, and Velociteach sued him and CertiFi, alleging claims for breach of contract, Uniform Deceptive Trade Practices Act4 (“UDTPA”) violations, fraud, tortious interference with a business relationship, conversion, and misappropriation of trade secrets. After discovery and the denial of the parties' cross-motions for summary judgment, the action was eventually tried by a jury, which awarded Velociteach $13,750 (from Trotman) and $134,000 (from CertiFi). The trial court also awarded Velociteach $30,000 in attorney fees and entered a permanent injunction requiring Trotman to, inter alia, return all Velociteach materials and abstain from using Velociteach's customer lists. Trotman appeals in A11A0402, and CertiFi appeals in A11A0403.5 Case No. A11A0402 1. During the litigation, Velociteach obtained an interlocutory injunction that prohibited Trotman and CertiFi from using any instructional slides contained in a certain exhibit. Based on Trotman's subsequent reformulation and use of a prohibited slide, the trial court found that Trotman had violated the injunction and held him in contempt, ordering Trotman 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 court's interlocutory injunction, but he does 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. As Trotman points to no other remedy affecting him or CertiFi resulting from the contempt finding itself, this enumeration presents nothing for review.6 2. Trotman argues that the evidence and verdict did not authorize the trial court to issue a permanent 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. The action of the trial court should be sustained on review where such discretion has not been abused.”7 19
- 21. (a) Based on the jury's verdict that Trotman violated the UDTPA, the trial court granted an injunction against Trotman that (1) prohibited him from using a specified trial exhibit containing Velociteach course materials, (2) required him to return all Velociteach property and course materials, (3) forbade him from using Velociteach's 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 the UDTPA, the only basis for the finding would be his failure to maintain his PMP certification. And because he later remedied the lapse in his certification, he argues that this 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 he personally violated the UDTPA, regardless of whether the jury attributed his behavior to CertiFi. 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, or association with or certification by another; ․ (7) Represents that goods or services are of a particular standard, quality, or grade or that goods 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 of misunderstanding. (b) In order to prevail in an action under this part, a complainant need not prove competition between the parties or actual confusion or misunderstanding. 8 At trial, there was evidence that Trotman created a misleading advertisement stating that CertiFi had developed course content over a four-year period, which would have referred to the time Trotman was with Velociteach, not CertiFi. There was also evidence that Trotman solicited former Velociteach students on behalf of CertiFi, referencing the Velociteach course and falsely holding himself out as PMP certified. Velociteach also introduced evidence that Trotman published a list of Velociteach customers and falsely represented them to be CertiFi customers. Finally, there was evidence that Trotman used nearly duplicate versions of certain Velociteach course materials without its consent. This evidence supported the jury's finding that he violated the UDTPA, and the trial court did not abuse its discretion by awarding equitable relief to Velociteach against Trotman based on the jury's finding.9 20
- 22. (b) Trotman also argues that an injunction against future conduct is unwarranted because his confidentiality agreement has expired, and his wrongful conduct took place in the past and is not likely to recur. This argument is misplaced. There was evidence supporting a finding that Trotman's conduct violated the UDTPA regardless of his confidentiality agreement, and the nature of the wrongful behavior was not such that it could not be repeated, i.e., by re-creating confusing or misleading marketing materials or re-using Velociteach's proprietary course materials.10 Nor was the injunction's breadth an abuse of the trial court's discretion. The injunction essentially pertained to the use of Velociteach course materials and customer list, and it did not prohibit Trotman from engaging in other PMP teaching activity. Nor was it an abuse of discretion to allow Velociteach five years to monitor Trotman's courses, because the harm to Velociteach would not diminish over time if Trotman unfairly competed with it. Accordingly, this enumeration provides no basis for reversal.11 3. Trotman next challenges the trial court's failure to give his requested jury charge on the UDTPA claim. “In order for a refusal to charge to be error, the request[ ] must be entirely correct and accurate, and adjusted to the pleadings, law, and evidence, and not otherwise covered in the general charge.”12 Trotman's requested charge was as follows: Although a finding of actual confusion [in the marketplace] is not necessary to prove a likelihood 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 of actual confusion raises a presumption against a likelihood of confusion; however, the presumption may be rebutted by evidence of other factors tending to support a finding of a likelihood of confusion. As support, Trotman relies on Ackerman Security Systems, Inc. v. Design Security Systems, Inc.,13 which included the following language: “In the case at hand, the trial court ․ incorrectly applied the likelihood of confusion test by requiring a showing of actual confusion․ Although evidence of actual confusion is obviously the best evidence of a likelihood of confusion, it is not necessary to a finding of likelihood of confusion.”14 The emphasized portion of this statement was dicta and not a statement of settled law;15 thus the requested charge was not entirely correct and accurate. Further, the trial court correctly charged the jury as to the settled law stated in Ackerman, i.e., that actual confusion in the marketplace need not be shown. We discern no reversible error here.16 Case No. A11A0403 4. CertiFi contends that the evidence was insufficient to support the jury's verdict on the conversion claim, which was predicated on Trotman's use of Velociteach training materials. Specifically, CertiFi argues that because Trotman's confidentiality agreement required him to return or destroy any training materials, Velociteach had abandoned them, which would preclude a conversion claim due to an absence of Velociteach's right of possession.17 The confidentiality agreement does not evince an intent to abandon the property, however; instead, it shows Velociteach's attempt to remain in exclusive control and possession of its confidential information. This is wholly consistent with the 21
- 23. conversion claim because it shows that Trotman's retention and use of the materials was unauthorized: “The very essence of conversion is that the [defendant's] act of dominion is wrongfully asserted.”18 CertiFi 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 by the evidence that the methodology and teaching concepts reflected in the Velociteach course materials were originated by and exclusive to Velociteach. Accordingly, this enumeration presents no basis for reversal. 5. CertiFi also challenges the sufficiency of the evidence as to the value element of Velociteach's unjust enrichment claim. CertiFi relies on Phoenix Airline Svcs. v. Metro Airlines,20 which is physical precedent only21 and states that if “an award of monetary damages is made for unjust enrichment, it must, of course, be supported by evidence from which it can be determined to a reasonable certainty that the defendants in fact realized such a gain.”22 Here, there was evidence that Trotman had unsuccessfully requested 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 cost for each kit he used to teach CertiFi students. CertiFi does not dispute that Trotman taught more than 300 students on its behalf. This evidence authorized the jury's damages award.23 6. CertiFi also challenges the trial court's award of $30,000 in attorney fees under OCGA § 9–15–14(b) based on its finding that the defendants unnecessarily expanded the proceeding. That Code section authorizes an attorney fee award based on conduct “including, but not limited to, abuses of discovery procedures․”24 Here, the trial court cited a series of orders granting Velociteach's motion to compel, prohibiting the use of certain teaching slides, granting a motion for contempt, and ordering production of documents—all of which were the product of Trotman's and CertiFi's resistance to discovery and failure to cooperate with court orders. Based on this behavior, the trial court did not abuse its discretion by awarding attorney fees under OCGA § 9–14–15(b),25 but the trial court's order fails to show how it apportioned its award to fees generated based on sanctionable behavior. “As we have held in cases involving OCGA § 9–15–14(a) or (b), the trial court must limit the fees award to those fees incurred because of the sanctionable conduct. [Thus,] ‘[l]ump sum’ or unapportioned attorney fees awards are not permitted in Georgia.”26 Velociteach's counsel submitted an affidavit with billing statements totaling $95,974.66. The trial court's award of $30,000 may have been reasonable, but the trial court's order, “on its face ․ fails to show the complex decision making process necessarily involved in reaching 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 and remand for appropriate fact finding with respect to the amount of attorney fees to be assessed.28 22
