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inside... Legal Proficiencies and Skills for the Tech Lawyer Local Resources for Attorneys Entering Houston’s Innovation Ecosystem Innovation in the Life Science Industry Introduction to Blockchain Technologies and Smart Contracts Energy and Patents in Houston
Volume 57 – Number 3
November/December 2019
Innovation and Technology Law
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Irelan McDaniel, PLLC Jackson Lewis P.C. Jenkins & Kamin PC Johnson DeLuca Kurisky & Gould, P.C. Jordan, Lynch & Cancienne PLLC Kean | Miller LLP Kelly, Sutter & Kendrick, P.C. Kilpatrick Townsend & Stockton LLP KoonsFuller, PC Kroger | Burrus Law Feehan Adams LLP Linebarger Goggan Blair & Sampson, LLP Lorance & Thompson PC MacIntyre McCulloch & Stanfield, L.L.P. McGinnis Lochridge McGuireWoods LLP McKool Smith MehaffyWeber PC Morris Lendais Hollrah & Snowden Nathan Sommers Jacobs PC Pagel Davis & Hill PC Peckar & Abramson, P.C. Phelps Dunbar LLP Pillsbury Winthrop Shaw Pittman LLP Pipkin Ferguson PLLC Ramey, Chandler, Quinn & Zito, P.C. Rapp & Krock, PC Reynolds Frizzell LLP Roach & Newton, L.L.P. Ross Banks May Cron & Cavin PC Royston, Rayzor, Vickery & Williams, L.L.P. Rusty Hardin & Associates, P.C. Rymer, Echols, Slay, Wilkerson & Nelson-Archer PC Schiffer Hicks Johnson PLLC Schirrmeister Diaz-Arrastia Brem LLP Schwartz, Page & Harding, L.L.P. Scott, Clawater & Houston, L.L.P. Shannon Martin Finkelstein Alvarado & Dunne, P.C. Shearman & Sterling LLP Shellist | Lazarz | Slobin LLP Shipley Snell Montgomery LLP
Smith Murdaugh Little & Bonham LLP Spencer Fane LLP Sponsel Miller Greenberg PLLC Sprott Newsom Quattlebaum & Messenger Strong Pipkin Bissell & Ledyard LLP Stuart PC Taunton Snyder & Parish Taylor Book Allen & Morris Law Firm Thompson & Horton LLP Tindall England PC Tracey & Fox Law Firm Ware, Jackson, Lee, O’Neill, Smith & Barrow, LLP West Mermis, PLLC Weycer, Kaplan, Pulaski & Zuber, PC Williams Hart Boundas Easterby LLP Wilson Cribbs & Goren PC Wright Abshire, Attorneys, PC Wright Close & Barger, LLP Ytterberg Deery Knull LLP Zimmerman Axelrad Meyer Stern Wise Zukowski, Bresenhan & Piazza L.L.P. Firms of 25-49 Attorneys Adams and Reese LLP Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing P.C. Andrews Myers, P.C. Beck Redden LLP Blank Rome LLP BoyarMiller Coats | Rose Cokinos | Young Gibbs & Bruns LLP Hogan Lovells US LLP Kane Russell Coleman & Logan PC Liskow & Lewis Littler Mendelson P.C. Martin, Disiere, Jefferson & Wisdom McDowell & Hetherington LLP Ogletree Deakins Nash Smoak & Stewart, P.C. Yetter Coleman LLP
Firms of 50-99 Attorneys Akin Gump Strauss Hauer & Feld LLP BakerHostetler LLP Greenberg Traurig, LLP Haynes and Boone, LLP Jackson Walker L.L.P. Morgan, Lewis & Bockius LLP Susman Godfrey LLP Winstead PC Firms of 100+ Attorneys Baker Botts L.L.P. Bracewell LLP Hunton Andrews Kurth LLP Locke Lord LLP Norton Rose Fulbright US LLP Porter Hedges LLP Vinson & Elkins LLP Corporate Legal Departments Anadarko Petroleum Corporation CenterPoint Energy EOG Resources, Inc. MAXXAM, Inc. Plains All American Pipeline, L.P. Quantlab Financial, LLC Rice University S & B Engineers and Constructors, Ltd. Law School Faculty South Texas College of Law Houston Thurgood Marshall School of Law University of Houston Law Center Government Agencies Harris County Attorney’s Office Harris County District Attorney’s Office Harris County Domestic Relations Office Metropolitan Transit Authority of Harris County Texas Port of Houston Authority of Harris County, Texas 1st Court of Appeals 14th Court of Appeals
contents November/December 2019
Volume 57 Number 3
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FEATURES Proficiencies and 10 Legal Skills for the Tech Lawyer By Keith Strahan and Josh Mathews
Resources for Attorneys 12 Local Entering Houston’s Innovation Ecosystem
By Koby Wilbanks
in the Life 14 Innovation Science Industry By A. Rusty Rogers
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to Blockchain 18 Introduction Technologies and Smart Contracts
By Ali Dhanani and Ryan Dowell
and Patents in Houston 24 Energy By Peter Brewer Capital for Cheap(er): 28 Raising An Overview of Common Securities Registration Exemptions
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By Heath DeJean and Dasha Hodge
Harvest Celebration 34 70th Raises Record Support for
The Houston Lawyer
Pro Bono Legal Services
The Houston Lawyer (ISSN 0439-660X, U.S.P.S 008-175) is published bimonthly by The Houston Bar Association, 1111 Bagby Street, FLB 200, Houston, TX 77002. Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1111 Bagby Street, FLB 200, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/ SUR, 10306 Olympia Dr., Houston, TX 77042, 281-955-2449 ext 1, www.thehoustonlawyer.com, e-mail: leo@quantumsur.com. Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. ŠThe Houston Bar Association/QuantumSUR, Inc., 2019. All rights reserved.
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contents November/December 2019
Volume 57 Number 3
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departments Message 6 President’s Become an Advocate: Volunteer By Benny Agosto, Jr.
the Editor 8 From Practicing Law in an Innovative
Culture
By Taunya Painter THE RECORD 36 OFF In the Wild with
Judge Lesley Briones
By Judge Josefina Rendón
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in professionalism 37 AKimProfile Ogg
Harris County District Attorney
Spotlight 38 committee Diversity and Inclusion Committee:
A New Name and an Amplified Mission By Francesca Perkins Austin
Spotlight 39 SECTION HBA Family Law Section:
Section Name Describes More than Practice Area By Kate McConnico
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TRENDS 40 LEGAL Texas Supreme Court Addresses
Impact of Insurance Appraisal on TPPCA Claims By Travis Armstrong
Is the Affordable Care Act on its way to SCOTUS Again? By Raffi Melkonian
ReviewS 42 Media School Law’s Evolution–
Reflections of a Texas Lawyer Reviewed by Anietie Akpan
Fifty Shades of Black & White – Anatomy of the Lawsuit behind a Publishing Phenomenon The Houston Lawyer
Reviewed by Koby Wilbanks
44 Litigation MarketPlace 4
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president’s message By Benny Agosto, Jr. Abraham, Watkins, Nichols, Sorrels, Agosto & Aziz
Become an Advocate:
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Volunteer
he Houston Bar Association has an incredibly rich moments was representing a police officer from Harris history. For almost 150 years and from the very County who was injured on the job some years ago. His beginning, HBA lawyers have volunteered and beserious injuries put him in a coma for many months. His come advocates for change, tirelessly giving of their medical bills were in the hundreds of thousands of doltime to assist others. lars. However, the claim went unpaid, denied for months, Our very first president, Judge Peter Gray, was a distinand the client suffered without receiving proper compenguished jurist who was one of the foundsation. I was able to take the case pro bono, ing members of the law firm of Gray, Botts win at trial, push hard through an appeal, and As members & Baker (now Baker Botts) and who later make new law, not only for my client, but for of the HBA, served on the Texas Supreme Court. He led all Texas peace officers. I became an advocate, by example when he became an advocate volunteered, and served. (See Hinajosa v. Harwe have in the case of Emeline, a free woman of color, ris County.) v. Jesse P. Bolls. Representing Emeline pro Today my firm and I still take on pro bono the great bono, Judge Gray helped this former slave cases. The Houston Volunteer Lawyers proopportunity and her children regain and maintain their vides us with those opportunities. HVL Execfreedom utive Director Michael Hofrichter and his team to serve. As members of the HBA, we have the great are standing by to help you, as well. Please give opportunity to serve. Our sister organizations—Houston them a call and ask them to connect you with a pro bono Bar Foundation, Houston Volunteer Lawyers, Houston case. I promise you that you will not regret it. Lawyer Referral Service and the Dispute Resolution CenAnother way to be an advocate is through contributing ter—as well as our committees and sections, allow us to to the Kay Sim Endowment to Maintain Access to Justice serve our members and our community. So today, I want in Houston. The Houston Bar Foundation has a goal of to encourage you to become an advocate and a volunteer. raising $2.5 million by May 2020 to sustain future annual The HBA serves us in so many ways. Sometimes even I funding for pro bono legal services in Harris County. To overlook all that the bar does for its members. The HBA learn more, please visit www.hba.org/endowment. makes us better lawyers and helps us meet our annual conAs I close, I want to encourage you by quoting words of tinuing education requirements with free CLE and over wisdom by a former HBA president, one of my mentors and 120 hours of online programming. In addition, there are our first female president, Lynne Liberato. “As lawyers, we professional networking opportunities, including getting know that serving others and taking on pro bono cases are to know our judiciary; committee and section memberpart of our obligations to become successful and respected ship; opportunities to participate in over 35 community lawyers. Serving others simply warms your heart.” programs; and providing pro bono legal opportunities for I believe in our noble profession and, like Lynne, I bethose in need. lieve that success and respect are derived from doing When we thoughtfully examine all the ways the HBA things right. Volunteering will allow you to achieve both. serves its members, we should remember the opportunities Through our law school training, we learned how to beto help others through pro bono legal service. The example come advocates. I ask that you use that training to become set by our very first president gives us a path to underan advocate for those who will otherwise not have one. standing the ultimate goal: By volunteering, we become an On behalf of my family and myself personally, I want to advocate for good. wish you a very happy holiday season and a fulfilling year When I look back on my career, one of my proudest in 2020.
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The Houston Lawyer
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November/December 2019
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from the editor By Taunya Painter Painter Law Firm PLLC
Associate Editors
Anietie Akpan METRO
Anna M. Archer U.S. District Court
Kimberly Chojnacki Baker Donelson
The Houston Lawyer
Trey Holm Houston Volunteer Lawyers
Koby Wilbanks Murrah & Killough
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Practicing Law in an Innovative Culture
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obert, my husband, went to a legal conference about a year ago that has been life changing for our family, to the chagrin at times of the kids. At this conference, he learned about innovations in body and brain optimization. He has had our family of six individually doing what the kids call “brain training” every day for the last four months. Before that, it was training for heart rate, breathing, and sleep. All of this is done with an interface between us, an apparatus, and an app on our personal devices. While we do have a coach, the whole program is technology driven. The results are measurable, and in our kids, visible. As we have gone through the process, it has been fascinating to learn, mostly through Ted Talks and seeing our personal results, how far neurology and technology have advanced and intersected in the last 10 years. I’m excited to be living in a city that embraces an innovative culture. Houston certainly deserves an “A” for efforts over the last few years for making our city an emerging hub for innovation. When a member of THL Editorial Board, Koby Wilbanks, floated the idea of having an issue on this, I was thrilled. Texas is second only to California in technology and innovation jobs. Houston has about 228,000 technology workers, and many more filling technology roles in non-tech sectors, and a strong projected growth over the coming years. Houston’s recent and projected growth is partly tied to the pace of change in Houston’s core sectors: energy, life sciences/medicine, and manufacturing. Many technology companies are successfully clustering around their biggest customers, like in the medical center and in west Houston in the energy corridor. The technology job growth is also attributable to the emphasis placed on an innovative culture by the city, collaborative organizations, and businesses. There is a plan to centralize a space for innovation, between downtown and the Medical Center—an innovation corridor along the light rail. Houston Exponential/HX (Twitter: @HouEX) was cre-
November/December 2019
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ated to coordinate efforts. While HX has had its detractors, asserting that the tech industry can only grow organically, HX has major benefits and early deliverables. Rice University and others investing hundreds of millions into this new technology corridor do need this level of planning. I applaud this city-wide support for investing in this urban space, and can’t wait to see what restaurants, coffee shops, and other businesses will buy in to this vision. Maybe even some “technology lawyers” will move to the area. I mentioned that Koby Wilbanks championed the idea for this issue, but I also want to recognize Heath DeJean. Together they are the guest editors for the issue, and they both wrote substantive articles. If you are wanting to become or sharpen your skills as a technology attorney, there are two articles focused on that. Keith Strahan and Josh Mathews’s article, Legal Proficiencies and Skills for the Tech Lawyer, is a must read, and Koby Wilbanks provides the best collection of practical resources I’ve seen, Local Resources for Attorneys Entering Houston’s Innovation Ecosystem. Two of the articles get to the heart of the innovation sector. Funding for startups, and specifically a list of exemptions to a full SEC registration, is covered in Heath DeJean and Dasha Hodge’s article, Raising Capital for Cheap(er): An Overview of Common Securities Registration Exemptions. Also, Ali Dhanani and Ryan Dowell educate us on innovations in blockchain, what it is and how it relates to the legal field, in Introduction to Blockchain Technologies and Smart Contracts. Because Houston is the “Energy Capital of the World” and the Texas Medical Center is the largest in the world, we included articles about innovation in these anchor industries because of their attraction for startups. Innovation in the Life Science Industry, was masterfully handled by patent attorney who also holds a Ph.D. in chemistry from Rice University, A. Rusty Rogers. And Peter Brewers, a patent attorney and a petroleum engineer, shares his expertise in Energy and Patents in Houston.
BOARD OF DIRECTORS President
Secretary
President-Elect
Treasurer
First Vice President
Past President
Benny Agosto, Jr.
