The KOM of Data Privacy and Utilizations

By: Esteban Múnera

December 2017

The Big Data Challenge

Data privacy was once viewed primarily as a narrow legal niche, mainly relevant for a handful of industry segments, with very little impact on most lawyers and most companies.  Today, particularly in the past few years, data privacy and security have become regular front page news with the need for substantial attention in virtually every company.  Behind the scenes, regulators vie for jurisdiction on enforcement issues, and legislators at all levels attempt to balance between personal interests and the potential gains for society from data.  As a result, you cannot run a meaningful company without an effective information security program. By the same token, you cannot benefit appropriately from the information available to you without understanding how privacy laws and regulations impact big data and overall data analysis.

The big data challenge involves both private enterprise and government seeking greater insights into people’s behaviors and sentiments which may aid product and process discovery, productivity, and policymaking.  This post will provide a primary overview of the legal considerations of data privacy.  U.S. and international privacy regulations aside, all lawyers must advise their respective clients on potential data privacy threats and beneficial utilizations.  As the example below illustrates, this line between privacy and utilizations is not always clear and constantly changing.

Case Study: Strava

            In 2009, Strava, launched their site, and opened a virtual community for athletes.  “The Social Network for Athletes”, is a website and mobile app used to track athletic activity via satellite navigation and compete virtually against other users (e.g., King of the Mountain segment challenges, or “KOMs”).  There are a number of features available which include the ability to search the database for routes, athletes, and local challenges.  Athletes can “follow” each other and activities are automatically grouped together when they occur at the same time and place (for example, taking part in an organized marathon/sportive or group run/ride).  In addition, athletes can give “Kudos” (similar to a Facebook Like) and comment on each other’s activities, and upload photos to activities.

This year, Strava celebrated a major milestone: the one-billionth activity shared to their social network for athletes.  As a rapidly growing social network for athletes, Strava saw one million new users every 40 days, and athletes share a staggering average of 1,382,138 activities per day. Athletes on Strava have covered 12,967,788,011 miles—the equivalent of 54,281 trips to the moon! And if you thought Instagram was the only player in the social network space, the platform also sees a whopping 17 million feed views per day, 55 million comments and kudos each week, and 2.2 million photos uploaded per week.[1]

The Business = Data

Although Strava offers a premium subscription business, most users are “weekend-warriors” who opt for the free service option.  Premium subscription according to Strava is for “the athlete who squeezes every drop out of their sport” through advanced data analytics.[2]  Unsurprisingly, these premium perks prove to be superfluous and financially prohibitive for the majority of its consumer base.

In addition, unlike online music providers, Strava is completely add-free for both premium and non-premium users.  Strava’s new CEO, James Quarles, explained that ads are not where he is steering Strava’s business line.  He believes that for ads a certain kind of scale and user expectation is needed.  He should know - Quarles brings to Strava invaluable experience as most recently the VP of Instagram Business and previously Regional Director of Facebook in Europe, the Middle East and Africa.

So how does Strava make money?  As the Quarles explained, it has a “metro business” (Strava Metro) which aggregates and anonymizes commute data to sell back to a city’s department of transportation so they can better plan pedestrian bicycle routes in cities.  Although it may see like Strava Metro is a broad departure from its primary service, this invaluable data has the potential to inform every respective athlete’s city on questions of infrastructure.  It is the most powerful example of advocacy and awareness.  In the long run, pun intended, the tracked data will lead to new bike paths, bike lanes, and improved infrastructure

So, as with any social network – as the community grows, the types of business and data abstractions will grow.  But with the good, comes the bad.

Location-Based Dangers – The Strava Run Map and FlyBy

As a lifelong runner, I’ve become adept at predicting the best times, routes, and strategies to jog in cities while avoiding street impediments.  From circumventing stops at traffic lights to seeking quiet streets, I have adopted behaviors that may put my personal safety at risk.  To make matters worse, Strava may broadcast the route of my daily runs, including the starting location (i.e., my home address).  Furthermore, the new Strava Flybys feature allows you to see your run/ride, plus the run/ride of anyone else you ran/rode with, or who crossed your path.  So even if you were on the same road for just a couple of minutes, you can then view where the other athlete went.