- 24. 7. (a) CertiFi contends that the trial court erred by failing to give its requested jury charge on waiver with respect to the conversion claim. However, in light of our holding in Division 4, that the confidentiality agreement did not evince Velociteach's abandonment or waiver of its right to exclusively possess its course materials, this charge was not authorized by the evidence.29 (b) CertiFi also asserts as error the trial court's failure to give its requested jury charge on apportionment of damages under OCGA § 51–12–33, in light of evidence that Trotman had another Velociteach employee help him make revisions to the Velociteach teaching materials 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 court does 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 At trial, Trotman explained that he was personally responsible for the content of the revisions to the teaching materials and he did not assign any blame to his fellow employee or the marketing firm he hired. Further, the evidence is undisputed that he alone was responsible for using the materials for teaching. Based on the record before us, we discern no reversible error in the trial court's failure to give the requested charge.31 8. CertiFi challenges the trial court's exclusion of certain testimony that Crowe, the founder of Velociteach, was motivated by racial bias when he terminated Trotman. Specifically, CertiFi proffered testimony from a Velociteach employee who heard Crowe use racially derogatory language in reference to Trotman.32 The trial court sustained Velociteach's objection to the testimony on relevance grounds. The decision to admit or exclude evidence is committed to the sound discretion of the trial court and will not be disturbed on appeal absent a clear abuse of discretion. When an issue is raised whether the probative value of evidence is outweighed by its tendency to unduly arouse the jury's emotions of prejudice, hostility, or sympathy, a trial court's decision regarding admissibility is a matter of discretion. Further, a trial court may exclude relevant evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading of the jury.33 Here, the issues at trial centered on the similarity between the teaching material used by Trotman/CertiFi to that created by Crowe/Velociteach and Trotman's authority to use them after his termination. The proffered witness stated that any derogatory statements made by Crowe were not in connection with Crowe's termination of Trotman, who had received favorable evaluations prior to the events leading up to his termination, i.e., the lapse in Trotman's PMP credentials and his misuse of the company credit card. Based on the record before us and the inflamatory nature of the proffered evidence, we discern no clear abuse of the trial court's discretion.34 9. Finally, CertiFi attempts to incorporate by reference to its brief in the companion case an argument challenging the sufficiency of the evidence to show that it tortiously interfered with Velociteach's business relationships or contracts. This enumeration was not otherwise supported by argument or citation to authority.35 Nevertheless, we note that 23
- 25. during his tenure at Velociteach, Trotman had taught classes to students from a company called Axiom, including one class shortly before his termination. Shortly after his termination, Trotman solicited Axiom on behalf of CertiFi based on his prior contact with them, and Axiom employed CertiFi and declined to employ Velociteach. Crowe, Velociteach's founder testified as to the loss of Axiom as a paying client. Thus, this enumeration is without merit.36 10. CertiFi and Trotman's remaining enumerations are moot. 24
- 26. A Dispute Over Who Owns a Twitter Account Goes to Court (NEW YORK TIMES) By JOHN BIGGS Published: December 25, 2011 How much is a tweet worth? And how much does a Twitter follower cost? Enlarge This Image In base economic terms, the value of individual Twitter updates seems to be negligible; after all, what is a Twitter post but a few bits of data sent caroming through the Internet? But in a world where social media’s influence can mean the difference between a lucrative sale and another fruitless cold call, social media accounts at companies have taken on added significance. The question is: Can a company cash in on, and claim ownership of, an employee’s social media account, and if so, what does that mean for workers who are increasingly 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 a popular mobile phone site, Phonedog.com, after nearly four years. The site has two parts — an e-commerce wing, which sells phones, and a blog. While at the company, Mr. Kravitz, 38, began writing on Twitter under the name Phonedog_Noah, and over time, had amassed 17,000 followers. When he left, he said, PhoneDog told him he could keep his Twitter account in exchange for posting occasionally. 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 new handle. But eight months after Mr. Kravitz left the company, PhoneDog sued, saying the Twitter list was a customer list, and seeking damages of $2.50 a month per follower for eight months, for a total of $340,000. 25
- 27. PhoneDog Media declined to comment for this article except for this statement: “The costs and resources invested by PhoneDog Media into growing its followers, fans and general brand awareness through social media are substantial and are considered property of PhoneDog Media L.L.C. We intend to aggressively protect our customer lists and confidential information, intellectual property, trademark and brands.” Mr. Kravitz said the lawsuit, filed in the United States District Court in the Northern District of California, was in retaliation for his claim to 15 percent of the site’s gross advertising revenue because of his position as a vested partner, as well as back pay related to his position as a video reviewer and blogger for the site. The lawsuit, though, could have broader ramifications than its effect on Mr. Kravitz and the company. “This will establish precedent in the online world, as it relates to ownership of social media accounts,” said Henry J. Cittone, a lawyer in New York who litigates intellectual property disputes. “We’ve actually been waiting to see such a case as many 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 might set on the worth of one Twitter follower to a media company, saying the price set could 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 or prospects, then the account was opened on behalf of PhoneDog, not Mr. Kravitz. An added complexity is that PhoneDog contends Mr. Kravitz was just a contractor in the related 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 representatives and customer service employees to interact with fans and irate customers. JetBlue, for example, often answers customer queries via Twitter, although its official policy is to not respond to “formal complaints” on Twitter. 26
- 28. Other issues may arise when companies hire popular Twitter users partly because of their social media presence. For example, Samsung Electronics hired the outspoken blogger Philip Berne to review phones for the company internally. Mr. Berne uses his personal Twitter account but often posts explicitly about Samsung products and his opinions on the phones he has tested. He cleared his Twitter account 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 a Samsung representative, and I should make it clear that any opinions are my own and not those of my employer,” Mr. Berne said. In general, social media experts advise companies to tread with caution when it comes to account ownership. Sree Sreenivasan, a professor at the Columbia Journalism School and the author of Sree’s Social Media Guide, said smart companies let social media blossom where it may. “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 this will make it less attractive to recruit the next round of people.” He said that many industries had policies that required sales staff to leave their Rolodexes behind, but that these policies were as relevant to social media as Rolodexes are to the modern office. After all, social media accounts are, almost by definition, 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 to overestimate the value of an account to an organization and underestimate what it means 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’m sitting I held up my end of the bargain.” 27
- 29. 28
- 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 others A BILL TO BE ENTITLED AN ACT 1 To amend Chapter 7 of Title 50 of the Official Code of Georgia Annotated, relating to the 2 Department of Economic Development, so as to create the Georgia Capital Acceleration 3 Authority; so as to provide for legislative findings; to provide for definitions; to provide for 4 a program administrator; to provide for the issuance of premium tax credits to insurance 5 companies or holding companies that purchase such credits to offset liability for state 6 insurance premium taxes; to provide for reports; to provide for related matters; to provide for 7 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 the Department 11 of Economic Development, is amended by adding a new article, to read as follows: 12 "ARTICLE 8 13 50-7-90. 14 The General Assembly declares that its purpose in enacting this legislation is to increase 15 the amount of private investment capital available in this state for Georgia based business 16 enterprises in the seed, early, or growth stages of business development and requiring 17 funding, as well as established Georgia based business enterprises developing new methods 18 or technologies, including the promotion of research and development purposes, thereby 29
- 31. 19 increasing employment, creating additional wealth, and otherwise benefiting the economic 20 welfare of the people of this state. Accordingly, it is the intention of the General Assembly 21 that the Georgia Capital Acceleration Authority make investments in support of Georgia 22 based business enterprises in accordance with the investment policy authorized and 23 required under this article and focus its investment policy principally on venture capital 24 funds and private equity organizations investing in Georgia based business enterprises. 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 holds power 29 to vote any outstanding voting securities or other voting ownership interests of a 30 venture firm or an insurance company; or 31 (B) A person whose outstanding voting securities or other voting ownership interests 32 are directly or indirectly beneficially owned, controlled, or held with power to vote by 33 a venture firm or an insurance company. 34 The term does not include an insurance company that becomes a purchaser in accordance 35 with an allocation of investment tax credits under this article solely by reason of the 36 allocation. 37 (2) 'Authority' means the Georgia Capital Acceleration Authority created under Code 38 Section 50-7-92. 39 (3) 'Contributed capital' means the amount of money contributed to the Georgia Capital 40 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 by the 43 Georgia Capital Acceleration Fund into individual early stage venture capital funds or 30