Diana Gomez
Bill Kroger
Jennifer A. Hasley
Chris Popov
Warren W. Harris
Second Vice President
David Harrell
DIRECTORS (2018-2020)
Greg Moore Mitch Reid
Collin Cox Hon. Erin Lunceford
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Stephen Barnes Natasha Breaux Heath DeJean Elizabeth Han Matthew Heberlein Jonathan Jabcuga Kristen Lee David Lopez Timothy McInturf Avi Moshenberg George Murr Andrew Pearce Timothy Riley Joe Villarreal
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November/December 2019
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By Keith Strahan and Josh Mathews
Legal Proficiencies and Skills for the Tech Lawyer
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he rapid expansion of innovative technology has been changing the landscape of business and entrepreneurship in virtually every industry. As a result, startups and tech companies have been emerging organically in a variety of locations. Houston itself has seen expansion of accelerators, co-working spaces, and venture capital funds, making Houston a notable player in the startup world. Along with this growing innovation sector, the need for legal services arises. From a legal perspective, startups face challenges across a wide variety of legal disciplines, some of which are not terribly different than corporations, and some that are unique to the startup stage of the company. Also, a lawyer serving startup clients should have or develop a unique skill set. I. Areas of Law Relevant to the Tech Lawyer The typical startup attorney functions in many ways as a generalist, with the ability to answer questions from “Do I in-
corporate in Texas or Delaware?” to “Is my salesperson an employee or an independent contractor?” But there are some substantive areas that should be of particular interest to a tech attorney. Corporate Governance and Entity Formation At the inception of a company, one of the most critical decisions is choosing the correct legal structure for the business and ensuring that the company has properly documented the various steps along the way. There are a variety of factors that can come into play in determining the proper legal structure including tax responsibilities, liability considerations, and future fundraising plans. Tech startups need to be challenged to think about the “what ifs” several years out, as many are only considering short-term objectives with the industry changing so quickly. Tax Law In conjunction with the above-mentioned liability protection and other consider-
ations for forming an entity, a major factor in determining the entity type is the taxable nature of the entity, as well as the tax implications for the startup owners. Under federal tax laws, a C-Corp is taxed separately from its owners at the entity level, while the owners are taxed again at a second level. This “double taxation” treatment is distinct from the taxation treatment of different entity types. An LLC, for example, allows pass-through taxation to its owners. Employment and Labor Law Once a company moves beyond the initial founders, startups need to be aware of and prepared for employment and labor law issues. When a startup enters the stage of hiring employees, there are various methods that startups use to attract, motivate, and retain employees. For example, providing equity incentives is commonly used, especially with early stage employees where limited working capital is an issue. An example of this in use is a Stock Option Plan, which allows employees to share in the growth and success of a company by receiving the option to contribute capital and exercise the right to purchase shares of the company at a future date for a predetermined price. This method of compensating employees can be particularly useful because it helps preserve cash, which is important to a startup company, while also aligning employee incentives with those of the company. Additionally, legal counsel can help startups understand the important distinctions between employees and independent contractors, as well as any other employment exemptions that may apply in their given context, thus limiting the risk of liability from labor law issues. Startups often begin with people in multiple states or expand quickly. Labor issues are often answered differently based on the state or jurisdiction. Securities Law A tech attorney would likely represent
conflicts may not be readily apparent to the co-founders themselves and discussing the expectations of each can help all parties understand the expectations required of them and address any misalignments in each person’s responsibilities and vision for the future. Many founders of startups tend to be creatives and visionaries with a great idea, product, or dream. An attorney can provide tremendous value in these situations by helping the founders think through the details and logistics of executing the vision and making Along with note of the potential pitthis growing falls that may arise.
a startup that needs to pursue various funding options, reaching out to investors of various types and sophistication levels in pursuit of further capital and assistance. Having experience in securities laws and exemptions to securities registration can be incredibly important, as this area of law is vast and complex. It is crucial to ensure the company does not violate any securities laws that could subject the company to fines, penalties, or other legal consequences.
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Intellectual Property For many startups, their most important asset is their intellectual propinnovation Understand the Industry erty. A tech attorney’s A significant number of protection of a comsector, startup companies are pany’s intellectual propthe need for founded by individuals erty from the beginning with a technology, engiis vital to its health and legal services neering, or science-heavy success. This means not background, who are only being aware of patarises. best able to communicate ent and trademark law their idea or product using the language requirements and filing timeframes, in their industry. Having a thorough unbut also understanding who specifically derstanding or background in the parowns the intellectual property and enticular industry relevant to each specific suring that asset is safeguarded from client is obviously the most helpful, but encumbrances which might affect future simply having a working proficiency to fundraising or exit. understand and speak with tech professionals can pay large dividends. Not only II. Skills and Strategies Relevant to the will it help set you apart from a generTech Lawyer alist and establish rapport with the client, but it will also help you serve the Set the Expectations and Goals Up Front client’s interests better. It can open lines Understanding the dynamics of a startup of communication that help more easily can become crucial to building a client identify and address concerns that would base and creating lasting relationships. not have been identified without the atAll involved need to understand who the torney understanding some of the techclient is, and where potential conflicts nical knowledge regarding how the prodcan arise. This is often a concept couct or service works. This can include founders have not thought about. areas where there may be vulnerability Also, in very early-stage companies, to liability, privacy concerns, third-party the company itself can become entangled relationships, and intellectual property by the unique personalities of co-foundprotections. ers. Becoming familiar with the relationship dynamics that are at play between Keep Pace co-founders and effectively navigating Tech startups often move at lightning through those dynamics can help set the speed compared with a typical corporate company on the right trajectory. This is client. Once they get their idea moving, particularly important because potential
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they want to launch it and set up a group to run it, while they are off to a new idea. While a tech attorney needs to provide solid legal advice, a relationship with a tech client can sour fast if they think the attorney’s answer is always “no,” or if the attorney cannot keep up with their plans. Part of the success of tech companies is their disruptive nature. This is an important aspect of the industry of which an innovation attorney should be aware. Check in Regularly With early-stage startups, the legal needs of the company are not always consistently present. The legal needs will ebb and flow, but unlike a traditional corporate business, the direction they take and the speed at which they move is not as predictable. Also, they often do not have the traditional “safety check” personnel in place, like a human resources department or finance department that would often think to contact legal advice. While you may tell them that it is less expensive to plan than to fix, this may not sink in. Therefore, it is good for the tech attorney to routinely check in with the client having regular calls or being included in strategy meetings. A tech lawyer, above all, should love technology and innovation. Innovators often want to surround themselves with idea people—those that can come up with solutions, not roadblocks. This is likely no different when they are hiring an attorney. Clearly, as attorneys, we sometimes have to deliver news a tech client does not want to hear, but they will be more willing to listen if the advice comes with ideas on how to keep their innovation alive. Keith Strahan is the managing partner at Fulton Strahan Law Group, PLLC. He enjoys helping startups and small businesses in all legal matters from incorporation, investments, M&A, and exit. Josh Mathews is an associate attorney at Fulton Strahan Law Group, PLLC, who focuses his practice on corporate transactional work.
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November/December 2019
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By Koby Wilbanks
Local Resources for Attorneys Entering Houston’s Innovation Ecosystem
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wo years ago, I made the decision to actively transition my practice to focus on supporting local businesses, including start-ups. I was faced with the daunting task of creating a network of relationships and support systems in Houston’s innovation ecosystem, an area in which I had no contacts. To me, creating a network seemed even more difficult than learning a new area of law because while the internet and free exchange of information allows any diligent attorney to access information, there was no roadmap to building a network from scratch, especially in such a highly fragmented space. I am thankful that the Houston innovation ecosystem was welcoming and inspiring and full of passionate individuals willing to share their time and expertise with a newcomer. After much trial and error, I have compiled a list of Houston resources that should provide a launching off point
for any attorney interested in breaking into the innovation sector. My hope is that this (non-exhaustive) list will inspire Houston attorneys interested in this area to finally take the leap and break into the Houston innovation ecosystem. Coverage, News, and Events • InnovationMap – A sister-site to CultureMap, InnovationMap shines a spotlight on innovation in Houston within startups, tech, health, energy, social impact, and more, as well as providing features on local leaders. Twitter: @ InnoMapHou. Website: https://Houston. innovationmap.com. • HIGHLIGHT – Editor Natalie Harms’s weekly feature “3 Houston innovators to know this week” helps readers connect with and learn more about their fellow Houstonian innovators. Twitter: @NatalieJHarms. • Houston Business Journal and Houston Chronicle Innovation Coverage —Provide well-respected reporting regarding innovation in companies of all sizes, from new accelerator cohorts to Houston staples like Shell. The Houston Business Journal does a daily email on Houston business news. • HIGHLIGHT – Follow reporter Chris Mathews at HBJ and Andrea Leinfelder at the Chronicle for up-todate coverage. Twitter: @HBJ_Chris and @a_leinfelder • Texas-Squared Startup Newsletter – Weekly online newsletter started by Marc Nathan, an experienced leader in the technology startup community, that features news and events regarding startups throughout Texas. Twitter: @marc1919 or sign up for the weekly newsletter at https://bit.ly/ texassquared. • Houston Exponential – Non-profit organization that helps accelerate the growth of Houston’s innovation ecosystem by connecting, attracting, and promoting local startups, investors, corporations, governments, and universities. Twitter: @HouEX. Website: https://houstonexponential.org.
• HIGHLIGHT – The HX Calendar compiles events posted on multiple platforms and provides a one-stop shop for Houston’s innovation events. Communities, Incubators, and Accelerators • The Cannon – A coworking ecosystem in West-Houston started by a Houstonian and created for Houston’s entrepreneurs, small businesses, freelancers, and creatives, that also has its own venture arm to invest in local startups. Twitter: @thecannonhtx. Website: https://thecannonhouston.com. Also follow the founder and president, Lawson Gow, @LawsonGow10. • HIGHLIGHT – The Cannon’s campus offers the first one-stop-shop for Houston innovators, providing office space, meeting rooms, kitchen facilities, financial resources, and mentorship all under one roof. The official opening and ribbon cutting was October 28, 2019, at the 120,000 square foot facility, 1334 Brittmoore Road, Houston. • The Ion – An innovation center for technology companies backed by Rice University that provides the heart of Houston’s “innovation corridor” between downtown and the Texas Medical Center (still under construction in the old Sears building). The center is set to open in 2020. The Ion will bring together Houston’s entrepreneurial, corporate, and academic communities during all stages of the innovation lifecycle. Website: https://ionhouston.com. • Station Houston – A community, accelerator, and coworking space that will be part of the Ion’s campus and provide entrepreneurial workshops, conferences, job training, educational classes, and other programming for the Ion. Twitter: @StationHouston. Website: https://stationhouston.com. • HIGHLIGHT: The Smart Cities Accelerator, led by the Ion and Station Houston and backed by Intel, Microsoft, and the City of Houston,
will use the “internet of things” to create and test technologies that will enhance Houstonians’ community experience on issues such as flood mitigation and traffic flow. Website: https://www.stationhouston.com/ smartcities. • Texas Medical Center Innovation Institute – A community aimed at impacting health care by supporting and creating medicine and cuttingedge health technology that provides multiple programs for startups, including TMCx, TMCx+, TMC Biodesign, JLABS, and the Foundry. Twitter: @ TMCInnovation. Website: https://tmc. edu/innovation/. • Founder’s Institute – A pre-seed startup accelerator focused on tech and tech-enabled businesses with multiple cohorts per year. Twitter: @FounderHouston. Website: https://fi.co. • HIGHLIGHT – The Houston chapter provides a connection to a national organization with connections in every major U.S. city. • Mass Challenge – Accelerator with programs ranging from one to six weeks that provide mentorship, connections, and in-person and virtual resources. Twitter: @MassChallengeTX. Website: https://masschallenge.org/ programs-texas. • HIGHLIGHT – This accelerator is unique in that it accepts startups from all industries (not just technology) and takes zero equity (a real rarity). • Bunker Labs – A nonprofit and national network of veteran entrepreneurs assisting new veteran entrepreneurs with starting their own businesses. Twitter: @BunkerLabsHOU. Website: https:// bunkerlabs.org. Venture Capital and Crowdfunding • Houston Angel Network – The oldest and most active angel network in Texas whose members are accredited investors, funds, accelerators, and universities interested in early stage companies. Twitter: @Houston_Angels. Website:
https://houstonangelnetwork.org. • The Goose Society of Texas – The Grand Order of Successful Entrepreneurs is a super angel investor network whose members are all professionals who have founded or ran major, successful businesses on a national or international scale. Twitter: @sjolewis (Samantha Lewis, Director of Goose). Website: https://goosesocietyof texas.com. • HIGHLIGHT: GOOSE is different from a traditional venture capital fund because its members invest directly to companies rather than contributing to a fund first, which means each individual member has greater control over the types and amounts of investments. • Texas Halo Fund – Venture Capital Fund on its third iteration that invests over a three-year period. Twitter: @texashalofund. Website: https://texas halofund.com. • Artemis Fund – A newer Houstonbased venture capital fund interested in investing in women-owned and led startups. Twitter: @ArtemisFund. Website: https://theartemisfund.com. • Next Seed – A crowdfunding platform focused on local small businesses (with a heavy emphasis on the hospitality industry) that has a securities arm and has been responsible for helping Houston businesses such as Bravery Chef Hall, The Toasted Coconut, The Waffle Bus, Poitin, Pokeology, Peli Peli, and the Buffalo Bayou Brewing Co. taproom at Sawyer Yards. Twitter: @thenextseed. Website: https://nextseed.com. • Let’s Launch – A newer crowdfunding platform partnered with the Cannon and interested in diversified businesses, including clothing, golf sport tech, social media, professional services, and more. Website: https://letslaunch.com. Koby Wilbanks is a member of The Houston Lawyer Editorial Board and provides local business, including startups, with the legal advice and business strategy support they need to succeed and grow.