To help combat privacy threats, Strava allows its users to customize the information he or she shares to satisfy the balance between being social and being private that feels right to the user.  The issue is that many users still do not understand how public their activities on the site are.  There is a misconception that since this a platform for athletes, there are no bad actors using the information available to them.  This is simply not true.

For Flybys, athletes can specifically opt-out of being part of Flybys features by selecting the appropriate option under their privacy settings area. f they do this their activity is not included in any Flyby replays.  Again, the issue is that many users do not know about this function or its opt-out option.  The Flybys feature is not part of the main platform, instead it is only available via a link on individual activity pages.

Creative Solutions

Privacy controls should not be an issue an active user, such as myself, should have to Google.  Like the modern trend in writing and displaying legal terms and conditions, privacy control options should be presented at the inception of a new account in a clear and plain manner.  These options should include direct implications of a user’s choice.  For example, choosing a private account setting control does not necessarily exclude your activities from public segment and challenge leaderboards.

Recently, Strava has responded to feedback from its community with a new feature, Beacon.  This service provides Premium members the ability to turn on Beacon before an activity, which allows up to three safety contacts are able to see their location on a map in real- time.  The problem, however, is that the majority users are not Premium members.  Creative solutions like Beacon, or some non-premium variety, need to be uniformly applied for all its users.  Personal and data security is a threat to all – no matter the athletic ability.

[1] https://blog.strava.com/2016-stats/

[2] https://www.strava.com/premium

“MAP” Agreements: an arrow in your quiver

By: Benjamin Ruano

December 2017

Entrepreneurs with a steadfast vision of introducing into the marketplace a uniquely useful or innovative product — those who skillfully craft its every contour and element of design, scrupulously examine and select its component parts, and exuberantly market the product to consumers and investors — understandably become crestfallen upon seeing their product advertised by retailers for much less than their suggested retail price.  This scenario represents more than a mere stab at one’s ego or emotions, it may even adversely impact a nascent business.  Entrepreneurs and manufacturers, however, have a potentially useful arrow in their quivers to contend with this dismaying situation: Minimum Advertised Price (“MAP”) agreements.

Of “value” and “price”

Most, if not all, things have no intrinsic value; “value” is a human construction, the argument goes (pardon the philosophical conjecture, but there is a point to this). “Value” in the marketplace, then, may be seen as an edifice of worth erected by consumers, retailers, entrepreneurs, advertisers and manufacturers alike.  For instance, a consumer may perceive a product’s value (and the price she is willing to pay) to be much higher than the value or price a retailer ascribes to the same product. 

As droves of consumers, retailers, manufacturers, and the like, proceed to weigh-in on their perceived value of a given product, over time the outward-facing sticker-price will begin to approximate and reflect the aggregated view of marketplace actors.  This is a manifest oversimplification of how goods and services are priced (lest We forget supply and demand); but it is nevertheless a useful exercise in coming to terms with the fact that the prices of products you put forth into the marketplace are often in discord with how you as entrepreneurs value them.  Indeed, in the aftermath of cold appraisal by rational actors—whom are largely disinterested in the viability of your company—you may not always end up with a price with which you are content. 

To wit, there is a great tension between the aims of retailers and manufacturers. Retailers are in a highly competitive market and face pressures to advertise and sell at the lowest possible price; entrepreneurs and manufacturers, meanwhile, desire strong sales but also rely on particular price-floors to draw accurate revenue projections and confidently enter into financing agreements—and in some cases, to merely stay afloat.

A primer: “MAP” Agreements

Some market participants, such as large retailers that both advertise and sell products (e.g. Target and Amazon), have a disproportionate impact on where the price-dust settles.  If certain products are being advertised (and sold) for far less than cost, it can hurt brand and product value while also hurting other retailers who are selling a product at MSRP (“Manufacturer Suggested Retail Price,” typically the total cost of producing a product plus an embedded profit margin).  In a competitive marketplace, this scenario spurs a “race to the bottom” for retailers just looking to make sales by dramatically undercutting on price; this is especially critical for online retailers who more frequently are faced with new competitors.1 In an effort to guard against this “race to the bottom,” Minimum Advertised Price (“MAP”) agreements were conceived and quickly began to sprout about the marketplace.  “MAP” is the lowest price a retailer can advertise a manufacturer’s product in online ads or print – note, this does not affect the price at which a certain product can be sold while in-store. 