- 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 of the 47 designated capital; 48 (B) A fund whose principals have at least five years of experience in the venture 49 capital, angel capital, or private equity sector by investing primarily in Georgia 50 domiciled companies or a fund whose managers have been based, as defined by having 51 a principal office, in the State of Georgia for at least five years prior to the effective 52 date of this article; 53 (C) At the discretion of the program administrator and the authority, one or more early 54 stage venture capital funds that are first-time Georgia based funds, so long as the fund 55 managers have at least five years of experience in venture capital or angel capital 56 investing in Georgia based business enterprises; and 57 (D) A fund of which the primary investment strategy must be the achievement of 58 transformational economic development outcomes through focused investments of 59 capital in seed or early stage businesses with high growth potential. The fund principals 60 must have demonstrated the ability to lead investment rounds, advise and mentor 61 entrepreneurs, and facilitate follow-on investments. A minimum of 10 percent of the 62 committed capital of the fund must be committed by the institutional investors, fund 63 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 in Georgia that 66 has at least two principals employed to direct the investment of the designated capital: 67 (B) A fund whose principals have at least five years of experience in the venture 68 capital, angel capital, or private equity sector by investing primarily in Georgia 69 domiciled companies or a fund whose principals have been based, as defined by having 31
- 33. 70 a principal office, in the State of Georgia for at least five years prior to the effective 71 date of this article; and 72 (C) A fund which has as its primary investment strategy the achievement of 73 transformational economic development outcomes through focused investments of 74 capital in growth stage businesses with high return potential. The fund principals must 75 have demonstrated the ability to lead investment rounds, advise and mentor 76 entrepreneurs, and facilitate follow-on investments. A minimum of 50 percent of the 77 committed capital of the fund must be committed by the institutional investors, fund 78 principals, or other accredited investors. 79 (8) 'Insurance premium tax credit' means a credit against insurance premium tax liability 80 offered to a purchaser under Code Section 50-7-98. 81 (9) 'Insurance premium tax liability' means any liability incurred under Code Sections 82 33-3-26 and 33-8-4; provided, however, that any insurance premium tax liability incurred 83 under the provisions of Code Section 47-7-61, relating to fire, lightning, or extended 84 coverage, inland marine or allied lines, or windstorm coverage, shall not be offset by any 85 insurance premium tax credits issued under this article. 86 (10) 'Program administrator' means a state appointed investment advisory firm consisting 87 of experienced investment professionals that will actively pursue investment 88 opportunities for the State of Georgia. The investment advisory firm will evaluate and 89 select Georgia based venture capital funds, in conjunction with the Georgia Capital 90 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; and 95 (iii) Pays contributed capital to purchase an allocation of premium tax credits under 96 this article; or 97 (B) A holding company that: 98 (i) Has at least one insurance company subsidiary authorized to do business in 32
- 34. 99 Georgia; and 100 (ii) Pays contributed capital on behalf of one or more of these subsidiaries. 101 (12) 'Qualified distribution' means any distribution or payment by the Georgia Capital 102 Acceleration Fund in connection with any of the following: 103 (A) Costs and expenses of forming, syndicating, and organizing the Georgia Capital 104 Acceleration Fund, including fees paid for professional services, and the costs of 105 financing and insuring the obligations of the Georgia Capital Acceleration Fund, 106 provided such payments are not made to a participating investor; 107 (B) An annual management fee in accordance with a fund's partnership agreement and 108 consistent with the fund's other private investors, to offset the costs and expenses of 109 managing and operating the Georgia Capital Acceleration Fund; or 110 (C) Reasonable and necessary fees in accordance with industry custom for ongoing 111 professional services, including, but not limited to, legal and accounting services related 112 to the operation of the Georgia Capital Acceleration Fund, but not including any 113 lobbying or governmental relations. 114 (13) 'Qualified early stage' or 'seed' business means a business that, at the time of the 115 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 and intends to 118 maintain its principal business operations in the state after receiving an investment from 119 the venture capital firm. In order to discourage the business from relocating outside 120 Georgia within three years from the date of an initial investment, the investment in the 121 business shall be subject to redemption by the venture capital firm within one year from 122 the time the business relocates its principal business operations outside the state, unless 123 the business maintains a significant presence in Georgia as determined by relative 33
- 35. 124 number of employees or relative assets remaining in Georgia following the relocation; 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 aggregate cash 128 proceeds from the issuance of its equity or debt investments, not including commercial 129 loans from chartered banks or savings and loan institutions; and 130 (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 for which an 134 admission is charged; 135 (iv) The business of insurance, banking, lending, financial, brokerage, or investment 136 activities; 137 (v) Natural resource extraction, including but not limited to oil, gas, or biomass; or 138 (vi) The provision of professional services by accountants, attorneys, or physicians. 139 A business classified as a qualified early stage business at the time of the first qualified 140 investment in the business will remain classified as a qualified early stage business and 141 may receive continuing qualified investments from venture capital firms participating in 142 the Georgia Capital Acceleration Fund. Continuing investments will constitute qualified 143 investments even though the business may not meet the definition of a qualified early 144 stage business at the time of such continuing investments. 145 (14) 'Qualified growth stage business' means a business that, at the time of the first 146 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 limited 149 partnership located in this state; 150 (C) Has its principal business operations located in the State of Georgia and intends to 151 maintain its principal business operations in the state after receiving an investment from 34
- 36. 152 the venture capital firm. In order to discourage the business from relocating outside 153 Georgia within three years from the date of initial investment, the investment in the 154 business shall be subject to redemption by the venture capital firm within one year from 155 the time the business relocates its principal business operations outside the state, unless 156 the business maintains a significant presence in Georgia as determined by relative 157 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; and 160 (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 for which an 164 admission is charged; 165 (iv) The business of insurance, banking, lending, financial, brokerage, or investment 166 activities; 167 (v) Natural resource extraction, including but not limited to oil, gas, or biomass; or 168 (vi) The provision of professional services by accountants, attorneys, or physicians. 169 A business classified as a qualified growth stage business at the time of the first qualified 170 investment in the business will remain classified as a qualified growth stage business and 171 may receive continuing qualified investments from venture capital funds participating in 172 the Georgia Capital Acceleration Fund. Continuing investments will constitute qualified 173 investments even though the business may not meet the definition of a qualified growth 174 stage business at the time of such continuing investments. 175 (15) 'Qualified investment' means the investment of money by the Georgia Capital 176 Acceleration Fund in each early or growth stage venture capital fund selected by the 177 program administrator. 35
- 37. 178 50-7-92. 179 (a) There is hereby created the Georgia Capital Acceleration Authority, which shall 180 exercise the powers and perform the duties prescribed by this article. The exercise by the 181 authority of its powers and duties is hereby declared to be an essential state governmental 182 function. The authority is subject to all laws generally applicable to state agencies and 183 public officials, to the extent those laws do not conflict with the provisions of this article. 184 (b) The authority shall consist of three members appointed by the Governor, one member 185 appointed by the Lieutenant Governor, and one member appointed by the Speaker of the 186 House of Representatives. Each appointed member shall be a resident of Georgia and shall 187 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; or 191 (4) Entrepreneurship. 192 No member of the authority shall be affiliated in any way with any venture capital fund that 193 is selected to perform services for the authority. 194 (c) The commissioner of economic development, revenue commissioner, and Insurance 195 Commissioner or their designees shall serve as nonvoting members of the authority. 196 (d) Initial appointees to the authority shall serve staggered terms, with all of the initial 197 terms beginning on January 1, 2013. The terms of one member appointed by the Governor 198 and the members appointed by the Lieutenant Governor and the Speaker of the House of 199 Representatives shall expire on December 31, 2015. The terms of the other two initial 200 appointments by the Governor shall expire on December 31, 2017. Thereafter, terms of 201 office for all appointees shall be for four years, with each term ending on the same day of 36