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By A. Rusty Rogers
Innovation in the Life Science Industry
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ouston—long recognized for being the energy capital of the world—is now a rising star of innovation and investment for the life science industry in the United States. Having an attractive combination of a highly skilled workforce, employment growth, access to top-ranked universities, medical research and health services institutions, Houston has been ranked second as an emerging life science cluster in the country.1 Houston continues an upward momentum with volumes of activity and significant government and private funding developing innovations in the life sciences. Located in the heart of Houston is the Texas Medical Center (TMC), reportedly the largest medical complex in the world and a major driving force of Houston’s life sciences sector. With 54 institutions, the TMC is home to leaders in research, medicine, and innovation in healthcare and has a large roster of universities offering specializations in medical and life sciences including the University of Tex-
as Systems, MD Anderson Cancer Center and UT Health Science Center, Texas A&M University, Texas Tech, Baylor College of Medicine, University of Houston, and Rice University. The recent unveiling of the “TMC3,” a cutting-edge collaborative research ecosystem, is a further testament to Houston’s growing initiative to be the “third coast” for life sciences. In fact, the Greater Houston Partnership has recently reported that Houston alone houses more than 19,400 biotech specialists and 6,650 of the world’s top medical researchers.2 With the uptake of talent and growth in the number of state-of-the-art facilities in Houston and throughout Texas, significant public and private funding has followed suit. This year to date, the National Institutes of Health has provided $1.35 billion in research funding in the State of Texas. Since 2008, the Cancer Prevention and Research Institute of Texas (“CPRIT”) has awarded over $2.4 billion in grants for an array of cancer-related research with a specific mission to expand research capabilities and create high quality jobs in Texas.3 Established through a constitutional amendment in 2007 authorizing the State of Texas to issue $3 billion in bonds to fund groundbreaking cancer research and prevention programs, over 1,400 CPRIT grants have been awarded to academic institutions, non-profit organizations, and private companies throughout Texas, resulting in $10.9 billion in economic activity, the creation of 98,000 jobs, a drastic increase in the availability of clinical services, and recognition of a CPRIT-funded scholar with a Nobel prize in medicine.4 CPRIT has recently awarded the TMC with $5 million in funding for the development of a new Accelerating Cancer Therapeutics program specifically designed to facilitate individuals and startups focused on developing novel cancer therapeutics on the path to clinical trials and beyond.5 In the recent November election, Proposition 6 authorized an additional $3 billion in CPRIT funding.
In addition to federal and state funding, there is no shortage of private funding and technology incubators. In 2018, venture capital funding set a decade record with a total of $117.2 billion invested in the United States, and this year funding remains on track to finish well above average. Texas has claimed $334 million from 44 out of 1,304 large venture capital deals across the United States. So, while venture capital funding cooled in the third quarter of 2019, to $26 billion, a slide year-over-year from $29.5 billion during the third quarter of 2018, private funding generally remains at historically record levels.6 Over the past five years, Houstonians have further benefited from the efforts of several life science-focused incubator and accelerator programs at the TMC’s Innovation Institute. TMCx is the Innovation Institute’s accelerator, which focuses on early-stage companies in the areas of medical devices, digital health care services, diagnostics, and therapeutics. TMCx+ is a related program helping seed-stage companies in those same sectors. Thus far, nearly 100 companies have enrolled in the TMCx program with over $150 million in funding raised. In 2017, the TMC Venture Fund was established with a goal of investing $25 million in early-stage health care tech companies in Houston. Partnering with the TMC Innovation Institute are Johnson & Johnson’s JLABS@TMC and AT&T Foundry, which support digital health services companies. To further support local entrepreneurs and startups with access to training and capital, collaborations have been formed throughout Houston. For example, BioHouston, Inc., is a non-profit corporation founded by Houston-area academic research institutions with a mission “to create an environment that will stimulate technology transfer and research commercialization, thereby generating economic wealth for the Houston region and to make Houston a global competitor in life science commercialization.”7 Innovation hubs have also propagated in
the region, searching for new ideas and entrepreneurs, including MD Anderson Cancer Center’s “Institute for Cancer Care Innovation,” and a developing innovation district that includes Rice University’s “The Ion” and technology incubators such as Houston Exponential and Station Houston. For a trained scientist and practicing patent attorney, the prospects for living and working in Houston could not be brighter. The challenge will be maintaining the ongoing drive to support and foster innovation, as it is an ongoing process. With innovation comes the need to navigate the regulatory environment, protect any intellectual property that is developed, establish clear interparty agreements, and leverage inventions to ensure stakeholders are fairly compensated. For innovators in the life sciences, establishing patent rights are often at the forefront of the process of capitalizing on a discovery; and for a patent attorney answering the call, navigating the current field is exciting as
patent laws struggle to keep up with the ever-quickening technological advances. This is particularly true as the scope of patent-eligible subject matter continues to change. Further, the increased use of artificial intelligence in drug discovery has raised a number of provocative legal issues as to who the true inventor is for developed drugs. While the answers are seemingly clear for human-led research projects, as autonomy grows, defining boundaries as to true inventorship can become unclear. In the past decade, patent protection in the life sciences area has undergone certain transformations that have increased uncertainty as to what can be patented, as well as the cost of obtaining a patent for stakeholders. Animated by concerns about granting exclusive rights to naturally occurring materials and abstract ideas that are free to all, judicial decisions parsing patent-eligible subject matter, under 35 U.S.C. § 101, have reshaped obtainable patent scope for life science innovators, particularly
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eligible subject matter. Similarly, in Gefor inventions directed to medical diagnetic Veterinary Sciences, Inc. v. Laboklin nostics. Following the Supreme Court’s GMBH & Co. KG, claims directed to the practical elimination of DNA patent-eli8 identification of a point mutation in a segibility in Myriad and reformulation of lected dog breed was not patent-eligible, requirements for diagnostic methods in 9 because the mutation is a natural pheMayo and computer-based methods in nomenon and identification of the muAlice,10 claims to breakthrough products tation was done by routine methods.13 and methods must be carefully crafted to survive examination and invalidaWhile this is just a sample of appellate tion. opinions from earlier this year, the deThe current trend for patents to methcisions are representative of the overall ods in the life sciences continues to repicture that the tide has ebbed on the main challenging in the near-term, as scope of patent protection in the field many recent decisions resulted in the inof medical diagnostics and that the old validation of previously-granted patents. strategies for claiming these inventions In Athena Diagnostics, must be revisited. Inc. v. Mayo Collaborative A legislative solution The current Services, LLC,11 claims to to clarify patent subject trend for patents matter eligibility has methods for diagnosing been proposed in a bill neurological disorders to methods in sponsored by Senators by detecting antibodTillis (R-NC) and Coons ies to a protein called the life sciences (D-DE), but progress on muscle-specific tyrosine continues the bill currently apkinase were invalid as pears to be stalled.14 being directed to a corto remain relation between the Consensus is that the presence of an antibody current framework for challenging in and a disease state–a patent eligibility is too the near-term. natural phenomenon. difficult to navigate for Even in the face of a voinventors, practitioners, cal dissent by Judge Newman that the and judges. Further, there is a concern method amounted to a patent-eligible that allowing patent protection to erode “man-made reaction sequence employon entire invention classes could lead ing new components in a new combinato the United States losing ground in tion to perform a new diagnostic proceemerging areas like diagnostic methdure,” the en banc majority saw natural ods, genetics, artificial intelligence, and phenomenon in conjunction with consoftware methods, as patent protection ventional steps, which was insufficient is easier to obtain in international juto confer patent eligibility. risdictions such as Europe and China. In INO Therapeutics LLC v. Praxair However, solutions to the problems are 12 Distribution Inc., claims to a method of viewed as either going too far in the elimination of all judicial exceptions, or treatment in which at-risk patients are not far enough, such that too much amselectively removed from a treatment biguity remains. schedule were invalidated as seeking to To maximize the prospective economclaim a natural phenomenon. The Court ic growth from the volume of investment reasoned that excluding at-risk patients in innovation being made in Houston, from treatment is an “instruction not to intellectual property must be harnessed act” that amounts to a claim to a natuand utilized effectively. As previously ral process within the patient, and that observed at the national scale, the U.S. the remainder of the claim was routine economy is “a shining reminder of evand conventional activity that failed erything that American innovation to transform the method into patent-
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policy has achieved,” and patent protection is at the heart of U.S. innovation.15 The case for maintaining a strong patent system is not merely a sentimental one, as the patent system is a useful tool in realizing the extraordinary rate of innovation in this country and rewarding individual inventors, start-ups, and other small business for their contributions. A. Rusty Rogers is an associate attorney with Nielsen IP Law LLC, with special expertise in chemical patent practice. Roger holds a Ph.D. in Chemistry from Rice University and graduated from the University of Houston Law Center. The author would like to thank Ann Tanabe, Chief Executive Officer, BioHouston, for her guidance in preparing sections of this article. Endnotes
1. 2019 U.S. Life Sciences Clusters,’ CBRE (Feb. 13, 2019), https://www.cbre.us/research-and-reports/US-LifeSciences-Clusters-2019. 2. Patrick Jankowski & Josh Pherigo, Biotech and Life Sciences, GREATER HOUSTON PARTNERSHIP (June 20, 2018), https://www.houston.org/houston-data/ biotech-and-life-sciences. 3. CANCER PREVENTION & RESEARCH INSTITUTE OF TEXAS, https://www.cprit.state.tx.us/about-us (last visited Nov. 6, 2019). 4. CANCER ACTION NETWORK, https://www.fightcancer.org/states/texas (last visited Nov. 6, 2019). 5. Texas Medical Center Selected for $5 Million CPRIT Grant for New Cancer Therapeutics Program, TEXAS MEDICAL CENTER (Sept. 20, 2019), https://www. tmc.edu/news/2019/09/texas-medical-center-selectedfor-5-million-cprit-grant-for-new-cancer-therapeuticsprogram/. 6. PwC/CB Insights, MoneyTree™ Report Q3 2019, https://www.pwc.com/us/en/moneytree-report/assets/moneytree-report-q3-2019.pdf. 7. BIOHOUSTON, www.biohouston.org/about/ (last visited Nov. 6, 2019). 8. Ass’n for Molecular Pathology v. Myriad Genetics, Inc.,569 U.S. 576, 133 S. Ct. 2107 (2013). 9. Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66, 132 S. Ct. 1289 (2012). 10. Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 134 S. Ct. 2347 (2014). 11. Athena Diagnostics, Inc. v. Mayo Collaborative Servs., LLC, No. 2017-2508 (Fed. Circ. 2019). 12. INO Therapeutics LLC v. Praxair Distrib. Inc., No. 2018-1019 (Fed. Circ. 2019). 13. Genetic Veterinary Scis., Inc. v. Laboklin GMBH & Co. KG, No. 2018-2056 (Fed. Circ. 2019). 14. Michael Borella, Senate Subcommittee on Intellectual Property Holds Hearings on Proposed Revisions to 35 U.S.C. § 101, PATENT DOCS (June 17, 2019), www. patentdocs.org/2019/06/senate-subcommittee-onintellectual-property-holds-hearings-on-proposedrevisions-to-35-usc-101.html. 15. Remarks of Maureen K. Ohlhausen, Commissioner, U.S. Federal Trade Commission, “The Economic Contribution of Technology Licensing” Conference (June 8, 2016).
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By Ali Dhanani and Ryan Dowell
Introduction to Blockchain Technologies and Smart Contracts
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oughly a decade ago, a term was coined for “an emergent new model” of computer infrastructure called cloud computing.1 Suddenly, “the cloud” was a magic phrase to make anything sound cutting-edge. Cloud computing has since matured into vital infrastructure for businesses and individuals alike. Around the same time “the cloud” captured the zeitgeist, a white paper was quietly published describing the peer-to-peer payment system Bitcoin—the first blockchain application. After many years as a niche tech-
nology, a sudden cryptocurrency boom brought blockchain to the forefront, and the term has become a new cutting-edge buzzword. But what does blockchain actually mean? How is it being used? How does this impact your clients? This article explores those key questions at the forefront of every business and by extension in-house counsel’s mind. At its core, blockchain is a distributed ledger—a way to record and store information across several locations. What makes blockchain technology different is how it is designed in a way that creates a particularly robust and tamper-resistant record. This lends itself well to transferring value between parties, commonly in the form of cryptocurrencies. While blockchain is the technological backbone of cryptocurrencies, it can apply to other industries beyond currency and finance. Broader applications of blockchain are developing, including self-executing contracts and retention of secure, verified records. As a result, blockchains are being adapted to many industry needs. On the regulatory front, the comparison between cloud computing and blockchain is informative. Adoption of blockchain technologies has outpaced regulatory efforts, mirroring how legislation is just starting to catch up to the rise of big data. Fortunately, these developments can be applied to blockchain technology to anticipate how regulations may develop and effectively put blockchain into practice. Blockchain Basics Much like cloud computing, blockchain is an infrastructure technology with various implementations, rather than a singular entity. Blockchain design falls into two categories: the structure of a blockchain and what can be done with records on a blockchain. Different blockchain structures can be more suitable for dif-
ferent implementations. Several prominent blockchain platforms have emerged, such as Hyperledger, which provide semistandardized framework for blockchain applications. Many companies run their blockchains on these platforms, rather than building their own.2 The fundamental structure of blockchain is, axiomatically, a chain of blocks.3 Blocks store sets of records, e.g., transactions and associated information. Each block is cryptographically linked to the previous and next blocks, creating a continuous chain of blocks. This cryptographic link is perhaps the most important structural feature of blockchain. Every block is hashed, which creates a unique “fingerprint” from the block’s information. The hash of the previous block is included, along with the new block’s hash, verifying that the chain contains valid entries. Another key element is that the ledger is distributed, meaning that it is computed across a network of many computers rather than a single system. Blockchain ledgers are also decentralized across the network, storing and validating copies with every network participant. Taking these elements together, blockchain can be viewed as a recordkeeping system with no single storage location or authority, in which each new record is intrinsically tied to the previous record. The combination of features creates a system where records are difficult to modify, destroy, or lose. The basic function of a blockchain is to store information, but certain blockchains are configured to carry out tasks. Such tasks are often likened to code or programs that run on a blockchain, such as Ethereum, where recorded transactions act as included instructions. Smart contracts are a prime example of this. These are self-executing contracts that automatically resolve when specified conditions are met. Think of it like escrow without a third party. Blockchain in the Wild Perhaps the most well-known blockchain implementations are cryptocurrencies, like Bitcoin and Ether. It is important to
note that blockchain and cryptocurrency,4 although closely related, are not the same thing. Cryptocurrencies are digital assets linked to a blockchain, often generated as a reward for running the underlying calculations that power that blockchain. Unlike fiat currencies (i.e., those backed by governments), cryptocurrencies are backed by the blockchain network. The secure record of transactions itself supports the asset. Although many cryptocurrencies
are valued based on supply and demand, which can be rather volatile, some are designed to prevent such fluctuation.5 Nearly every industry is looking to blockchain to improve their businesses. Many companies have started to accept payments in cryptocurrency. Some are using it to track supply chain logistics, particularly where the authenticity of a product’s source is important, such as medications and designer goods. Others are setting up automated trading plat-
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Equal Access Champions
The firms and corporations listed below have agreed to assume a leadership role in providing equal access to justice for all Harris County citizens. Each has made a commitment to provide representation in a certain number of cases through the Houston Volunteer Lawyers.