There are many pros linked to “MAP” agreements for manufacturers and retailers: 2   

For Manufacturers

For Retailers

Protects brand equity

Maintains product value

Eliminates free-riding

Controls downstream prices

Coordinates channels prices

Protects profit margins

Prevents price cascading

Helps marketing efforts

Drives revenue growth

Collusion? Hardly.

Since minimum advertised pricing only relates to advertised pricing and does not tell a retailer at which price they can actually sell it in their store, this type of collusion between manufacturers and retailers is perfectly legal under U.S. antitrust statutes.  Departing from a 96-year-old precedent, the Supreme Court of the United States in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007) found that such agreements actually promoted competition and were per se “legal” – the only exception lying in situations where the price agreements are abused for illegal anticompetitive purposes, determined on a case-by-case basis and analyzed under the Court’s “rule of reason” standard.3

Two items are relevant to note: First, unauthorized retailers—those with no formal relationship with the manufacturer—are not bound by “MAP” agreements.  Second, that online retailers have figured out a way to sell products for prices below “MAP” and skirt such agreements, with the blessing of the Federal Trade Commission (“FTC”) and the courts.4  In short, the FTC says that the price displayed in a secure or encrypted shopping cart is not subject to “MAP” agreements because it is technically not “advertising” once in a private cart.  Have you ever seen, while online shopping, text to the effect of “price displayed in shopping cart?”  You can thank a savvy lawyer for that.

To “MAP,” or not to “MAP”? An entrepreneur’s soliloquy.  

A written, formally-executed “MAP” agreement between a manufacturer and retailer stating minimum pricing not only carries the potential benefits enumerated above, it also bears all the hallmarks of a contract - including legal remedies for noncompliance. This is somewhat comforting, but one taking this route must contemplate the legal costs associated with drafting a bespoke agreement, as well as the possibility that a retailer will eschew doing business with your company entirely, in terse response. 

By comparison, in the event that no “MAP” agreement is signed, manufacturers have far less authority, and legal backing, to enforce their regulations or purely internal policies.

There is also the issue of enforcement.  Supposing a “MAP” agreement was entered into and a retailer advertised your product below “MAP,” you would be entitled to pull your products from the retailer and restrict them from selling the product again.  (Which begs the question: how many entrepreneurs have the constitution and willingness to pull a successful product from a big-box store or online marketplace?)  Moreover, if dozens (or hundreds, or more) of these agreements are executed, consistent enforcement can be unruly and costly.  Yet, by not consistently enforcing them you may inadvertently suggest to your retailers that they can renege on the agreement with impunity, effectively defeating your original purpose. 

Nevertheless, these agreements seem to work.  A recent study on this topic, undertaken by researchers at the Kellogg School of Management, revealed that just 15% of authorized retailers do not comply with their “MAP” agreements.  As a best practice, the researchers suggested, manufacturers should have “a little flexibility” in “MAP” pricing definitions, which can actually benefit all parties.  Manufacturers should understand that retailers are competing for business, and in consideration of this there may be a stipulation, for example, that a retailer is in violation only if it prices a specific product at least $10 lower than the “MAP”.  Such flexibility might make it easier for the retailer to agree to enter into the agreement and might help manufacturers direct their limited resources at more egregious “MAP” violations.

Ultimately, affixing your best business judgment to the question of whether or not you should implement a “MAP” agreement is a worthwhile initiative—particularly as regards the “value” of your product.  Indeed, by utilizing a “MAP” agreement you can at least afford yourself a more pronounced say as to what “value” (and price) you think your product should be accorded in the marketplace.

Deregulating the Entrepreneur

By: Tyler Archer

December 2017

A robust entrepreneurial spirit is a defining characteristic of American workers and businesspeople—and with good reason. Of the roughly 25 million businesses operating in the United States in 2015, about 23 million were sole proprietorships or partnerships.[1] Ninety percent of American companies have fewer than 20 employees[2] and companies with fewer than 500 employees account for roughly 65% of all net new jobs.[3] Half the American workforce clocks in everyday at a small business.[4] The statistics roll on – America is a small business nation.