- 38. 202 the same month as did the term that it succeeds. A vacancy on the authority shall be filled 203 in the same manner as the original appointment, except that a person appointed to fill a 204 vacancy shall be appointed to the remainder of the unexpired term. Any appointed member 205 of the authority is eligible for reappointment. 206 (e) A member of the authority may be removed by the member's appointing official for 207 misfeasance, willful neglect of duty, or other cause, after notice and a public hearing, 208 unless the notice and hearing are waived in writing by the member. 209 (f) Members of the authority shall serve without compensation, The Governor shall 210 designate a member of the authority to serve as chairperson. A majority of the voting 211 members of the authority constitutes a quorum, and the affirmative vote of a majority of 212 the voting members present is necessary for any action taken by the authority. A vacancy 213 in the membership of the authority does not impair the right of a quorum to exercise all 214 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 land from the 218 state government, and to hold, lease, and dispose of real and personal property of every 219 kind and character for its corporate purpose and to enter into any contracts, leases, or 220 other charges for the use of property or services of the authority and collect and use the 221 same as necessary to operate the authority; and to accomplish any of the purposes of this 222 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 and in such 224 manner as it may deem proper, real property, or rights or easements therein, or franchises 225 necessary or convenient for its corporate purpose, and to use the same so long as its 37
- 39. 226 corporate existence shall continue, and to lease or make contracts with respect to the use 227 of such property, or dispose of the same in any manner it deems to be to the best 228 advantage of the authority; 229 (4) To appoint, select, and employ officers, agents, and employees, including real estate, 230 environmental, engineering, architectural, and construction experts, fiscal agents, and 231 attorneys, and to fix their respective compensations; 232 (5) To make contracts and leases and to execute all instruments necessary or convenient. 233 Any and all persons, firms, and corporations and any and all political subdivisions, 234 departments, institutions, or agencies of the state and federal government are authorized 235 to enter into contracts, leases, or agreements with the authority upon such terms and for 236 such purposes as they deem advisable; and, without limiting the generality of the 237 foregoing, authority is specifically granted to municipal corporations, counties, political 238 subdivisions, and to the authority relative to entering into contracts, lease agreements, or 239 other undertakings authorized between the authority and private corporations, both inside 240 and outside this state, and between the authority and public bodies, including counties 241 and cities outside this state and the federal government; 242 (6) To accept loans and grants of money or materials or property of any kind from the 243 United States of America or any agency or instrumentality thereof upon such terms and 244 conditions as the United States of America or such agency or instrumentality may 245 require; 246 (7) To accept loans and grants of money or materials or property of any kind from the 247 State of Georgia or any agency or instrumentality or political subdivision thereof upon 248 such terms and conditions as the State of Georgia or such agency or instrumentality or 249 political subdivision may require; 38
- 40. 250 (8) To exercise any power usually possessed by private corporations performing similar 251 functions, provided that no such power is in conflict with the Constitution or general laws 252 of this state; and 253 (9) To do all things necessary or convenient to carry out the powers expressly given in 254 this article. 255 (h) The department shall provide the authority with office space and such technical 256 assistance as the authority requires and the authority shall be attached to the department for 257 administrative purposes. The department shall also consult with the authority in connection 258 with the administration of the Georgia Capital Acceleration Program created under this 259 article. 260 50-7-93. 261 The authority's primary responsibilities include: 262 (1) Establishing an investment policy for the selection of a program administrator; 263 (2) Selecting a program administrator to administer the provisions of this article; 264 (3) Giving final approval to allocations of designated capital to the venture capital funds 265 selected by the program administrator; 266 (4) Executing and overseeing the contract of the program administrator in order to assure 267 compliance with this article; and 268 (5) Establishing a policy with respect to use of capital and profits returned to the state 269 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 a transparent open 272 bid process and will be responsible for administering the Georgia Capital Acceleration 273 Fund and for making all venture capital fund selections in accordance with the investment 274 policies developed by the authority or contained in this article. 39
- 41. 275 (b) The program administrator will be responsible for selecting a group of Georgia based 276 venture capital funds in two categories, early or seed stage venture capital funds and 277 growth stage venture capital funds. 278 (c) The early stage venture capital funds shall invest primarily in early or seed stage 279 businesses and shall be selected using a transparent open bid process pursuant to guidelines 280 developed by the authority. The program administrator shall ensure that a diverse 281 cross-section of industry sectors is represented by the selected funds, including technology, 282 health care, life sciences, agribusiness, logistics, energy, and advanced manufacturing. 283 (d) The growth stage venture capital funds shall be selected using a transparent open bid 284 process pursuant to guidelines developed by the authority. The program administrator shall 285 ensure that a diverse cross-section of industry sectors is represented by the selected funds, 286 including technology, health care, life sciences, agribusiness, logistics, energy, and 287 advanced manufacturing. 288 (e) In the selection of the early stage venture capital funds and the growth stage venture 289 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 applicant's reputation in the venture firm industry and the applicant's ability 293 to attract coinvestment capital and syndicate investments in qualified businesses in 294 Georgia; 295 (C) The knowledge, experience, and capabilities of the applicant in subject areas 296 relevant to venture stage businesses in Georgia; and 297 (D) The tenure and turnover history of principals and senior investment professionals 298 of the fund; 299 (2) The fund's investment strategy, including: 300 (A) The applicant's record of performance in investing in early and growth stage 40
- 42. 301 businesses; 302 (B) The applicant's history of attracting coinvestment capital and syndicate 303 investments; 304 (C) The soundness of the applicant's investment strategy and the compatibility of that 305 strategy with business opportunities in Georgia; and 306 (D) The applicant's history of job creation through investment; 307 (3) The fund's commitment to making investments, that to the fullest extent possible: 308 (A) Create employment opportunities in Georgia; 309 (B) Lead to the growth of the Georgia economy and qualified businesses in Georgia; 310 (C) Complement the research and development projects of Georgia academic 311 institutions; and 312 (D) Foster the development of technologies and industries that present opportunities 313 for the growth of qualified businesses in Georgia; and 314 (4) The fund's commitment to Georgia, including: 315 (A) The applicant's presence in Georgia through permanent local offices or affiliation 316 with local investment firms; 317 (B) The local presence of senior investment professionals; 318 (C) The applicant's history of investing in early and growth stage businesses in 319 Georgia; 320 (D) The applicant's ability to identify investment opportunities through working 321 relationships with Georgia research and development institutions and Georgia based 322 businesses; and 323 (E) The applicant's commitment to investing an amount that matches or exceeds the 324 amount of the applicant's designated capital received under this article, in Georgia 325 based qualified early stage businesses and qualified growth stage businesses. 326 (f) A venture capital fund shall file an application with the authority in the form required 327 by the program administrator. The authority shall begin accepting applications on or 328 before September 1, 2012. 329 50-7-95. 41
- 43. 330 (a) The Georgia Capital Acceleration Fund will be capitalized through state insurance 331 premium tax credits. The State of Georgia will sell tax credits to purchasers, pursuant to 332 the provisions of this article, and the tax credits shall be used to offset the purchasers' state 333 insurance premium tax liability. 334 (b) The capital raised through the auction of insurance premium tax credits will be 335 periodically distributed to the venture capital funds selected by the program administrator 336 pursuant to Code Section 50-7-94. 337 (c) Each year the purchasers shall be issued a tax credit certificate by the authority. 338 (d) Purchasers will be able to claim their tax credits pursuant to the provisions of Code 339 Section 50-7-98. 340 50-7-96. 341 (a) The State of Georgia will sell a maximum of $200 million in insurance premium tax 342 credits over a three-year period through an auction process administered by the program 343 administrator pursuant to guidelines developed by the authority. The $200 million in 344 insurance premium tax credits will be auctioned in the first year of the Georgia Capital 345 Acceleration Program, and the purchasers will be obligated to pay the purchase amount to 346 the authority for deposit in the Georgia Capital Acceleration Fund in three equal amounts 347 over the three-year period. 348 (b) The program administrator shall obtain the services of an independent third party to 349 conduct the bidding process to secure purchasers for the capital acceleration program. 350 (c) Using the procedures adopted by the independent third party, each potential purchaser 351 shall make a timely and irrevocable offer, subject only to the authority's issuance to the 352 purchaser of tax credit certificates, to make specified contributions of designated capital 353 to the authority on the dates specified in Code Section 50-7-98. 42