Large Firm Champions Baker Botts L.L.P. Bracewell LLP Hunton Andrews Kurth LLP Locke Lord LLP Norton Rose Fulbright US LLP Vinson & Elkins LLP
Corporate Champions CenterPoint Energy, Inc. Exxon Mobil Corporation Halliburton Energy LyondellBasell Industries Marathon Oil Company Shell Oil Company
Mid-Size Firm Champions
Akin Gump Strauss Hauer & Feld LLP BakerHostetler LLP Beck Redden LLP Chamberlain Hrdlicka Clark Hill Strasburger Foley Gardere LLP Gibbs & Bruns LLP Gray Reed & McGraw, P.C. Greenberg Traurig, LLP Haynes and Boone, L.L.P. Jackson Walker L.L.P. Jones Day King & Spalding LLP Morgan, Lewis & Bockius LLP Porter Hedges LLP 20
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ReedSmith LLP Sidley Austin LLP Winstead PC Winston & Strawn LLP
Quinn Emanuel Urquhart & Sullivan, LLP Shortt & Nguyen, P.C. Trahan Kornegay Payne, LLP
Boutique Firm Champions
Individual Champions
Abraham, Watkins, Nichols, Sorrels, Agosto & Aziz Blank Rome LLP Dentons US LLP Fullenweider Wilhite PC Hogan Lovells US LLP Jenkins & Kamin, L.L.P. LeClairRyan McDowell & Hetherington LLP Ogden, Broocks & Hall, L.L.P. Ogletree, Deakins, Nash, Smoak & Stewart P.C. Weycer, Kaplan, Pulaski & Zuber, P.C. Wilson, Cribbs & Goren, P.C. Yetter Coleman LLP
Small Firm Champions
Coane & Associates Frye, Benavidez and O’Neil, PLLC Fuqua & Associates, P.C. Gibson, Dunn & Crutcher LLP Givens & Johnston Katine & Nechman L.L.P. Katten Muchin Rosenman LLP KoonsFuller, P.C. MehaffyWeber, P.C.
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Law Office of Peter J. Bennett Law Office of J. Thomas Black, P.C. Burford Perry, LLP The Dieye Firm The Ericksen Law Firm Law Office of Todd M. Frankfort Hasley Scarano L.L.P. David Hsu and Associates The Jurek Law Group, PLLC Law Firm of Min Gyu Kim PLLC The LaFitte Law Group, PLLC Law Firm of Catherine Le PLLC C. Y. Lee Legal Group, PLLC Law Office of Gregory S. Lindley Martin R. G. Marasigan Law Offices Law Office of Evangeline Mitchell, PLLC Rita Pattni, Attorney at Law Law Office of Robert E. Price The Reece Law Firm, PLLC Sanchez Law Firm Law Office of Jeff Skarda Angela Solice, Attorney at Law Diane C. Treich, Attorney at Law Law Office of Norma Levine Trusch Law Office of Cindi L. Wiggins, J.D. Trey Yates Law
forms for commodities. Some healthcare companies are looking to blockchain as a means to verify professional credentials. This first wave of blockchain applications may lead to many other uses. Developing Legal Issues Since large-scale blockchain adoption is a relatively new trend, regulatory bodies are beginning to take notice. As a result, it can be difficult to pin down what rules and regulations apply when using a blockchain. One constant is that there is no one-size-fits-all blockchain regulation—each blockchain implementation may implicate different laws. For example, cryptocurrencies have drawn attention from financial regulators, and healthcare applications must comply with existing industry-specific regulations. As an EU blockchain initiative put it in the context of data storage and privacy under the EU’s General Data Protection Regulation (GDPR), “[t]here is no such thing as a GDPR compliant blockchain technology. There are only GDPR compliant use cases and applications.”6 Blockchains pose a number of challenges for regulators and those who are regulated alike. Blockchains are often distributed globally, which can make it difficult to determine jurisdiction or enforce regulations. For a business, this means there may be different restrictions depending on node location. Many blockchains emphasize user privacy and may obscure identifying details, which can prevent regulators from determining who the rules apply to. On the user end, this adds to the uncertainty of how to make sure one’s blockchain is compliant at present or in the future. Financial Sector As a result of the cryptocurrency boom, it is perhaps the form of blockchain with the most developed regulatory policy. Cryptocurrencies obviously have value, but what sort of asset are they? Because cryptocurrencies, like the blockchains that power them, come in many varieties, this is a fact-specific answer. Many
cryptocurrencies assert that they are nothing more than a currency. The Commodity Futures Trading Commission has determined that Bitcoin, and other virtual currencies, are commodities under the Commodity Exchange Act and are therefore subject to its authority for anti-fraud and manipulation enforcement.7 Initial Coin Offerings (ICOs) may be securities regulated by the Securities and Exchange Commission depending on whether they have characteristics of securities, such as “being sold on the potential for tokens to increase in value... or to otherwise profit from the tokens based on the efforts of others.”8 This isn’t an empty threat—the SEC has launched investigations into entities involved with ICOs for failing to treat the offerings as securities (and also levied significant fines and entered into settlement agreements).9 Many existing monetary regulations are applicable to cryptocurrencies. Money-laundering is being addressed by the Financial Action Task Force (FATF), an inter-governmental agency that has focused on this for 30 years.10 Like other income, cryptocurrencies create tax obligations, which the IRS is eager to remind taxpayers.11 Cryptocurrency regulation is still developing, but the existing financial rules are generally being adapted to map onto cryptocurrencies and related instruments. Smart Contracts and Supply Chain12 Twenty-five years ago, smart contracts were conceived as “a computerized transaction protocol that executes the terms of a contract.”13 While this is largely true, smart contracts are more like computer programs than legal contracts. On a basic level, smart contracts are simply if-then statements that do not need to be a part of a blockchain. However, many technologists see smart contracts and blockchain technology as natural fits for each other. The smart contracts can execute on the blockchain, making the process automated, trustless, and verifiable—the same features that make blockchains desirable for storing records. Further, blockchains thehoustonlawyer.com
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can automatically transfer things of value, such as cryptocurrency, when the conditions of a smart contract are objectively satisfied, removing the need for a trusted third party like a bank. As the term “smart contract” generally refers to any if-then statements in code, the term necessarily encompasses a number of smart contracts that would not satisfy the elements of a legally enforceable contract. Many in the legal industry refer to smart contracts that contain all elements of a legally enforceable contract as “smart legal contracts” (SLCs) to distinguish from more basic versions. SLCs are being used in many industries to enhance operations. In supply chains, SLCs are automating portions of heavily paperbased systems. SLCs can be configured to automate contractual terms, such as reconciling transactions to determine which party owes what to whom. Verifiable records on a blockchain can make it simpler to document agreements, prove contractual terms, and confirm the timeframe of agreed terms. SLCs are also being used to automate the trading of commodities and securities. Of course, SLCs are subject to existing laws and do not operate in a vacuum. For example, when SLCs are used to automate the sale of goods, the UCC likely applies. Practitioners need to grapple with issues like how to perfect security interests in digital assets and determining when ownership has legally changed hands. As a result, disputes may seem familiar on their face—these are contractual disputes. However, the nature of these disputes is changing. There must be significant thought applied before ambitious smart contract projects “go live,” and there will be fascinating resulting legal disputes resolved in courts of law over the coming years. Blockchain and Privacy Like other data-driven technologies, privacy and security are major concerns for blockchain. Because blockchains may be distributed (i.e., not geographically limited), laws with extraterritorial ef22
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fect may impact unsuspecting actors and should be considered in any blockchain strategy. For example, the GDPR protects the personal data of its citizens and can impose penalties for activity beyond the EU’s borders.14 Does this apply to data in a blockchain? Although no definitive policy has been developed, the general view by European regulatory bodies is that under the right circumstances, it does.15 Similarly, California’s Consumer Privacy Act (CCPA) is not limited to businesses located in California but can apply when conducting any business in the state.16 Many pending state-based privacy regulations are modeled after the GDPR and CCPA, which will further increase the complexity of compliance. Although blockchain-specific regulations are uncommon, general privacy considerations apply because, ultimately, blockchains store data just like other systems. What the data is matters more than the mechanics of how the data is stored or processed. Data privacy laws are often industry-specific, usually corresponding to sensitive types of data. Instead of being regulated as financial instruments themselves, as discussed above, blockchains that contain consumer reporting data likely require compliance with the Fair Credit Reporting Act (FCRA). Blockchains handling certain health data need to be aware of HIPAA, as those records are still “in electronic form” even if they are not on a traditional server.17 When advising on blockchain applications, it is important to determine how it will be used and what privacy rules are implicated. Blockchain in Practice Blockchain is growing into the role it has been hyped up for. Given the prospective value blockchain can deliver, industries are rapidly adopting the technology. Yet much like big data, cloud computing, and other paradigm-changing technologies, there is no single all-encompassing rulebook. Every application requires a bespoke approach, right-sized to the problem at hand. Organizations should make informed decisions and tailor their
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blockchain to their needs. And organizations need to be ready for the intellectual property being sought, including patent protection, for various applications of this technology. Advising clients on nascent technology can be difficult, but with the right goals in mind, blockchain seems poised to deliver and uncover great value for businesses ready to meet the challenge. Ali Dhanani, a partner at Baker Botts, is a sought-after speaker and writer who advises companies on blockchain-based development strategies, including in the healthcare and energy industries. Media and telecommunication companies rely on Ali’s significant experience to protect their intellectual property and defend against claims of infringement. Ryan Dowell, an associate at Baker Botts, is a Certified Information Privacy Professional (CIPP/US and CIPP/E) who advises on privacy and data protection issues. Across life sciences and high tech, he helps clients achieve their intellectual property strategies. Endnotes 1. Conversation with Eric Schmidt hosted by Danny Sullivan, Search Engine Strategies Conference (Aug. 9, 2006) https://www.google.com/press/podium/ ses2006.html. 2. See, e.g., Hyperledger, https://www.hyperledger.org/; Michael del Castillo, Blockchain 50: Billion Dollar Babies, Forbes (Apr. 16, 2019), https://www.forbes. com/sites/michaeldelcastillo/2019/04/16/block chain-50-billion-dollar-babies/#784f2b1757cc. 3. See, e.g., NIST, Blockchain Technology Overview, NISTIR 8202 (Oct. 2018), https://nvlpubs.nist.gov/ nistpubs/ir/2018/NIST.IR.8202.pdf. 4. Id. at 17. 5. See, e.g., Tether, https://tether.to/. 6. BLOCKCHAIN AND THE GDPR, EUROPEAN UNION BLOCKCHAIN OBSERVATORY & FORUM (Oct. 16, 2018), https://www.eublockchainforum. eu/sites/default/files/reports/20181016_report_ gdpr.pdf?width=1024&height=800&iframe=true. 7. See, e.g., Bitcoin, CFTC, https://www.cftc.gov/Bitcoin/ index.htm; https://www.cftc.gov/sites/default/files/ idc/groups/public/%40customerprotection/docu ments/file/oceo_aivc0218.pdf. 8. SEC, Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017), https://www.sec.gov/news/ public-statement/statement-clayton-2017-12-11#_ ftnref2. See also Spotlight on Initial Coin Offerings (ICOs), SEC, https://www.sec.gov/ICO. 9. SEC, SEC Charges ICO Research and Rating Provider with Failing to Disclose It Was Paid to Tout Digital Assets (Aug. 20, 2019), https://www.sec.gov/news/ press-release/2019-157.
10. Public Statement on Virtual Assets and Related Providers (June 21, 2019), https://www.fatf-gafi.org/ publications/fatfrecommendations/documents/pub lic-statement-virtual-assets.html. 11. IRS, Virtual currency: IRS issues additional guidance on tax treatment and reminds taxpayers of reporting obligations (Oct. 9, 2019), h t t p s : / / w w w. i r s . g o v / n e w s r o o m / v i r t u a l currency-irs-issues-additional-guidance-on-taxtreatment-and-reminds-taxpayers-of-reportingobligations. 12. This section contains contributions from Ronald Smith at Norton Rose Fulbright US LLP. 13. Nick Szabo, Smart Contracts (1994), http://www.fon. hum.uva.nl/rob/Courses/InformationInSpeech/ CDROM/Literature/LOTwinterschool2006/szabo. best.vwh.net/smart.contracts.html. 14. 2016 O.J. (L 679), Art. 3 (“This Regulation applies to the processing of personal data in the context of the activities of an establishment of a controller or a processor in the Union, regardless of whether the processing takes place in the Union or not.” (emphasis added)) 15. See, e.g., BLOCKCHAIN AND THE GENERAL DATA PROTECTION REGULATION: CAN DISTRIBUTED LEDGERS BE SQUARED WITH EUROPEAN DATA PROTECTION LAW?, Panel for the Future of Science and Technology (July 2019), http://www.europarl.europa.eu/RegData/etudes/ STUD/2019/634445/EPRS_STU(2019)634445_ EN.pdf; SOLUTIONS FOR A RESPONSIBLE USE OF THE BLOCKCHAIN IN THE CONTEXT OF PERSONAL DATA, Commission nationale de l’informatique et des libertés (Nov. 2018), https:// www.cnil.fr/en/blockchain-and-gdpr-solutionsresponsible-use-blockchain-context-personal-data. 16. CAL. CIV. CODE § 1798.140. 17. 45 CFR § 160.102.