Elected officials on both sides of the aisle often sing the praises of small businesses, but less often they pass laws or support reforms that could make it easier for small businesses to do what they do best: allow individuals to make their dreams reality. Perhaps the best example of a well-intentioned government action getting in the way of the entrepreneur is occupational licensing. For a growing list of occupations, government permission is required to enter the market. A recent 50-state survey of occupational licensing found that for over one hundred jobs the average requirements included $200 in fees, nine months of training, and at least one exam.[5] The report offered two other important findings. First, occupational licensing is random: only 15 of the studied professions are licensed in 40 or more states and the average job only requires a license in fewer than 25 states. Second, the difficulty of entering a profession often does not correspond with its perceived difficulty or the health and safety risks. One notable example in Massachusetts is that Barbers requires ten times more training hours than EMTs. These inconsistencies raise questions about whether licenses are necessary for public safety or result from political motives such as cronyism—wherein established businesses benefit from making it more difficult for competitors to enter the market.

To make matters worse, occupational licenses tend to disproportionately impact low- and moderate-income jobs. One illuminating story comes from Tupelo, Mississippi.[6] In 1995, Melony Armstrong, a young African-American mother of four, wanted to open her own business braiding hair in styles common among Africans and African-Americans. To become a braider, Melony completed 300 hours of coursework—though none covered braiding—to earn her wigology license. After years as the state’s only braider, Melony wanted to pass her skills on to the next generation of young African-American girls. In stepped the government. The state’s Board of Cosmetology required Melony to obtain a cosmetology license (an additional 1,200 hours), then a cosmetology instructor’s license (another 2,000 hours), and then apply for a school license. None of these 3,500 hours covered anything related to braiding or teaching others how to braid. Melony had had enough and filed a lawsuit to break down these regulatory barriers. In 2005, the lawsuit ended when Mississippi Governor Haley Barbour signed legislation allowing braiders to practice and teach their craft without any workshop hours, license, or school—just a $25 registration fee and continuing compliance with state and local health codes. Since 2005, 300 other women have opened braiding businesses in Mississippi, thereby gaining financial independence under the banner of entrepreneurship. Melony’s story has become the prime example of the cumbersome barriers-to-entry government erects in the face of entrepreneurs and what can happen when it gets out of the way.

 Excessive or poorly implemented regulation is another way well-intentioned government actions can impede entrepreneurs. Moving beyond the everyday complaints of monotonous paperwork and “bureaucracy” easily found in workplaces around the country, recent studies have attempted to find empirical evidence of the dampening effect regulations can have on small businesses. The evidence appears most readily when considering how legislators and bureaucrats draft regulations. In general, as a business grows it triggers more and more regulation. Two of the most common triggers occur at 50 and 250 employees. For many businesses on these margins, the additional regulatory cost of hiring that next employee can outweigh the benefit that employee would bring, and small businesses choose to delay expansion. This plays out in Department of Labor statistics on the distribution of private small businesses by employee-size. In what would otherwise be a relatively flat distribution for firms, two bunches appear at sizes 20-49 and 100-249, just before these “regulatory cliffs”.[7] This is not just an American phenomenon. A recent study of French small businesses by the London School of Economics revealed this bunching effect—but to a more dramatic degree.[8]

For the wonkier among us, in a first-of-its-kind study, economists at George Mason and Duke universities attempted to estimate the cumulative cost of regulations on the American economy.[9] By analyzing 22 industries over a 35-year period, they estimated that regulations have reduced the economy 0.8% annually—roughly 25% in total—translating to $4 trillion in lost economic growth in just one year. Put another way, that is roughly $13,000 per capita.

None of this is to say that all licenses or regulations are bad, or that we would be better off with an unfettered free-for-all. Certain benefits—such as environmental and human health—are difficult if not impossible to measure in economic terms. Rather, data and stories like the above should serve as lessons for legislators and regulators, and encourage them to consider the individual impacts of the laws and rules that they propose, as well as the overall regulatory burden they place on the economy.