- 44. 354 (d) The offer shall include: 355 (1) The requested amount of tax credits, which may not be less than $5 million; 356 (2) The potential purchaser's specified contribution for each tax credit dollar requested, 357 which may not be less than the greater of: 358 (A) Eighty-five percent of the requested dollar amount of tax credits; or 359 (B) The percentage of the requested dollar amount of tax credits that the program 360 administrator, on the recommendation of the independent third party, determines to be 361 consistent with market conditions as of the offer date; and 362 (3) Any other information the independent third party requires. 363 (e)(1) The deadline for submission of applications for tax credits is February 1, 2013. 364 (2) Each potential purchaser shall receive a written notice from the program 365 administrator not later than May 1, 2013, indicating whether or not it has been approved 366 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 of contributed 369 capital, the authority and each selected venture capital fund that has been allocated 370 designated capital shall enter into a contract under which the allocated amount of 371 designated capital will be committed by the authority to the selected venture capital funds 372 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 capital in the 375 Georgia Capital Acceleration Fund shall be allocated among the early stage venture 376 capital funds, in accordance with the following eligibility and requirements: 377 (A) Each early stage venture capital fund shall be eligible for a minimum $10 million 378 allocation of designated capital and a maximum $15 million allocation to be contributed 379 to the funds over a three-year period coinciding with the sale of the tax credits or in 43
- 45. 380 accordance with the fund's partnership agreement and concurrent with the contributions 381 of the fund's other investors; 382 (B) Each early stage venture capital fund shall be required to obtain other independent 383 investors. A minimum of 10 percent of the committed capital of the early stage venture 384 capital fund must be committed by independent institutional investors, fund principals, 385 or other accredited investors; and 386 (C) Each early stage venture capital fund shall be required to commit, via a side letter 387 or otherwise, to invest in Georgia based qualified early stage businesses and qualified 388 growth stage businesses, an amount that matches or exceeds the amount of the fund's 389 designated capital received under this article; 390 (2) Growth stage venture capital funds: Seventy percent of the total contributed capital 391 in the Georgia Capital Acceleration Fund shall be allocated among the growth stage 392 venture capital funds, in accordance with the following eligibility and requirements: 393 (A) Each growth stage venture capital fund shall be eligible for a minimum $10 million 394 allocation of designated capital over a three-year period coinciding with the sale of the 395 tax credits or in accordance with the fund's partnership agreement and concurrent with 396 the contributions of the fund's other investors; 397 (B) Each growth stage venture capital fund shall be required to obtain other 398 independent investors. A minimum of 50 percent of the committed capital of the growth 399 stage venture capital fund must be committed by independent institutional investors, 400 fund principals, or other accredited investors; and 401 (C) Each growth stage venture capital fund shall be required to commit, via a side letter 402 or otherwise, to invest in Georgia based qualified early stage businesses and qualified 403 growth stage businesses, an amount that matches or exceeds the amount of the fund's 404 designated capital received under this article; and 44
- 46. 405 (3) Program administrator: Up to $25 million of the contributed capital shall be held in 406 reserve by the program administrator for coinvestment in funds as provided pursuant to 407 guidelines developed by the authority. 408 50-7-98. 409 (a) Contributed capital committed by a purchaser shall be paid to the authority in three 410 equal yearly installments due on June 1 of 2013, 2014, and 2015. 411 (b) On receipt of each installment of allotted capital, the authority shall issue to each 412 purchaser a tax credit certificate representing a fully vested credit against state insurance 413 premium tax liability equal to one-third of the total insurance premium tax credits allocated 414 to the purchaser. 415 (c) The tax credit certificate shall state: 416 (1) The total amount of insurance premium tax credits that the purchaser may claim; 417 (2) The amount of capital that the purchaser has contributed in return for the issuance of 418 the tax credit certificate; 419 (3) The dates on which the insurance premium tax credits will be available for use by the 420 purchaser; 421 (4) Any penalties or other remedies for noncompliance; 422 (5) The procedures to be used for transferring the insurance premium tax credits; and 423 (6) Any other requirements the authority, in consultation with the Department of 424 Revenue, considers necessary. 425 (d)(1) A tax credit certificate may not be issued to any purchaser that fails to make a 426 contribution of capital within the time the authority specifies. 427 (2) A purchaser that fails to make a contribution of capital within the time the authority 428 specifies shall be subject to a penalty equal to 10 percent of the amount of contributed 429 capital that remains unpaid, payable to the authority within 30 days after demand by the 430 authority. 45
- 47. 431 (3) The authority, after consultation with the program administrator, may offer to 432 reallocate the defaulted contributed capital amount among the other purchasers, so that 433 the result after reallocation is the same as if the initial allocation had been performed 434 without considering the insurance premium tax credit allocation to the defaulting 435 purchaser. 436 (4) If the reallocation of contributed capital results in the contribution by another 437 purchaser or purchasers of the amount of capital not contributed by the defaulting 438 purchaser, then the authority, in consultation with the program administrator, may waive 439 the penalty provided under this subsection. 440 (5)(A) A purchaser that fails to make a contribution of capital within the time specified 441 may avoid the imposition of the penalty by transferring the allocation of insurance 442 premium tax credits to a new or existing purchaser within 30 days after the due date of 443 the defaulted installment. 444 (B) Any transferee of an allocation of insurance premium tax credits of a defaulting 445 purchaser under this paragraph shall agree to make the required contribution of capital 446 within 30 days after the date of the transfer. 447 50-7-99. 448 (a)(1) Subject to the restriction in paragraph (2) of this subsection, a purchaser may claim 449 the insurance premium tax credits on an insurance premium tax return filed after 450 December 31, 2013, for a taxable year that begins on or after January 1, 2014. 451 (2) In each calendar year from 2014 through 2016, a purchaser may claim up to one-third 452 of the insurance premium tax credits allocated to that purchaser. 453 (b)(1) The credits to be applied against insurance premium tax liability in any one year 454 may not exceed the insurance premium tax liability of the purchaser for that taxable year. 455 (2) Any unused credits against insurance premium tax liability may be: 46
- 48. 456 (A) Carried forward indefinitely until the insurance premium tax credits are used; and 457 (B) Used by the purchaser without restriction during any calendar year after 2016. 458 (3) On 30 days' advance notice to the authority, insurance premium tax credits allocated 459 to a purchaser under this article may be transferred without further restriction to any other 460 entity that: 461 (A) Meets the definition of a purchaser; and 462 (B) Agrees to assume all of the transferor's obligations under this article. 463 (c) A purchaser claiming a credit against insurance premium tax liability earned through 464 an investment under this article is not required to pay any additional tax as a result of 465 claiming the credit. 466 (d) A purchaser is not required to reduce the amount of premium tax included by the 467 purchaser in connection with rate making for any insurance contract written in Georgia 468 because of a reduction in the purchaser's insurance premium tax derived from the credit 469 granted under this article. 470 50-7-100. 471 A purchaser or an affiliate may not directly or indirectly: 472 (1) Manage a venture capital fund that receives any designated capital under this article; 473 (2) Beneficially own, through rights, options, convertible interests, or otherwise, greater 474 than 15 percent of the voting securities or other voting ownership interest of a venture 475 capital fund that receives any allotted capital under this article; or 476 (3) Control the direction of investments for a venture capital fund that receives any 477 designated capital under this article. 478 50-7-101. 479 (a) Not later than December 31 of each year, each venture capital fund shall report to the 480 authority: 481 (1) The amount of designated capital remaining uninvested at the end of the preceding 47
- 49. 482 calendar year; 483 (2) All qualified investments made during the preceding calendar year, including the 484 number of employees of each business at the time the qualified investment was made and 485 as of December 31 of that year; 486 (3) For any qualified investment in which the venture capital fund no longer has a 487 position as of the end of the calendar year, the number of employees of the business as 488 of the date the investment was terminated; and 489 (4) Any other information the authority requires to ascertain the impact of this article on 490 the economy of Georgia. 491 (b) Not later than 180 days after the end of its fiscal year, each venture capital fund shall 492 provide to the authority an audited financial statement that includes the opinion of an 493 independent certified public accountant. 494 (c) Not later than 60 days after the sale or other disposition of a qualified investment, the 495 selling venture capital fund shall provide to the authority a report on the amount of the 496 interest sold or disposed of and the consideration received for the sale or disposition. 497 50-7-102. 498 Designated capital resulting from the qualified investments made under this article shall 499 be retained and used to make additional qualified investments in venture capital funds 500 selected by the program administrator; provided, however, that the Georgia Capital 501 Acceleration Fund shall receive any and all returns representing the principal portion of 502 designated capital and shall receive 80 percent of investment returns in excess of 503 designated capital from each respective venture capital fund with the remaining 20 percent 504 of investment returns in excess of designated capital retained by each respective venture 505 capital fund in accordance with the fund's partnership agreement. 506 50-7-103. 48