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November/December 2019
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By Peter Brewer
Energy and Patents in Houston
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ouston is known as the “Energy Capital of the World.”1 The city is home to the headquarters of more than 500 oil and gas exploration and production firms and countless manufacturing and engineering firms that provide support.2 Behind all of that “energy” is a lot of technology, much of which is protected through the efforts of patent attorneys Houston-Based Patents U.S. Patent and Trademark Office records show that over 4,000 patents were issued in 2018 to inventors living in the Houston area (that is, where at least one person from the greater Houston area was named as an inventor). A significant percentage of those patents related to the energy sector. According to records published by the Intellectual Property Owners Association, Houston-based oil and gas companies
(including oilfield services companies) were issued over 2,300 patents in 2018. The largest patent recipient was Halliburton Energy Services, Inc., followed by Schlumberger Technology Corporation and ExxonMobil Corporation.3 Other patent recipients of note include Saudi Arabian Oil Co. (which has its U.S. headquarters in Houston)4 and Weatherford Technology Holdings, LLC.5 A number of patents are also issued each year to companies having employees in the Houston area that are not specifically energy companies. These include chemical companies, refining companies and computer companies.6 In addition, 32 patents were issued to the University of Houston, and 26 patents were received by William Marsh Rice University last year. Preparing and filing these patent applications is done by registered patent attorneys. These are attorneys who not only have a technical background but who have also taken and passed a special bar examination offered by the Department of Commerce.7 A registered patent attorney is permitted to prepare and file patent applications for clients in any state.8 Patent Office records show that there are around 1,000 registered patent attorneys having an office in the Houston area. A few of these, including the author, are also degreed petroleum engineers. Tech Incubators Specific to Energy To encourage and foster innovation in the energy industry, a variety of local incubators have been established. These include Shell Technology Ventures (STV), Chevron Technology Ventures (CTV), ABB Technology Ventures, ConocoPhillips Technology Ventures, Equinor Technology Ventures and BP Ventures. These entities were created to develop beneficial technology, to help start-up companies grow and, in some cases, to have access to capital. STV was originally formed with the mission to create new businesses from
technology that came out of Shell Oil for many fields is at or just above $30/ Company. In 1998, STV was “broadbbl. ened to maximize value from the global The lower and highly unstable price commercial exploitaof oil pushes production tion of Shell E&P techcompanies and operaU.S. Patent 9 nologie.” Today, STV tors to reduce costs and and Trademark to improve capital effioffers technical and ciencies. Unfortunately, business assistance to Office records lower prices can somestart-ups and small entimes mean that core terprises that wish to show that research and developcommercialize technolover 4,000 ment expenditures are ogy related to both oil reduced, meaning fewer and gas and alternative patents were inventions and fewer fuels, including renewpatent applications. able energy. issued in 2018 That remains a chalCTV offers a portlenge that is unique to folio of seed and early to inventors the Houston patent bar. stage venture capital for 10 living in the The future remains technology companies. bright for Houston CTV seeks to integrate Houston though. The federal emerging technologies government lifted its into its oil and gas proarea... ban on exporting oil in duction and distribution 2015. In December of 2015, the United operations. CTV has identified six arStates exported its first oil cargo in 40 eas of technology including water manyears. Within two years the United agement, production enhancement, emerging materials, power systems, information technology and subsurface business. The local patent bar plays an important role in helping to protect energyrelated technology by assisting companies, inventors and these incubators.
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States was exporting more than one million barrels per day (B/D), much of it being sweet crude produced in the Permian Basin of West Texas and Eastern New Mexico. The United States has now overtaken Saudi Arabia as the world’s largest exporter. The International Energy Agency (IEA) has reported that crude oil exports are now at three million B/D, with much of the oil and gas being carried by tankers embarking from the Gulf Coast. Legal Challenges and Opportunities Perhaps the greatest challenge to patent attorneys, not only in Houston but throughout the country, is a pair of unfortunate decisions issued by the U.S. Supreme Court.12 Section 101 of the Patent Act provides that “[w]hoever invents or discovers any useful process, machine, manufacture, or composition of matter, or any useful improvement thereof, may obtain a patent therefor...”.13 Historically, Section 101 has been interpreted broadly, allowing in-
Challenges and Opportunities A downside to being the energy capital of the world is that Houston’s economy tends to rise and fall with the price of oil. According to the U.S. Energy Information Administration, West Texas Intermediate (WTI) annual average oil prices have fluctuated over the last 10 years between a low of $43/bbl in 2016 and $98/bbl in 2013.11 That is a tremendous swing. The price was $76/ bbl (WTI spot price) at the beginning of October 2018 (one year ago), fell 40% to $45/bbl at the first of 2019, but has slowly progressed to its current (October 14, 2019) price of $55/bbl. This is still a relatively low price, especially considering that the “break-even point” thehoustonlawyer.com
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ventors to obtain patents for any technical improvements with the exception of laws of nature, natural phenomena, and mere mathematical formulae.14 However, with the Alice and Mayo decisions the Supreme Court has further excluded from the realm of patentable subject matter so-called “abstract ideas.”15 Broadly speaking, an abstract idea refers to mental processes, methods of organizing human activity, and “basic tools of scientific and technological work.”16 From the author’s perspective, a patent application directed to a process that could be done using a pencil and a piece of paper, even if such would take infinitely longer than if done using a “general purpose computer,” is going to cause the inventor problems. Classic examples include actuarial tables, determining insurance rates, managing escrow transactions and calculating stock values at the end of a trading day. These are considered “fundamental economic principles.”17
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The Court has stated that such processes may nevertheless be patentable if they are integrated into a practical application.18 However, this second step of analysis has proven to be difficult to apply and has resulted in significant uncertainty in patent law. The author has seen inventions related to pumping units and downhole tools rejected as being mere “abstract ideas” even though the purpose was to produce something very tangible–hydrocarbon fluids. In the author’s view, the Alice / Mayo decisions have resulted in the demise of hundreds (if not thousands) of properly issued patents and the rejection of valuable inventions at the application stage. Planning for the Future Laudably, PTO Director Andrei Iancu is making an effort to restore predictability to “patent eligibility” through his “2019 Revised Patent Subject Matter Eligibility Guidance.”19 In essence,
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Director Iancu is attempting to fill a void intentionally left by both the Supreme Court and the Federal Circuit by providing guidelines for examination. One commentator has stated: It has been frustrating—to say the least—that courts have refused to define the term abstract idea despite that being the critical term in the Supreme Court’s extra-statutory patent eligibility test. Without a definition for the term abstract idea rulings have been nothing short of subjective; some would even say arbitrary and capricious.20 While the Supreme Court may see wisdom in allowing the Federal Circuit, the district courts, and the patent examiners to make an abstract idea analysis on a case-by-case basis, the patent bar has been left with a series of judicial decisions that are at best difficult to harmonize and at worst impossible to apply.
Peter Brewer is a registered patent attorney with Thrive IP®. He holds a degree in petroleum engineering from Texas A&M University and a law degree from South Texas College of Law. He is also a former briefing attorney with the Texas Supreme Court. Brewer represents companies in patent and trademark matters across the oil patch—from North Dakota to Texas and from California to Louisiana. Endnotes 1. John Nova Lomax, The Evolution of the Energy Capital of the World, TEX. MONTHLY, Feb. 14, 2017, https:// www.texasmonthly.com/energy/evolution-energycapital-world/. 2. WORLDWIDE POWER PRODS., WHY DID HOUSTON BECOME THE ENERGY CAPITAL OF THE WORLD?, https://www.wpowerproducts.com/news/ why-did-houston-become-energy-capital-of-theworld/ (last visited Nov. 4, 2019). 3. IPO, TOP 300 ORGANIZATIONS GRANTED U.S. PATENTS IN 2018: 36TH ANNUAL LISTING (2019), https://www.ipo.org/wp-content/uploads/2019/07/ Final_2018-Top-300.pdf. 4. Saudi Aramco, https://www.saudiaramco.com/en/ who-we-are/overview/global-presence (last visited Nov. 13, 2019).
5. IPO, TOP 300 ORGANIZATIONS GRANTED U.S. PATENTS IN 2018: 36TH ANNUAL LISTING (2019), https://ipo.org/wp-content/uploads/2019/07/2018Top-300-Final.pdf. Also of note, General Electric Co. is listed as the fourth largest recipient of U.S. patents in 2018. General Electric is the owner of the service company branded as Baker Hughes, (referred to in 2018 as “Baker Hughes, a GE Company”). 6. Note that the Houston area has nine refineries producing over 2.3 million barrels of crude oil every day. See WORLDWIDE POWER PRODS., supra note 2. 7. U.S. PATENT & TRADEMARK OFFICE, BECOMING A PATENT PRACTITIONER, https://www. uspto.gov/learning-and-resources/patent-and-trademark-practitioners/becoming-patent-practitioner (last visited Nov. 4, 2019). 8. Sperry v. Florida, 373 U.S. 379 (1963). 9. SHELL, ABOUT SHELL VENTURES, https://www. shel l.com /energ y- a nd-i n novat ion /newenerg ie s /shel l-vent ure s /about.ht m l# va n it ya H R 0 c H M6 Ly 93 d 3 c u c 2 h l b Gw uY 29 t L 2VuZXJneS1hbmQtaW5ub3ZhdGlvbi9pbm5vdmF0aW5nLXRvZ2V0aGVyL3NoZWxsLXZlbnR1cmV zL2Fib3V0Lmh0bWw (last visited Nov. 4, 2019). 10. CHEVRON,CHEVRONTECHNOLOGYVENTURES, https://www.chevron.com/technology/technologyventures (last visited Nov. 4, 2019). 11. M. Garside, West Texas Intermediate Annual Average Oil Price 1976-2019, STATISTICA, Oct. 21, 2019, https://www.statista.com/statistics/266659/westtexas-intermediate-oil-prices/. 12. See Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 573 U.S. 208, 134 S. Ct. 2347, 2354 (2014), and Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66, 71 (2012).
13. 35 U.S.C. §101 14. Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980) (“Einstein could not patent his celebrated law that E=mc2; nor could Newton have patented the law of gravity.”). 15. Alice Corp. Pty. Ltd., 573 U.S. at 217-18 (citing Mayo Collaborative Servs., 566 U.S. 66). 16. Mayo, 566 U.S. at 71 (“Phenomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work” (quoting Gottschalk v. Benson, 409 U.S. 63, 67 (1972)). 17. See Iancu Andrei, Director, U.S. Patent & Trademark Office, The Current State of Innovation Within the U.S. Legal System: Views of Evolving Protection for Intellectual Property Rights in the United States from the USPTO and the Courts, Remarks at the N.Y. Intellectual Property Law Association (Mar. 22, 2019), available at https://www.uspto.gov/about-us/ news-updates/remarks-director-iancu-new-yorkintellectual-property-law-association. 18. See Revised 101 Guidelines of the U.S. Patent and Trademark Office, p. 5 (Dec. 20, 2018), https://www. ipwatchdog.com/wp-content/uploads/2019/01/revised-101-guidance-2018-28282.pdf. 19. Mark Marrello, A Plea to All IP Stakeholders: Support Director Iancu’s Efforts to Restore the Value of U.S. Patents, IP WATCHDOG, Mar. 5, 2019, https:// www.ipwatchdog.com/2019/03/05/a-plea-to-all-ipstakeholders-support-director-iancus-101-guidance/ id=106976/. 20. Gene Quinn, Revised Patent Eligibility Guidance Effectively Defines What is an Abstract Idea, IP WATCHDOG, Jan. 4, 2019, https://www.ipwatchdog.com/2019/01/04/patent-eligibility-guidance-abstract-idea/id=104754/
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By Heath DeJean and Dasha Hodge
Raising Capital for Cheap(er):
An Overview of Common Securities Registration Exemptions
A
company engaging in a securities offering—whether it be a sale of equity or a debt issuance—generally has to register those securities with the Securities and Exchange Commission (“SEC”). The registration process tends to be time- and costintensive, and it can present a significant obstacle to the traditional capital markets, particularly for a young or small company. Fortunately, there are certain limited exemptions for issuers who are unable to, or who elect not to, engage in a traditional registered offering. Although these exemptions may still include a reporting or filing requirement, the disclosures are generally less onerous and costly than would be involved in a fully registered offering. A new company seeking early investment can benefit from taking advantage of one of the below exemptions, each of which is designed to address a specific type of offering or investor profile.1 Section 4(a)(2): Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) provides an exemption for transactions not involving a public offering.2 While Section 4(a)(2) does not define “public offering” or “private offering,” the SEC and courts tend to focus on certain factors to determine whether a sale will be deemed to involve a public offering. One of the factors is the sophistication of the purchaser. To avoid being deemed a public offering, the offering should be made to purchasers who have sufficient business knowledge to evaluate and appreciate the risks involved in the investment. Another factor suggesting that an offering is not a public offering is that the offering is made to a limited number of potential purchasers, with the idea that a smaller number of offerees is less likely to result in an offer being made to a nonsophisticated offeree, and is more like-
ly to be a negotiated transaction rather Regulation D: than a retail offering. Because the Section 4(a)(2) analysis The SEC and courts is somewhat flexible also consider the manand nondeterminative, Fortunately, ner of the offering. To the SEC has adopted there are be considered private, an objective test under the offering should be Regulation D3 pursucertain limited made through direct ant to which an offercommunications with ing would qualify as exemptions eligible offerees and private for purposes of for issuers cannot include any Section 4(a)(2). general advertising or Regulation D inwho are general solicitation. cludes several separate unable to, It is important to exemptions, namely note that this exempRules 504 and 506 (two or who elect tion is transactionexemptions here), each specific and does not not to, engage of which has its own exempt the securities requirements. The spein a traditional from registration incific rule that an issuer definitely. Any resales chooses to rely on for registered of the issuer’s securian offering depends on offering. ties by investors who the amount of money purchased the secuthat the issuer hopes rities in reliance on this exemption to raise and the type of investor from must be registered or rely on another which the issuer hopes to raise that registration exemption for the resale. money.
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All Regulation D offerings are subject to disqualification provisions for certain “bad actors,” meaning that if an issuer or another “covered person” (as defined by the SEC) has experienced a disqualifying event (for example, a conviction or sanction for securities fraud), then the issuer loses the ability to use Regulation D for a period of time following the event. A. Rule 504: Rule 504 allows issuers to sell up to $5 million of securities in a twelvemonth period. Notably, these securities may be sold to any number (and any type) of investor without limit, even if an investor does not qualify as an accredited investor. However, general solicitation or advertisement is not permitted. Rule 504 does not preempt state securities laws (commonly referred to as “blue sky” laws4), and therefore compliance with the rule alone is not enough. An issuer must also comply
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(who must still be financially sophisticated or use a representative who is). To the extent there are any non-accredited investors in a Rule 506(b) offering, the issuer must disclose certain B. Rule 506: additional information about itself, inRule 506 actually contains two excluding its financial statements. This emptions, located in Rule 506(b) and allowance of non-accredited investors, Rule 506(c). Unlike Rule 504, there are however, means that a Rule 506(b) ofno limits to the amount that may be fering cannot be widely advertised. raised under Rule 506. On the other hand, if an issuer is relySo why would an issuer use Rule 504 ing on Rule 506(c), then every investor when Rule 506 allows for an unlimited must be an accredited amount of money to be investor. Furthermore, raised? The answer lies Rule 506(b) the issuer must take in the number and type permits an active steps to verify of investor allowed: that accredited status. while Rule 504 allows unlimited A major benefit of Rule any type of investor, 506(c) is that since all Rule 506 only allows number of investors are accredaccredited investors. In ited, the issuer is perorder to be an accredaccredited mitted to advertise the ited investor, a potential investors. offering while still cominvestor who is a natuplying with the rule. ral person must meet An issuer deciding between the two certain income or net worth threshexemptions offered in Rule 506, thereolds. By limiting an offering to accredfore, must weigh the benefit of wideited investors, the SEC hopes to ensure spread advertising against the need for that all investors are able to assess and non-accredited investors. Under Rule to sustain the risk of loss involved, thus 506, an issuer must pick one exempmaking the additional protections aftion or the other. forded by a registered offering unnecA final benefit of Rule 506 over Rule essary. 504 lies in preemption of state blue Rule 506(b) permits an unlimited sky laws. If an offering complies with number of accredited investors, as well Rule 506, it need not separately comas up to 35 non-accredited investors ply with the registration or exemption requirements of the states in which securities are sought to be sold. This can result in a significantly lighter regulatory burden and provide greater certainty to issuers who may not have legal counsel in every state to advise on the with the registration requirements of any states in which the securities are being offered and sold.
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specifics of such laws. The securities issued pursuant to Regulation D will be restricted securities (meaning that the securities may not be resold unless the resale is also exempt from registration). However, under certain limited circumstances generally relating to offerings complying with state blue sky laws, these restrictions may be lifted. Regulation Crowdfunding: The passage of the Jumpstart Our Business Startups (JOBS) Act5 in 2012, opened the door for a new exemption that is more flexible than Regulation D when it comes to investments by individuals who are not sophisticated or accredited investors. Regulation Crowdfunding (or “Regulation CF”), adopted by the SEC in 2015, implements this new exemption and allows companies to tap their customer base and turn them into investors under certain circumstances.6 Crowdfunding involves the use of the Internet and social media to raise money, often coming in relatively small amounts from a large number of investors (many of whom may not qualify as accredited investors). Under Regulation CF, a company is able to raise money without regard for the number or type of investors. Instead, individual investors are limited in the amount that they may invest, as determined by the investor’s net worth and annual income. Although these income and net worth amounts are used to determine the maximum an investor may contribute, any investor is permitted to participate in an offering to some extent regardless of income or net worth. While Regulation CF provides some ease to issuers by allowing sales to a greater range of investors, it also imposes much lower limits on the amount of money that can be raised as compared other registration exemptions. A company issuing securities under Regulation CF is limited to an aggregate of $1.07 million over a twelve-month
period, including any securities sold in reliance on Regulation CF during the twelve months preceding the expected date of sale of any such securities. Any offering pursued through Regulation CF must be conducted through a single online intermediary, which must be a FINRA- and SEC-registered broker-dealer or funding portal (like Houston-based NextSeed, for example).7 An issuer is allowed to rely on the intermediary to ensure that the offering does not exceed the regulation’s limitations, as long as the issuer does not have knowledge otherwise. An issuer undertaking an offering under Regulation CF is permitted to publicly advertise the offering, including on the Internet or in social media, as long as the advertisement consists only of a notice directing potential investors to the funding portal or broker. The notice may contain only limited information regarding the offering. Once prospective investors have access to the portal, however, the issuer is permitted
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to communicate with them about the terms of the offering via communication channels within the intermediary’s portal. Securities sold in reliance on the exemption provided by Regulation CF may not be resold within a year of the date of purchase, other than to certain limited transferees. Additionally, in order to be eligible to take advantage of the regulation, the issuer must not be a reporting company, an investment fund, a non-U.S. issuer, or be disqualified under the SEC’s “bad actor” disqualification provisions. For a young company, Regulation CF provides an attractive avenue to raise small amounts of capital from a broad investor group, but it carries additional risk that comes from sales to investors who are not accredited investors. Anyone seeking to benefit from the regulation should weigh these considerations before deciding to proceed. Intrastate Offering: The intrastate offering exemption under Rule 3(a)(11)8 facilitates local fundraising by exempting offerings made solely to residents of a single state. The exemption currently operates under two rules: Rule 147 and Rule 147A. A. Rule 147A: Rule 147A is a simplified exemption adopted as part of the JOBS Act. In order to qualify for the intrastate exemption under Rule 147A, the issuer must meet certain criteria. First, the issuer must have its principal place of business in the state in which it is making the offering. Second, the issuer must be conducting business in the state in which it is making the offering. In order to meet this requirement, the issuer must (1) derive at least 80% of its consolidated gross revenues from the operation of a business or of real property located in-state or from the rendering of services in-state, (2) have at least 80% of its consolidated assets located in-state, (3) intend to use and 32
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use at least 80% of the net proceeds from the offering towards the operation of a business or of real property in-state, the purchase of real property located in-state, or the rendering of services in-state, or (4) have a majority of its employees based in-state. Third, the issuer must make the sales to in-state residents or persons the issuer reasonably believes are residents of the state. Finally, the issuer must obtain a written representation from all purchasers as to their residency. It is up to the issuer to determine the residency of the purchaser. In the case of an entity, the question is where such entity’s principal place of business is located, without regard to state of formation. B. Rule 147: Rule 147 provides a safe harbor under Section 3(a)(11) and is more burdensome than Rule 147A. In addition to the requirements of Rule 147A, the issuer must also be formed within the state it is making the offer, and must only offer the securities to in-state residents or persons the purchaser reasonably believes to be residents of the state. While Rule 147 is more burdensome to comply with, it plays an important role with respect to blue sky laws. Because certain states have adopted exemptions that are conditioned on compliance with Rule 147 and Section 3(a)(11), the SEC retained Rule 147 in order to allow issuers to continue to comply with the blue sky requirements in such states. The intrastate offering exemptions discussed above do not limit the size of the offering or the number of purchasers. However, a sale to even one out-ofstate purchaser voids the exemption for the entire offering, so it is critical to confirm the residency of each purchaser. There are no filings required for an issuer to use the intrastate exemption. Securities purchased in an offering pursuant to Rule 147 or Rule 147A can be resold to persons residing in-state for a period of six months from the date
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of the sale by the issuer to the initial purchaser. Conclusion While securities regulations can be daunting to first-time issuers, the exemptions discussed herein provide some relief to the registration and reporting requirements involved in a traditional public offering. Before advising a client on these matters, an attorney should ensure she is well-equipped to provide securities advice or work closely with a securities attorney to determine the exemption that most closely aligns with the client’s strategy, fundraising efforts and budget. Authors’ Note: On June 18, 2019, the SEC announced that it is reviewing the framework for private offering exemptions and has requested public comments in order to simplify and improve the framework for both companies and investors. Heath DeJean and Dasha Hodge are associates in the corporate and securities practice group in the Houston office of Thompson & Knight LLP. DeJean is also a member of The Houston Lawyer Editorial Board. Endnotes
1. See U.S. SEC. & EXCH. COMM’N, OVERVIEW OF EXEMPTIONS, https://www.sec.gov/smallbusiness/ exemptofferings/exemptofferingschart, for a helpful chart outlining the main criteria for each of the exemptions described in this article. 2. Securities Act of 1933 § 4(a)(6) (codified at 15 U.S.C. § 77d(a)(6)(2012)); Sec. & Exch. Comm’n v. Ralston Purina Co., 346 U.S. 119 (1953). 3. Regulation D, 17 C.F.R. § 230.501 et seq. 4. In addition to the federal securities laws, each state has its own securities laws, including registration exemptions. These are referred to as “Blue Sky Laws,” a term popularized after a Kansas Supreme Court justice cited a desire to protect investors from speculative investments with “no more basis than so many feet of ‘blue sky.’” 5. Jumpstart Our Business Startups Act, Pub. L. No. 112106, 126 Stat. 306 (2012) (codified in scattered sections of 15 U.S.C.). 6. See generally 17 C.F.R. § 227 (discussing crowdfunding exemptions, requirements, and general rules) . 7. See FINRA, Funding Portals We Regulate, , https:// www.finra.org/about/funding-portals-we-regulate, for a list of approved funding portals. 8. Securities Act of 1933 § 3(a)(11) (codified at 15 U.S.C. § 77d(a)(6) (2012)).
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70th Harvest Celebration Raises Record Support for Pro Bono Legal Services
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he 70th Harvest Celebration raised a record $873,874 to support pro bono legal services for low-income Houstonians. The largest annual fundraising event of the Houston legal community is sponsored by the Houston Bar Association, Houston Bar Foundation and Houston Bar Association Auxiliary. Nearly 950 Houston Bar Association (HBA) members and guests filled River Oaks Country Club the evening of November 11. “The HBA is committed to increasing its community service through much-needed pro bono legal services,” said HBA President Benny Agosto Jr. “The 70th Annual Harvest Celebration was truly record setting, and we want to thank all of the sponsors, the HBA team and Houston lawyers who are dedicated to making the HBA and Houston the best that it can be. Certainly, raising over $870,000 in one night for Houston Volunteer Lawyers absolutely proves that.” The Harvest Celebration supports the Houston Volunteer Lawyers (HVL), a project of the HBA that provides pro bono legal services for low-income families including veterans, the elderly, people with disabilities, and other low-income Houstonians with family law, consumer law, probate and other legal problems. Although the Harvest Celebration has been the legal community’s main social event since 1949, it was designated a fundraiser 20 years ago and has raised almost $9.5 million for pro bono legal services in Harris County. Held on Veterans Day this year, the event also celebrated the service of HBA members who are veterans and called attention to the Veterans Legal Initiative, which provides legal aid for low-income veterans through HVL. “Pro bono lawyers play a vital role in ensuring that our most vulnerable Houstonians have access to justice to meet their basic legal needs,” said Torrence. “I’m proud that the Harvest Celebration’s record-breaking fundraising has enabled us to be at the forefront of guaranteeing our neighbors and vetGreeting guests were, [from left to right] Nikki Agosto and HBA President Benny Agosto, Jr.; Heath erans will have equal access to jus- LaPray and Houston Bar Foundation Chair/Harvest Celebration Co-chair Travis Torrence; HBA Treasurer/ tice, regardless of their income.” Harvest Celebration Co-chair Jennifer A. Hasley and Greg Hasley; and HBA Auxiliary President Keisha
Photos by Debi Wallace, Barfield Photography
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Phillips and Felix Phillips.
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HBA Director Mitch Reid and Shannon Reid
Brian Fischer and daughter, Courtney Fischer
Members of the HBA Auxiliary assisted with the Harvest Celebration check-in. Left: Dominique Varner, Hazel Donato and Gracie Obertie; Right: Dr. Yvonne Cormier
John Eddie Williams and U.S. District Judge Andrew S. Hanen
The Houston Lawyer Editor in Chief Taunya Painter and HBA Director Robert Painter
Wendy Dawson, Former HBA President Alistair Dawson, and Texas Supreme Court Justice Jane Bland
Gail Stewart, HBA Executive Director Mindy Davidson and Josh Davidson
HBA President-Elect Bill Kroger and Elizabeth Mata Kroger, with Former HBA President Laura Gibson and Bill Ogden
Eric Pardue, Parul Anderson, Jeremiah Anderson and Monica Karuturi
Houston Volunteer Lawyers Executive Director Michael Hofrichter, HVL Pro Bono Coordinator Brittany Krohn, and HVL Legal Services Director Veronica Jacobs are joined by Gena and Nick Shum.