- 50. 507 (a)(1) On or before January 1, 2014, and January 1 of each subsequent year, the program 508 administrator, through the authority, shall submit a report on the implementation of this 509 article to the Governor, the Lieutenant Governor, the Speaker of the House of 510 Representatives, and the chairpersons of the Senate Finance Committee and the House 511 Ways and Means Committee. 512 (2) The department shall also publish the report on the department's website in a publicly 513 available format. 514 (3) The report published on the website shall not include any proprietary or confidential 515 information. 516 (b) The report shall include: 517 (1) With respect to each purchaser of insurance premium tax credits: 518 (A) The name of the purchaser of the insurance premium tax credits; 519 (B) The amount of insurance premium tax credits allocated to the purchaser; 520 (C) The amount of designated capital the purchaser contributed for the issuance of the 521 tax credit certificate; and 522 (D) The amount of any insurance premium tax credits that have been transferred under 523 Code Section 50-7-99; 524 (2) With respect to each venture capital fund or private equity organization that has 525 received an allocation of designated capital: 526 (A) The name and address of the venture capital fund or private equity organization; 527 (B) The names of the individuals making qualified investments under this article; 528 (C) The amount of designated capital received during the previous year; 529 (D) The cumulative amount of designated capital received; 530 (E) The amount of designated capital remaining uninvested at the end of the preceding 531 calendar year; 532 (F) The names and locations of qualified businesses receiving designated capital and 533 the amount of each qualified investment; 534 (G) The annual performance of each qualified investment, including the investment's 49
- 51. 535 fair market value as calculated according to generally accepted accounting principles; 536 and 537 (H) The amount of any qualified distribution or nonqualified distribution taken during 538 the prior year, including any management fee; 539 (3) With respect to the Georgia Capital Acceleration Fund: 540 (A) The amount of designated capital received during the previous year; 541 (B) The cumulative amount of designated capital received; 542 (C) The amount of designated capital remaining uninvested at the end of the preceding 543 calendar year; 544 (D) The names and locations of qualified businesses receiving designated capital and 545 the amount of each qualified investment; and 546 (E) The annual performance of each qualified investment, including the investment's 547 fair market value as calculated according to generally accepted accounting principles; 548 and 549 (4) With respect to the qualified businesses in which venture capital funds have invested: 550 (A) The classification of the qualified businesses according to the industrial sector and 551 the size of the business; 552 (B) The total number of jobs created in Georgia by the investment and the average 553 wages paid for the jobs; and 554 (C) The total number of jobs retained in Georgia as a result of the investment and the 555 average wages paid for the jobs." 556 SECTION 2. 557 This Act shall become effective upon its approval by the Governor or upon its becoming law 558 without such approval. 559 SECTION 3. 560 All laws and parts of laws in conflict with this Act are repealed. 50
- 52. In re OPENLANE, Inc. Shareholders Litigation, Cons. C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011). Issue Addressed: Did the majority shareholders and the board of directors in this closely- held company breach their fiduciary duties by approving a merger in which they had sufficient control to provide the statutorily required consent and did not follow customary procedures, such as failing to obtain a fairness opinion and failing to include a “fiduciary- out”? Short answer: No. Brief Overview This action arises out of the proposed merger of OPENLANE, Inc. with a wholly owned subsidiary. Plaintiff brought a class action on behalf of the public shareholders of OPENLANE and moved to preliminarily enjoin the merger. This 46-page decision denied that motion. OPENLANE was in the business of selling leased vehicles that were turned in by lessees. In April 2010, they anticipated a decline in the number of vehicles coming off lease in 2011 and 2012, and signed an engagement agreement with a financial advisor to undertake a market outreach to a limited number of strategic acquirers. In May 2011, OPENLANE entered into a second agreement with its financial advisor which provided for a market outreach to a limited number of strategic acquirers including one that had already expressed an indication of interest. On August 11, 2011, the board unanimously approved the merger and on August 15, 2011 entered into an agreement and plan of merger. The next day OPENLANE received consents from a majority of the preferred and common shareholders sufficient under Delaware law and the charter of OPENLANE to approve the merger agreement. The merger agreement with KAR provided that as a condition to closing, the holders of at least 75% of the outstanding shares of stock shall have executed and delivered written consents approving the merger, although that condition could have been waived by KAR. That condition was, however, satisfied on September 12, 2011. The merger agreement also included a no-solicitation provision and provided that $36 million would be held in escrow for at least 18 months to cover numerous contingencies, including indemnification obligations, and appraisal proceedings by shareholders. Procedural Posture On September 9, 2011, the plaintiff filed the complaint and a motion for a preliminary injunction requesting that the Court enjoin the merger. Plaintiffs’ Arguments Plaintiffs argued that the sales process undertaken by the board was flawed, and in violation of both Revlon and Omnicare.
- 53. The plaintiffs argued that the sales process was flawed because the board only contacted three potential buyers, failed to perform an adequate market check, failed to receive a fairness opinion and relied on scant financial information which led to a transaction that failed to maximize shareholder value. The plaintiffs also argued that the members of the board breached their fiduciary duty by agreeing to improper deal protection devices such as the no-solicitation clause and because the management owned a majority of the shares which made shareholder approval almost certain – - and there was also the absence of a fiduciary-out provision. The complaint also alleged that the board was motivated by improper reasons such as by an offer of employment in the surviving company and the acceleration of stock options. After reciting the familiar standard for preliminary injunctions, see footnote 14, the Court parsed each of the allegations. For example, the Court reviewed the Revlon claims and observed that there is no single path for the board to follow in order to maximize stockholder value but the directors must follow a path of reasonableness which leads to that goal. The Court observed that “if a board fails to employ any traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision, that board must possess an impeccable knowledge of the company’s business for the Court to determine that it acted reasonably.” See footnote 22. The Court described the two-part analysis for the enhanced scrutiny involved in a change of control transaction: (a) a judicial determination regarding the adequacy of the decision making process employed by the directors, including the information that the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing. The Court focused on the gist of the review under the enhanced scrutiny standard in this context as requiring that the board demonstrate that “they were adequately informed and acted reasonably.” Moreover, the Court reiterated the standard in the context of a preliminary injunction which requires a plaintiff to “establish a reasonable likelihood that at trial the members of the board would not be able to show that they had satisfied their fiduciary duties.” (citing Optima Int’l of Miami, Inc. v. WCI Steel, Inc., C.A. No. 3833-VCL, at 130 (Del. Ch. June 27, 2008) (transcript)). The Court explained in great detail why the plaintiff failed to present a compelling argument for injunctive relief and the Court also described in detail the satisfactory efforts that the board followed including the expertise by at least two members of the board who were very active in the industry. Escrow Agreement The Court found that although rare in deals with public companies, and common in deals for private companies, there is no inherent unfairness to shareholders of an escrow agreement, which is often incentive for buyers to pay more. 52
- 54. Defensive Devices Under Delaware Law to Lock up a Merger Defensive devices which lock up a merger require special scrutiny under the two-part test in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). The first part of the Unocal test requires that the board demonstrate that it had reasonable grounds for believing a danger to corporate policy and effectiveness existed which is basically a process-based review. They demonstrate the first part of the Unocal test by demonstrating good faith and reasonable investigation but the process must lead to the finding of a threat. The second part of the Unocal test requires the board to demonstrate that its defensive response was reasonable in relation to the threat posed. This inquiry also involves a two-step analysis. The board must first establish that the merger deal protection device is adopted in response to the threat and was not coercive or preclusive; and then demonstrate that their response was within a range of reasonable responses to the threat perceived. To satisfy this burden the plaintiff must establish a reasonable likelihood that at trial the members of the board would not be able to show that they had reasonable grounds for believing a danger to corporate policy and effectiveness existed and that the response they adopted to combat the threat was reasonable in relation to the threat posed. In a change of control transaction where a majority of the board has no interest in the surviving entity, the board does not have the entrenchment goal which the Supreme Court was worried may have motivated the directors in Unocal. The Court explained those situations that the Supreme Court in Unocal regarded as either coercive or preclusive. The Court also reviewed the Delaware Supreme Court decision in Omnicare in which the Supreme Court determined that shareholder voting agreements negotiated as part of a merger agreement, which guaranteed shareholder approval of the merger if put to a vote, coupled with the merger agreement that both lacked the fiduciary-out, and contained a Section 251(c) provision requiring the board to submit the merger to a shareholder vote, constituted a coercive and preclusive defensive device. See Omnicare, 818 A.2d at 935. The Court distinguished the Omnicare decision because in that case the merger was a fait accompli. Instead, the merger before the Court in the instant case was not a fait accompli, in part because there was no evidence of a stockholders agreement to lock up statutory approval of the merger. Rather, the merger was approved through the solicitation of shareholder consents under 8 Del. C. Section 228. See footnote 48. 53