The HBA Ambassadors are a young, diverse group of 10 women and 10 men who work to increase knowledge and understanding of the benefits of HBA membership in the legal community, enhance volunteerism and participation in the HBA, and promote opportunities for pro bono legal service through presentations to law firms and legal departments, law schools, HBA sections and committees, and other organizations. Attending the Harvest Celebration, from left, Alex Kamel, Susan Oehl, Quentin Smith, Maine Goodfellow, Fatima Hassan Ali, Derick Mendoza, Andrew Yeh, Mariame Aana and Ryan Cantu thehoustonlawyer.com
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OFF THE RECORD
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In the Wild with Judge Lesley Briones
The Houston Lawyer
By Judge Josefina Rendón
shark capital of the world. Although there were no great white sharks udge Lesley Briones has kissed tigers, walked with lions, and in the water that day—they’d been scared off by an orca who had killed swum with sharks and a jaguar. When she is not on the bench a great white days before—the experience was still “beyond exhilarator raising her three young daughters, she loves to travel the ing” because many other sharks appeared. Clamoring for the chum world and encounter wild animals. being thrown from the boat, two or three Judge Briones—described by sharks at a time charged the cage repeatedly friends as “fearless”—fell in love with these with their snouts piercing through the bars unique encounters when she backpacked of the cage, inches from her face. It felt like through Southeast Asia after the bar exam a “massive blow coupled with shaking” each and before starting her legal career at Vintime a shark struck the cage. Despite their son & Elkins, LLP. On that first trip, Judge power, Judge Briones also was struck with Briones visited a Buddhist temple in Thaihow peaceful the school of sharks—nine to land, where the monks raised tigers whose a dozen at a time—appeared as they peaceparents had been poached. There, she kissed fully swam in the distance once the water and relaxed with fully-grown tigers. “It was cleared of chum. surreal,” she shared. “Tigers had always Judge Briones, who presides over Harris been my favorite animal since I was a child, County Civil Court at Law Number 4, has but never did I think I would be laying on, loved animals since she was a child in South much less kissing one.” Texas. Her passion for traveling started when Next came a jaguar in Roatán, off the she was 15 after she received a Rotary Intercoast of Honduras, that she swam with and Up close with a jaguar in Roatán. national scholarship to spend the summer abroad—the first time walked on a leash. The jaguar alternated between swimming and sitshe had ever flown on an airplane. Thanks to various scholarships ting peacefully under an umbrella on a stump in the middle of the she continued to receive in high school and as a student at Harvard large pool. With instructions from the trainer not to grab the jaguar by University and Yale Law School, Judge Briones continued seeing the the neck, her husband, Adán (also an attorney), went first. When Adán world and more deeply appreciating the interconnectivity we share as grabbed too closely to the neck, the jaguar gave him a warning bite people and with nature. Whether in a small village in Cambodia or that, thankfully, did not cause an injury. Despite that, Judge Briones in Nicaragua, seeing that the people survived because of the land and still swam with and even hugged the jaguar. It was hard for her to tear animals around them, created in her a deep respect for nature and a away from him: “The eyes of the jaguar—there was a power, intensity.” desire to help preserve it. Recognizing that she wasn’t ready to leave the jaguar, the trainer ofWhen asked whether she was afraid during these encounters, Judge fered to let her walk the jaguar back to his enclosure on a leash, just as Briones responded, “No. These have been some of my most surreal, she would her dog at home. “It was amazing to be on the sand, on the exhilarating moments. Animals sense and react to you. Rather than beach, walking a jaguar, literally like I would walk my Golden Retrievfear, I’ve felt an inner calm and deep self-awareness. Since I’m still er. Frankly, the jaguar was better behaved than my Golden Retriever!” here to share the stories, they must have sensed my respect and awe.” Most recently, Judge Briones and her husband celebrated their 10Judge Briones next hopes to trek with gorillas in Uganda, swim year anniversary by walking with lions in Zimbabwe, diving with with humpback whales in Tonga, and explore the Galapagos Islands. sharks in South Africa, and going on safari in Botswana. The lions in Perhaps one of these adventures will happen next year for her 40th the Zimbabwe reserve were roaming freely in the bush until the guide birthday trip. called out. Two lions then came running at his call and walked with the couple for over an hour. The lions would play-fight one minute and let the couple pet them the next. Judge Josefina Rendón is a mediator and Associate MuniciThen came the sharks in Gansbaai, South Africa—the great white pal Judge for the City of Houston. 36
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A Profile
in pro f e s s i o n a l i s m
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Kim Ogg Harris County District Attorney
s the elected District Attorney of Harris County, I am actually a team of nearly 800 dedicated public servants: prosecutors, criminal investigators, paralegals, administrative assistants, and social workers. Whatever the role, professionalism is the cornerstone of how every employee carries out the public’s business. We train our staff at every level to seek the right case result for the crime victim, the accused and the community in every single case. To do so, they must balance competing interests—which are often in conflict. This practice is best accomplished through reliance upon the core values of this office: professional integrity, personal diligence and honesty. By embracing those principles, we work hard each day to earn and maintain the community’s trust. When I was first elected, it was important for our administration that the District Attorney’s Office reflect the diversity of the people we represent, so we recruited, hired and promoted to make that a reality. Since January 1, 2017, we have increased the number of African American prosecutors by 90 percent and our Latino ranks by 125 percent. Many are bilingual and some international—and they come from all three law schools in Houston and elsewhere around the nation. The mixture of culture and perspective is also part of our professionalism. Because we regularly interact with people who never wanted to be crime victims in the first place, obtaining their cooperation and shepherding them through the rigors of our criminal justice system also requires calm compassion. This is an irreplaceable component of professionalism in our practice area and requires a desire to truly help others. People expect public safety and fair treatment from their district attorney, and I expect the same from our prosecutors. That’s why professionalism is our cornerstone and the heart of our practice at the Harris County District Attorney’s Office.
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committee spotlight
Diversity and Inclusion Committee:
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A New Name and an Amplified Mission
The Houston Lawyer
By Francesca Perkins Austin
t is safe to say that the composition of the Houston Bar has During the 2018-2019 HBA bar year’s summer internship prochanged tremendously since the Minority Opportunities in gram, approximately 52 students were placed with 35 employthe Legal Profession Committee (MOILP) was established ers. Every June, the Committee hosts a luncheon to celebrate the in 1990. In conjunction with Houston Bar Association hard work of these students and honor the commitment of the President Benny Agosto’s program employers. It is a testacommitment to diversity, this ment to the program’s tremenCommittee recently changed dous success that the luncheon its name to reflect its renewed was recently moved to a larger pledge to promote both diverlocation to accommodate the sity and inclusion within the growing number of attendees. legal profession. The Diversity Looking forward, the Comand Inclusion Committee’s new mittee is adding to its already name also comes with an eximpressive work with new propanded mission: to continue to grams and partnerships. In July, Diversity and Inclusion Committee members Brian Max Trinidad and Amincrease the diversity pipeline, mar Dadabhoy, with program alum Morgan Morrow at a presentation at the HBA hosted its first annual while also welcoming and em- the University of Houston Law Center on the Summer Clerkship Program. Diversity Summit. The daylong powering diverse attorneys already in the profession. CLE included panels addressing the importance of allyship for The Diversity & Inclusion Summer Internship Program conmarginalized groups and the business side of diversity. The tinues to be the Committee’s signature initiative. The program Committee will play a major role in planning the next successencourages equal opportunities for minority lawyers in the legal ful Diversity Summit in 2020. Likewise, the Committee is esprofession. Summer internships are offered exclusively to firsttablishing an annual HBA Diversity Award that will honor both year law students from historically underrepresented ethnic, individuals and organizations. This award will be presented racial and LGBTQ+ groups from Houston’s three law schools. at the June luncheon. To bring awareness to diversity and inDiverse law students have historically proven themselves when clusion, the Committee believes that it is critical to celebrate given the opportunity, and this program gives more students those that are already doing it well. Finally, the Committee is that chance. Over 700 students have participated in the summer planning strategic partnerships with other HBA committees, inprogram since its inception. Employers include large law firms, cluding the newly formed LGBTQ+ Committee, to develop and corporations, judges, non-profit organizations, and government expand programs that address common goals. entities. If you would like more information about this Committee’s The application process kicks off in mid-January with a student transformative work, or if you are an employer interested in the interview panel and meet and greet reception. Students learn valuDiversity & Inclusion Summer Internship Program, please conable tips for interviews and meet employers and program alumni. tact any of this year’s co-chairs: Jackie Coleman, Collin Cox, After students accept their employment offers, they attend a manRenée Lowe, or The Hon. Ravi K. Sandill. datory “boot camp” where they are provided with helpful tips on the difference between a litigator and transactional attorney; how Francesca Perkins Austin is an associate at Baker Hostetler LLP, to write persuasively; and on interrelated issues on best practices, where she focuses on commercial litigation, product liability and networking and diversity. In addition, students are paired with a bankruptcy matters. She is a member of the HBA’s Professionalism mentor from the Diversity and Inclusion Committee. Committee and The Houston Lawyer Editorial Board. 38
November/December 2019
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SECTION spotlight
HBA Family Law Section
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Section Name Describes More than Practice Area
By Kate McConnico
he Family Law Section of the Houston Bar Associacustody, and visitation guidance at a low or free cost. Every tion has been a happy discovery in my career. As I lawyer should keep their number on hand for those times moved from civil trial law to family law, I wondered, when we meet someone in relationship/family distress and “What am I getting myself into?” It has honestly need to connect them with a helping hand (713-274-7300). been a real pleasure to practice in these two areas In fact, the Family Law Section has adopted the DRO’s Visitaand see what each section tion Center for its year-end offers. Among the oldest service project. The Visitaand most established of the tion Center provides a place HBA sections, the monthly for supervised visitation at luncheons, volunteer opseven locations throughout portunities, holiday party Harris County. The Section and legal resource materiestablished a goal that all als (David Gray’s and Salthe children who visited the lee Smyth’s Interesting Cases Center this holiday season anyone?) have provided an would receive a gift. Memanchor and guidepost for Monthly luncheons are just one way the Family Law Section serves members. bers purchased gifts for the family lawyers in Houston. In what can be an emotional and children by selecting an ornament on a “Giving Tree” at the contentious area of practice, the section provides camaraderie monthly luncheons in October and November. The Section and connection outside the courthouse that keeps us feeling also participated in the Visitation Center’s holiday party on like, well, family. December 21 where volunteers dressed up as Santa Claus, With over 500 members, the monthly luncheons are well elves, and other holiday characters distributing the gifts to attended and offer interesting speakers regarding the latest the children. issues affecting the family law bar and bench. Most family The Family Law Section is a community of family law atlawyers are solo practitioners and the Family Law Section is torneys committed to connecting, mentoring and encouraging a valuable resource that keeps us from feeling isolated. Case one another in service to the broader community. Luncheons updates, court procedures, technological developments and are held the first Wednesday of each month at The Houston trends in psychological evaluations are all covered on a rotatClub. Come join us for lunch or the many volunteer service ing basis. (We’re not just dividing pots and pans people!) events throughout the year. The Section offers tangible tools to solve life problems and participates in organized events geared toward serving memKate McConnico is a past chair of the HBA Family Law Section, bers of our community in need. Besides the free legal advice has practiced family law since 1996, and likes to sail when offered through LegalLine, the Harris County Domestic Relashe gets the chance. She is a member of The Houston Lawyer tions Office (DRO) offers mediation, adoption, child support, Editorial Board. thehoustonlawyer.com
November/December 2019
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LEGAL TRENDS
Texas Supreme Court Addresses Impact of Insurance Appraisal on TPPCA Claims
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The Houston Lawyer
By Travis Armstrong
n the recent case Barbara Techs. Corp. v. State Farm Lloyds, the Texas Supreme Court for the first time addressed whether an insured can prevail on a claim for delayed payment of benefits under the Texas Prompt Payment of Claims Act (TPPCA)—a statutory scheme setting specific deadlines for responding to, investigating, and evaluating insurance claims—when the insurer invokes the policy’s appraisal provisions and ultimately pays the insured in full in accordance with the appraisal.1 The Court concluded that timely payment of an appraisal award does not foreclose an insurer’s liability under the TPPCA. In reaching this conclusion, the Court overruled a fairly consistent body of law from Texas intermediate Courts on this issue. In Barbara Techs., a commercial property owner (the “insured”) filed a claim for hail and windstorm losses to certain of its property under a State Farm insurance policy. State Farm timely investigated the claim, ultimately concluding that covered losses were below the policy deductible. The insured, in turn, filed a lawsuit. State Farm subsequently invoked the policy’s appraisal provisions—a common feature in Texas insurance policies that allows the parties to settle the amount of the claimed 40
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loss through an extra-judicial process, wherein both parties appoint appraisers to independently evaluate the property and negotiate the extent of damages or submit their evaluations to an appraisal umpire for a final determination. The appraisal process in Barbara Techs. yielded a loss of almost $200,000.00, which the insurer promptly paid. Following the appraisal payment, the insured filed a motion for summary judgment, contending that State Farm’s payment of the appraisal award fell outside the 60-day time limit for satisfying claims under the TPPCA. State Farm filed a competing motion for summary judgment, contending that its appraisal payment estopped all TPPCA claims. The trial court denied summary judgment for the insured and granted summary judgment for State Farm. The intermediate appellate court also affirmed, citing its own precedent in Garcia v. State Farm Lloyds.2 The Texas Supreme Court however, reversed the trial and intermediate decisions concerning State Farm’s summary judgment motion, noting that “[n]owhere does the TPPCA mention appraisals or how invocation of an appraisal process affects the TPPCA’s deadlines and requirements,”3 notwithstanding the fact that “appraisal clauses were in use and enforceable well before enactment of the TPPCA.”4 The Court construed the TPPCA’s silence on appraisal “to mean that the Legislature intends neither to impose specific deadlines for the contractual appraisal process within the TPPCA scheme nor to exempt the contractual appraisal process from the deadlines provided by the TPPCA.”5 In other words, use of the appraisal process will not excuse an insurer from TPPCA liability if the insurer was liable for the underlying claim under the policy terms and failed to pay the claim on or before the statutory deadline. In reaching this conclusion, the Court acknowledged that Texas appellate courts have routinely held that full and timely payment of an appraisal award precludes
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an insured from recovering damages under the TPPCA as a matter of law.6 The Court agreed with these decisions insofar as they held that payment of an appraisal award did not establish liability under the Policy and could not, in itself, subject the insurer to TPPCA liability. However, the Court disapproved of these decisions “to the extent [they] could be read to excuse an insurer liable under the policy from having to pay TPPCA damages merely because it tendered payment based on an appraisal award, or to foreclose any further proceedings to determine the insurer’s liability under the policy[.]”7 In an important dissent, Chief Justice Nathan L. Hecht expressed grave concern over the impact of the majority’s decision on the utility of the appraisal process. Justice Hecht noted that “[a]ppraisals have been used in Texas for more than a century, and to good end,”8 functioning as a less expensive, more efficient alternative to litigation. Justice Hecht further observed that, under the majority’s decision, an insurer who timely and lawfully invokes the appraisal process could be subject to paying 18% interest and attorneys’ fees under the TPPCA anytime the appraisal award is greater than the original adjustment of the claim. Such a result, according to Justice Hecht, effectively subverts the entire purpose of appraisal to avoid litigation and encourage prompt resolution of insurance claims. The clear aim of the Barbara Techs. decision is to prevent insurers from delaying payment of claims that are clearly covered under the policy and then escaping TPPCA liability by invoking appraisal when the insured files a lawsuit. As understandable as this may be, it is hard to disagree with Justice Hecht’s reasoning. Since the appraisal process will almost always exceed the deadlines for claim investigation and payment under the TPPCA, an insurer that invokes a policy’s appraisal provisions virtually ensures—rather than avoids— litigation, at least as to TPPCA liability.