- 55. Shareholder Approval Under the DGCL, a majority of a corporation’s outstanding stock must support a merger based on Section 251(c) and stockholders are allowed to demonstrate their approval through written consents under Section 228(a). See Optima, C.A. No. 3833-VCL at 127 (noting that nothing in the DGCL requires any particular period of time between the authorization by a board of a merger agreement and the necessary stockholder vote). See also footnote 53 (noting that there is no clear authority under Delaware law that would require a Court to automatically enjoin a merger agreement that did not contain a “fiduciary out” when no superior offer has emerged). The facts of this case were that the majority consent was obtained one day after the board approved the merger, but the supermajority consent – - which was not needed to approve the merger but was a waivable condition to closing by KAR, came several weeks later. The Court spent a substantial number of pages discussing the disclosure claims which it rejected. The Court concluded the last few pages of the opinion with a review of the elements for the prerequisites for injunctive relief and found the absence of irreparable harm in addition to the failure to demonstrate a reasonable probability with success on the merits. As for the balancing of the equities, although the lack of an auction, the lack of a fairness opinion, the lack of a fiduciary-out or any post-agreement market check, did raise concerns, there were no better offers that came forward, and sophisticated buyers should understand that if a materially better offer were to be made, that judicial relief quite likely would have been available. In sum, the balancing of the equities did not favor enjoining the transaction and the motion for injunctive relief was therefore denied. Final practical observation: It should be noted in closing that this hefty opinion was drafted, and all the briefing and a hearing occurred all in the space of approximately 3 weeks. 54
- 56. MEMORANDUM TO: Clients and Entrepreneurs FROM: John Yates -- Morris, Manning & Martin, LLP Dan Branch -- Taylor Consulting Group, Inc. RE: Valuations & Appraisals – When, Why & How DATE: February 10, 2011 ___________________________________________________________________ This Frequently Asked Question (FAQ) memo addresses typical questions from companies regarding obtaining a valuation or appraisal. This document is co-authored by John Yates of Morris, Manning & Martin, LLP (www.mmmlaw.com) and Dan Branch of Taylor Consulting Group, Inc. (www.taylorconsultinggroup.com). The following questions are commonly asked of technology and business services companies. We hope this information is helpful to you. Please note that there are additional questions that will be relevant in this area and you should consult your legal, tax and accounting advisor with any other questions. 1. When do I need a valuation or appraisal? Answer: There are several situations where a valuation or appraisal may be appropriate. A few of the common situations are listed below: a. Determination of Stock Option Exercise Price – Stock options fall within the Financial Accounting Standards Board’s (FASB) definition of share-based payment arrangements, as described in FASB’s ASC 718 Compensation – Stock Compensation (formerly FAS 123(R)). Within that accounting standard, “fair value” is established as the required measurement objective for such share- based payment arrangements (which includes stock option plans). Entities are required to account for share-based payment transactions involving employees (the setting of a stock option exercise price is an example of such a transaction) using fair-value-based methodologies. Accurately determining the “fair value” of a financial instrument typically requires complex financial analysis and in-depth knowledge of several accounting standards. With increased scrutiny from auditors, the SEC, and other regulatory agencies, technology companies (even private ones if they are planning to go public within the next three to five years) should consider using an independent valuation expert to assist with such analyses. Additionally, such analyses may also fulfill compliance issues surrounding Section 409A of the Internal Revenue Code (the “Code”). There are exceptions to the ASC 718 requirements (e.g., an employee share ownership plan (ESOP) may be exempted); therefore, it is recommended that clients or interested parties discuss with their accountants or other advisors about how their technology company may be impacted by the ASC 718 requirements. b. Merger & Acquisition Support – Performing detailed evaluations of your proposed transactions (as well as a complete comparison of each) before negotiations begin ensures accurate planning and execution once negotiations are over. Valuation experts can assist in analyzing and evaluating your proposed transactions, without the full-blown financial commitment that an investment bank would require. Valuation experts can assist in determining and articulating the value
- 57. and risk drivers inherent in a proposed transaction to ensure that your growth strategy aligns with your business objectives – without an investment banker’s inherent incentive to “get the deal closed.” c. Tax Issues (for example, Gift or Estate Planning) – International, federal, state, and local regulatory authorities increasingly stress the need to support various financial and tax positions with thorough and independent valuations. These valuations can strengthen your tax strategies and address the broad spectrum of regulatory requirements. An independent valuation expert should apply thorough analysis, independent objectivity, and knowledge of case law to your tax-related valuation engagements. Additionally, experienced valuation experts typically have performed hundreds of valuations of closely held entities (including C corporations, S corporations, limited liability companies, and partnerships); therefore, their experience can ensure your tax-related valuation meets all regulatory requirements. 2. With regard to stock options, is there a legal requirement to have a valuation or appraisal every time that a company grants stock options? Answer: There is no formal legal requirement for a valuation or appraisal every time a company grants stock options, but it is a best practice to obtain an independent valuation for common stock (or other securities) which may be purchased pursuant to options granted in the context of an option or incentive plan. In some cases, companies will obtain an annual valuation and seek an update for any interim option grants to confirm the fair market value of the common stock and to set the exercise price at the time of an option grant. 3. What is Section 409A of the Internal Revenue Code (“Code §409A”) and how does it relate to the requirement or need for obtaining a valuation or appraisal? How is Code §409A relevant to stock option grants? Answer: Established by the American Jobs Creation Act of 2004, Code §409A provides new requirements applicable to “nonqualified deferred compensation plans,” which includes arrangements such as certain stock options, phantom stock, and certain stock appreciation rights. Code §409A generally requires that stock options and stock appreciation rights have an exercise price equal to or greater than the fair market value of the underlying common stock as of the grant date to avoid harsh tax consequences. If the stock option or stock appreciation right exercise price is less than the fair market value of the common stock, additional taxes and “penalties” may be assessed depending upon whether certain requirements are met. For purposes of Code §409A, fair market value is to be determined by the “reasonable application of a reasonable valuation method.” Regulations under Code §409A provide a “safe harbor” whereby a valuation resulting from an appraisal is presumed to be “reasonable” if the valuation is performed by an independent appraiser, and the date of the valuation used is within the last 12 months (provided that the valuation method used and the application of that method cannot be shown to be “grossly unreasonable”). Accordingly, most private companies utilize an independent valuation expert to perform an appraisal to determine the fair market value to take advantage of this safe harbor. It is helpful to know that appraisals that are performed to meet the requirements of ASC 718 (formerly FAS 123(R)) may potentially also be used to satisfy the requirements of Code §409A; this may enable the company to fulfill two regulatory requirements for the price of one analysis. Because the two standards are different (e.g., ASC 718 requires fair value measurements whereas §409A requires fair market value measurements; ASC 718 takes a corporate perspective while §409A takes a personal perspective), concluded values could be different; your independent valuation expert will be able to help you make that determination. 4. What is the accounting standard ASC 718 (formerly FAS 123(R)) and how does it relate to the grant of stock options and the need for a valuation or appraisal in connection with stock option grants? 2954568v1