LEGAL TRENDS
Thus, from an insurance defense perspective, appraisal loses most of its value as a litigation deterrent. In the long run, Barbara Techs. may prove to be an example of the Court throwing the baby out with the bathwater. Travis Armstrong is an appellate attorney at Sheehy Ware Pappas, P.C. and a member of The Houston Lawyer editorial board. Endnotes
1. Barbara Techs. Corp. v. State Farm Lloyds, No. 17-0640, 2019 WL 2710089, at *1 (Tex. 2019). 2. Id. at *8. 3. Id. at *5. 4. Id. 5. Id. 6. E.g., Garcia v. State Farm Lloyds, 514 S.W.3d 257, 274–75 (Tex. App.—San Antonio 2016, pet. denied) (explaining that payment of an appraisal award precluded TPPCA claims); In re Slavonic Mut. Fire Ins. Ass’n, 308 S.W.3d 556, 563–64 (Tex. App.—Houston [14th Dist.] 2010, no pet.). 7. Supra note 1, at *8. 8. Id. at *28.
Is the Affordable Care Act on its way to SCOTUS Again?
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By Raffi Melkonian
ost observers believed that the legal challenges to the Patient Protection and Affordable Care Act (the ACA)— the 2010 law passed under President Barack H. Obama to reform the healthcare market—had stopped for good after the Supreme Court’s decision in National Federation of Independent Business v. Sebelius.1 In that case, a 5-4 majority of the Court held definitively that Congress was
empowered to enact the individual mandate under the federal government’s taxing power. Thus, it seemed, the ACA’s legal foundations were finally secure. This changed however, when Congress enacted the Tax Cuts and Jobs Act of 2017 (the “TCJA”), which, among other things, reduced the tax penalty for the so-called individual mandate to zero. A coalition of States, led by Texas, immediately sued the federal government. The suit was filed in the Northern District of Texas in 2017, a district where Texas has often brought its claims due to its judges being historically favorable to conservative legal challenges. Texas’ lead role in this suit was consistent with its role in other important (and controversial) challenges to Federal initiatives: from successfully challenging the DAPA program (which provided immigration relief to the parents of American citizens), to disputing pollution regulations, and contraceptive coverage mandates, the Texas Attorney General’s office has aggressively used litigation to advance the interests of Texas’ leadership. On its face, Texas’ central argument against the ACA seemed implausible to many scholars of the health care litigation battles: if the individual mandate was only affirmed in the National Federation Supreme Court case because it was a tax, but now is no longer a revenue-raising tax, then the mandate is facially unconstitutional. Therefore, as said mandate was integral to the ACA, the statute in its entirety, would have to fall. In opposition, a coalition of left-leaning states argued that this argument had no legs. At the very least, if the individual mandate was actually unconstitutional (which they disputed) the remedy was to “sever” the mandate out of the ACA. All of the other parts of the law, including the prohibition against denying insurance for preexisting conditions, would survive. Under traditional severability analysis, the supporters of the ACA seemed to have the better arguments.
As improbable as Texas’ argument initially seemed, it found traction in court. Ultimately, in the very last days of 2018, the Northern District’s Judge Reed O’Connor struck down the entirety of the ACA, ruling that the landmark law was unconstitutional. In agreement with Texas’ standpoint, he wrote that the deeply personal way the “United States healthcare system touches millions of lives” demonstrates the individual mandate’s central function in the ACA – it was for this reason he found that the whole statute should be invalidated.2 When the case was appealed to the Fifth Circuit—at which point the Democraticmajority U.S. House of Representatives had intervened the suit to defend the ACA— many legal observers assumed the court would swiftly dispose of Texas’ arguments. This was true, despite the fact that the Department of Justice had adopted a new position in which it agreed with Texas that the entire ACA had to be struck down. Yet, oral argument before a three-judge Fifth Circuit panel (Judges Jennifer Walker Elrod, Carolyn Dineen King, and Kurt D. Engelhardt) on July 8, 2019, left everyone adrift. The panel did not seem interested in many of the threshold arguments that ACA defenders had about standing. Judge Engelhardt in particular, appeared skeptical of the House’s defense of the ACA which had intervened in a case that that the Republican-majority U.S. Senate had not.3 The decision of the Fifth Circuit has not yet been issued. Immediately after the argument, the consensus of most observers was that at least part of the Affordable Care Act would fall. But as time has passed and experts have had more time to consider the oral argument and the briefing, lawyers have speculated that while the individual mandate may be struck down, the bulk of the ACA might survive. After all, striking down the entire ACA would be an extraordinarily heavy lift for the Fifth Circuit. The question everyone is debating while we wait is—what next?
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LEGAL TRENDS
Media Reviews
The answer to that question depends to some extent on what the Fifth Circuit does. There are, broadly speaking, three possibilities in the immediate future: 1. The Fifth Circuit reverses Judge O’Connor’s decision and affirms the ACA; 2. The Court strikes down the individual mandate, but severs it from the rest of the Act; or 3. The Court affirms Judge O’Connor’s decision in full. If the Court strikes down the ACA in full across the entire United States, we can expect the U.S. Supreme Court to take the case in an expedited manner— or at least stay effect of that decision until it can resolve the case. More difficult questions arise if the Fifth Circuit panel disposes of the case while upholding the ACA in pertinent part. In that scenario, I can easily imagine the Supreme Court deciding to pass on the case if a petition is taken by Texas. Given the lack of realworld consequences and no circuit split, the Court may not want to take such a case in an election year. That sort of political role is not one that Chief Justice John Roberts seems to relish. Whatever happens in the Fifth Circuit and in the US Supreme Court, there’s one thing we can be sure of—this is the last lawsuit that will challenge the basis of the ACA. Right?. Raffi Melkonian is a partner at the Houston appellate and trial litigation firm, Wright, Close & Barger LLP. He litigates cases in the federal and states courts of appeals, and in the United States and Texas Supreme Courts.
The Houston Lawyer
Endnotes
1. Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012). 2. Texas v. U.S., 340 F. Supp. 3d 579, 585 (N.D. Tex. 2018). 3. See Emma Platoff, As Texas Seeks to Overturn Obamacare, Attention Focuses on a Potential Swing Judge, TEX. TRIB., July 9, 2019,www.texastribune.org/2019/07/09/5th-circuitobamacare-oral-arguments-texas-unconstitutionalcalifornia (noting Judge Englehardt’s remarks about the U.S. Senate and the ACA, commenting that the Senate “is sort of the 800-pound gorilla that’s not in the room.”)
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School Law’s Evolution– Reflections of a Texas Lawyer By Kelly Frels Education Law Association, 2019 Reviewed by Anietie Akpan
S
chool Law’s Evolution – Reflections of a Texas Lawyer is a comprehensive accounting of the decades-long career of school law trailblazer, Kelly Frels. His professional background includes representing public and private schools, community colleges and universities in areas of civil rights, employment, student discipline and the First Amendment. He had only been licensed as an attorney for a little over a month when he received a call on October 27, 1970 from George Garver, the Superintendent of Houston Independent School District, who advised that HISD wanted to establish a community college. What followed was weeks of Frels studying pertinent statutory law, presenting oral arguments before the Harris County Commissioner’s Court and the Texas Higher Education Coordinator Board, and countless correspondence and interactions with HISD Board members, administrators, state legislators and political, education and business community leaders. His tireless efforts resulted in the successful creation of what is now known as Houston Community College, on May 18, 1971. Thus was Frels’ first (of many)
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historical school law milestones, and the impetus of a nearly 50-year highly distinguished career. School law is an incredibly unique area of jurisprudence, covering a plethora of legal issues regarding, but not limited to, civil rights and discrimination, labor & employment, disability and special education, conduct and discipline, and board governance. School Law’s Evolution highlights the history of school law cases argued by Frels and his distinguished colleagues in the state of Texas, litigating on teachers’ strikes, school prayer and free speech, student discipline, and broader institutional issues under the Texas Open Meetings Act and Texas Public Information Act. But the case that Frels cites as having paramount impact on his professional career is the HISD desegregation case of Delores Ross, et al. v. HISD (457 F. Supp. 18 (1977). Set against the backdrop of the landmark U.S. Supreme Court case, Brown v. Board of Education of Topeka, Frels’ account of Delores Ross addresses the HISD Board of Education’s resistance to desegregate its schools, jurists’ responses to this resistance by proposing clustering of Black schools with White schools, and the subsequent efforts by community members to this proposal to create an entirely new school district (the proposed Westheimer Independent School District) to avoid having White children go to school with Black students and having their children taught by Black teachers. When Frels, a young associate in 1971, first took over the case, he had no idea that his involvement in the desegregation of HISD would be his “career case,” lasting until the termination of a five-year settlement agreement on September 10, 1989. Desegregation was not the only school
Media Reviews
law issue that paralleled social developments in our nation’s history. Frels also discusses his first experience with teachers’ strikes, walkouts and student free speech issues in the 1970s (galvanized by recent First Amendment cases regarding anti-Vietnam protests), transgender issues and clients in the 1980s (a male student beginning gender reassignment surgery wanted to use the women’s dressing room at the campus gym) and the development of charter schools in the 1990s. But School Law’s Evolution does not only highlight countless milestone cases, it also describes the development of school lawyer organizations in the state of Texas. Brown v. Board of Education triggered an upsurge of legal issues in school districts, requiring a forum for school attorneys to network and discuss common issues. Thus, the first meeting of the School Law Committee (now known as the School Law Section of the State Bar) was called in 1971. In addition to the genesis of the School Law Section, Frels describes other networking and professional associations: the National School Boards Association and Association of School Administration (whose respective conferences were hosted in Houston in 1974), the state affiliate of the same, the Texas Association of School Boards (at whose conventions Frels frequently spoke), and the Council of School Attorneys (Frels became the second vice-chair at only 30 years of age). Toward the end of the book, Frels provides reflections on how the education system has changed over the past 50-plus years: understanding the difficult experiences of marginalized communities in their journeys to access equal educational resources, examining how teachers navigate their respective work environments, studying the ways in which school districts have diversified over time, and looking at how educational curriculums have progressed to prepare students for jobs of the future.
School Law’s Evolution narrates the achievements of a man who has dedicated his professional and personal life to education advocacy, chronicling how school law has developed locally in Houston, in our state courts, and on the national stage as well. A great read for attorneys and non-attorneys alike.
By Mike Farris and Jennifer Pedroza Stairway Press, 2018 Reviewed by Koby Wilbanks
behind the best-selling Fifty Shades of Grey series. The book takes the reader through every step of the case, from initial client interview to trial to post-judgment discovery to final settlement, providing practical and substantive tips along the way. Every page includes useful information, with practical tips such as how to use storytelling to strengthen your position with the jury and the benefits of using a jury questionnaire to speed-up voir dire, as well as substantive tips such as the specific language to include in orders regarding constructive trusts and those extending temporary restraining orders until a temporary injunction hearing, and why to make objections even if you think the judge is on your side. What makes the book so impactful is the fact that the authors’ tips and tricks are explained via a real-world and multi-year lawsuit, rather than the varied hy potheticals generally used in legal texts. This is useful to both new and experienced practitioners alike and allows the reader to experience the chess-like strategy employed by successful trial attorneys, including the final outcome as the legal strategy plays out over time. As an added bonus, Pedroza provides a client-centric narrative that mirrors the legal narrative, a point of view generally missing from legal novels and textbook.
ifty Shades of Black & White by Mike Farris and Jennifer Perdoza sets out the anatomy of the dramatic oral partnership and fraud litigation between the owners of the publishing house
Koby Wilbanks is a member of The Houston Lawyer Editorial Board and provides local business, including startups, with the legal advice and business strategy support they need to succeed and grow.
Author’s Note: Kelly Frels is of counsel at Bracewell LLP, where he served as the firm’s managing partner from 1995-2001 and managing partner of the Houston office from 2001-2003. He served as president of the Houston Bar Association during the 1994–1995 bar year. Anietie Akpan is in-house counsel for METRO and serves as an associate editor for The Houston Lawyer.
Fifty Shades of Black & White – Anatomy of the Lawsuit behind a Publishing Phenomenon
F
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November/December 2019
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Office Space HOUSTON/GREENWAY PLAZA AREA – 3555 Timmons Three Solo Estate Planning attorneys seeking a transactional attorney for suite mate. Beautiful, quiet, elegant, unobstructed views from a triple window office plus staff office available. Amenities include conference rooms, reception area, copier/scanner/printer, kitchenette, high-speed internet, free parking for clients. Elevator lobby exposure. Immediate occupancy. Easy commute to West U, Bellaire and River Oaks @ $2600/month. Please call Michael Ramirez at 713-621-7057 or email tfrierson@friersonlaw.com.
The Houston Lawyer
Heights area law office sharing. 1 large office (approx 15x15) available August 1. Modern building with 24 hour security on North Loop near Shepherd with downtown views. Beautiful conference room with 60” TV/Whiteboard, color copier/fax/scanner available on network, internet, full featured VOIP phone system, Wi-Fi and wired internet, attached covered parking, room for your files. Kitchen in suite with microwave/pizza oven, coffee, soft drinks, water and snacks available. Contact Mike or Teri at 713 529-2020 for more information. ATTORNEY OFFICE Find and Rent the Ideal LawSpace for Your Practice www.LawSpaceMatch.com connects lawyers with offices and offices with lawyers. Exclusively for lawyers. Created by lawyers who share space. Search for offices in existing law firms in 40,000 zip codes for free. Find empty law offices for rent in law firms. 44
November/December 2019
HOUSTON GALLERIA OFFICE SPACE Galleria area office space for sharing arrangement. Three attorney’s spaces are available with space for support staff and files. Attorney offices are about 14’ X 15’ with large windows. We have conference rooms, kitchen, and other common areas. This is not an executive suite. Email Kurt Arbuckle, kurt@kurtarbuckle.com. Large furnished office with marble conference table in former art gallery (now law office) plus secretary’s office or cubicle. Near Richmond at Kirby. Phones, internet, kitchen, copier, postage, shredding service available. 713-840-9600 Professional Services
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