- 58. Answer: Any pre-IPO company will want to ensure it understands and correctly applies the accounting guidelines and standards that dictate the financial reporting of stock options. Otherwise, incorrect accounting of compensation expense related to previous equity awards may force a company to restate many years worth of financial statements – a nightmare for a company in the run-up to IPO. The GAAP accounting standard that codifies the requirements for the treatment of stock options is FASB’s ASC 718 Compensation – Stock Compensation (formerly FAS 123(R)). As required under ASC 718, both public and private companies must record compensation expense for stock options, even if those options have no intrinsic value. An important aspect of ASC 718 is that the “fair value” of the underlying common stock and the “fair value” of the stock option itself must be determined as of the grant date. It is this key point (determining the fair values as of the grant date) that usually catch unknowing companies in the “cheap stock” trap. (An example of the cheap stock trap: a company may spontaneously award a deserving employee with options that are fully vested and have a $0 strike price; because of the “cheap stock” deal, the company may not know it just burdened itself with substantial compensation expense as well as hit the employee with a personal income tax bill.) Determining the fair values of the common stock and the stock option itself requires significant judgment and complex financial analytical tools. Therefore, as an added level of comfort for directors and management, most private companies utilize an independent valuation expert to perform an appraisal to determine those fair values on the grant date. 5. What documentation should be obtained by a company in connection with stock option grants to support the valuation or appraisal used to determine the exercise price for the stock options? Answer: Because ASC 718 requires reasonable and supportable estimates for each assumption used in the analysis, a company should (at the least) maintain the documentation that demonstrates the rationale and application of each assumption. For instance, the expected term of the stock option should be based on the contractual term of the stock option as well as the employee’s expected exercise and post- vesting behavior; therefore, an auditor or SEC inspector will want to see the supporting materials and calculation used to develop the expected term. When a company uses an independent valuation expert to perform such an analysis, the expert, knowing the documentation requirements and audit process, typically provides the necessary documentation that supports their conclusion of value as well as a written report describing the assumptions used and methodologies applied. The level of documentation and inclusion of a written report varies depending on the agreed to scope of work and desired deliverables. 6. Can a company conduct its own valuation and use that for purposes of complying with the above or is an independent valuation required? Answer: There are no prohibitions against a company conducting its own valuation. However, because of the complex valuation methodologies utilized in stock option-related valuations, a company’s self-determined valuation would likely increase the level of scrutiny applied by the company’s auditors and regulatory agencies. In such cases, if the IRS challenges the company’s valuation, it may have an advantage if the company is not fully versed in valuation principles and methodologies. According to Code §409A, valuations must take into account standard valuation practices and must also take into account certain factors mentioned in regulations. Additionally, the person or persons performing the valuation should have significant knowledge, experience, education, and training in performing valuations. In relation to ASC 718 requirements, accurately determining the “fair value” of a financial instrument typically requires complex financial analysis and in-depth knowledge of several accounting standards. With increased scrutiny from auditors, the SEC, and other regulatory agencies, technology companies (even private ones if they are planning to go public within the next three to five years) should consider using an independent valuation expert to assist with such analyses. 7. What are the general costs and timetable for obtaining a valuation or appraisal for stock option purposes? 2954568v1
- 59. Answer: A rough estimate of costs is $5,000 to $12,000, though company-specific factors may warrant a cost outside of this range. The cost will depend on several factors including: a. Complexity of the capital structure (a company with several preferred stock tranches will require more time to analyze than a company with only common stock); b. Complexity of the corporate organizational structure (a company with foreign-based subsidiaries of partial ownership will require more time to analyze than a company with only wholly- owned domestic subsidiaries); c. Size of the company and the complexity of the company’s operations (a company with multiple or multinational business units and multiple product lines will require more time to analyze than a company with only one business unit and few products lines); and d. Timetable for completion of analysis (an analysis done in a compressed timetable typically requires additional staffing and resource levels compared to an analysis done in a normal timetable). A typical valuation for stock option purposes will take two to three weeks. Factors that will positively impact the timetable include the valuation expert’s familiarity with the company, timely receipt and availability of the company’s data, good responsiveness by the company’s representatives assisting in the valuation process, and participation of company personnel who are knowledgeable of the pertinent facts and circumstances. 8. In the area of mergers and acquisitions (M&A), when are valuations or appraisals required? Answer: Though valuations can provide important information to assist key decision-makers in analyzing and evaluation proposed transactions, valuations are not required. Typically, a company contemplating a transaction will perform a valuation to analyze the impact of the transaction. The company may perform its valuations internally or enlist an independent valuation expert. If performed internally, a company should ensure the personnel performing the analysis have the requisite knowledge and experience with valuation principles and methodologies. 9. Are there legal requirements for a valuation or appraisal in an M&A transaction? Answer: There is not a formal legal requirement for a valuation or appraisal in an M&A transaction. As mentioned previously, valuations can assist key decision-makers in analyzing and evaluating proposed transactions. However, key decision-makers typically desire analyses that can ensure they fulfill their fiduciary duties. Such analyses are typically called fairness opinions. Fairness opinions can provide proof in litigation that the decision maker used reasonable business judgment in making a decision on behalf of others. 10. What is a fairness opinion and why is it important? Answer: A fairness opinion is a statement by a financial advisor that, from a financial point of view, the consideration or the financial terms in a merger, acquisition, divestiture, securities issuance, or other transaction between specific parties are fair to a specific party. Fairness opinions serve two purposes: a. To provide key decision-makers with relevant, independently produced information; and b. To act as factual proof in litigation that the decision maker used reasonable business judgment in making a decision on behalf of others. An opinion of fairness, from a financial point of view, is not an assurance that the highest possible price will be received in a proposed sale or that the lowest price will be paid in a proposed purchase. It is the 2954568v1
- 60. financial advisor’s conclusion that, based on financial factors, the exchange of the consideration given and received in the proposed transaction or the proposed transaction’s financial terms falls within a range which the parties to the transaction might reasonably agree. Business decision-makers often need to understand whether a potential transaction is reasonable, from a financial point of view, to their businesses or to shareholders of their businesses. Sometimes this need may be a result of their fiduciary obligations; other times it may be simply to augment their business judgment. Acting with informed business judgment when considering a proposed transaction often can be the central issue in litigation against boards of directors or other decision makers exercising their fiduciary duty. What is “fair” can be disputed, especially by contending parties in a lawsuit. An opinion from a financial advisor can support the contention by a board of directors, special committee, general partner, or trustee that it acted with informed judgment in deciding on a proposed transaction. For instance, boards of directors have a fiduciary duty to the shareholders; therefore, fairness opinions requested by boards of directors will demonstrate the fairness (or unfairness) of the transaction from the perspective of the shareholders. If boards of directors are found to have been negligent in their fiduciary duty, even after the fact, the board members may be personally liable for such negligence. Because there can be many “perspectives” present in a transaction, it is not uncommon in very large transactions to have multiple fairness opinions performed in relation to a single transaction (each performed by separate, independent financial advisors with a specific financial perspective, or point of view). 11. Is a fairness opinion required in connection with every M&A transaction? Answer: As previously mentioned, a fairness opinion, though not required for M&A transactions, can provide key decision-makers with relevant, independently produced information as well as act as factual proof in litigation that the decision maker used reasonable business judgment in making a decision on behalf of others. Also, by utilizing an independent valuation expert, as opposed to obtaining a fairness opinion from a banker involved in the transaction, the independent valuation expert’s fairness opinion can provide an extra check on the terms of the transaction. Because the size and components of each transaction are different (i.e., there are rarely “plain vanilla” transactions), the key decision-makers will need to determine if a fairness opinion is warranted on a transaction-by-transaction basis. 12. What are the general costs and timetable for fairness opinions? Answer: Costs vary considerably. The cost for a fairness opinion will depend on several factors including: a. Complexity of the transaction; b. Complexity of the underlying assets or company being transacted; c. Size of the company; d. Diversity of products or services involved in the transaction; e. Purpose and use of the analysis; and f. Timing needs and staffing requirements. The timetable for a fairness opinion can also vary considerably depending on the same factors that affect cost. To ensure the information from a fairness opinion is available to the key decision-makers well in advance of the decision date (as well as reduce cost), it is wise to involve the independent valuation expert early in the transaction process. 2954568v1