Re-assessing occupational licensing is an easy option. Another could be designing future regulations to take gradual effect rather than at steep bureaucratic cliffs. Increasing accountability by putting regulations up for periodic review or requiring particularly costly regulations to have legislative approval are just some of the many ideas to modernize and streamline the way governments interact with and effect small businesses. If our lawmakers can focus on reducing barriers to entry, easing pressure on marginal firms, and limiting the corrupting power of cronyism, entrepreneurship will continue to be a driving force in the American economy, improving people’s lives and solving many of the problems bureaucrats seek to address in the first place.

I’m a Start-up: Should I Use Rocket Lawyer to Help Me with my Legal issues?

By: EIC Student

December 2017

The Moment of Truth in the Legal Industry, or Is It?

There are websites, such as Rocket Lawyer, Contractology, Avvo, LegalZoom, and Template Monster that allow entrepreneurs and companies to find legal templates and gain legal advice. These websites bypass the process of retaining the services of an attorney or law firm.

The relationship between the user and the website is akin to several other popular apps and websites: OpenTable allows the diner to make a reservation, instead of speaking to the hostess at a restaurant; Uber allows the rider to find a ride instead of hailing a taxi or speaking to the dispatcher at a car service company; TurboTax allows the tax payer to file taxes instead of consulting with a tax accountant; and WebMD enables a sick person to diagnose his or her ailments remotely instead of heading to the doctor’s office. The parallel is that these websites and apps remove the human element from the equation. Even David Byrne sees the parallels.

The legal profession, as with many industries, is in flux due to the “disruption” emanating from Silicon Valley. A recent New York Times article, “A.I. Is Doing Legal Work. But It Won’t Replace Lawyers, Yet,” provides an overview of this disruption. The article concludes that there are specific and niche legal services that businesses are willing to pay for, yet, some of the more routine legal work can now be completed by A.I.

Where does this leave the start-ups and entrepreneurs seeking legal advice? The below sections of this post outline both sides of the discussion, and provide you with answers to this question.

The Benefits of Legal Advice Websites

As a start-up or a small business, online legal resources are attractive options because googling, “how to form a C-Corp” and finding the answer with the click of the mouse seems more bearable and less time-consuming than contacting an attorney and paying legal fees.

There is a myriad of ostensible benefits to these legal advice websites:

·         Cost savings;

·         No need to be in direct with an attorney;

·         Clearer ownership and control over the process;

·         Provides entrepreneurs with foundational legal knowledge;

·         Free and direct access to legal resources;

·         And again, cost savings.

The cost may be the biggest reason that a young company would want to avoid retaining legal counsel. Especially, at an early stage, a start-up likely does not have the funds to hire a lawyer. Furthermore, these legal advice websites bring legal advice to the masses. Arguably, this creates a more informed body of entrepreneurs. Lastly, these advances also help lawyers: the websites enable lawyers to focus on the gray areas of clients’ issues, while allowing these websites to handle the rote drafting.

Through the advent of these websites, legal advice is a Google search away (and does not break the bank). The question becomes: why do I need a lawyer if Rocket Lawyer provides all the answers?

The Risks Associated with Legal Advice Websites

While these websites provide entrepreneurs with immediate access to legal resources, issues may arise during this process. An entrepreneur may not be versed in legal vernacular, and as a result, the information that the user inputs into the legal service website may be incomplete or inaccurate. In turn, the answer that the website automatically spits out may be wrong. This will place the entrepreneur at a disadvantage.

Furthermore, young entrepreneurs may not know that they may benefit from the services of a lawyer. As such, an entrepreneur may blindly follow the advice provided by these websites, without knowing the nuances that only a discussion with an expert could provide. Lastly, the websites may not be up-to-date on the most recent legal advice, or there may be different state requirements, and the website only provides federal information.

There Is a Balance to Strike

Lawyers are not going away anytime soon. According to a Massachusetts Institute of Technology (MIT) study, the authors, “estimate that automation has an impact on the demand for lawyers’ time that while measureable, is far less significant than popular accounts suggest.”

Instead, according to a McKinsey & Company study, the automation will transform, and not eliminate jobs. This type of change will enable certain tasks to become automated. Furthermore, according to a Harvard Business Review article, these automated systems will create consistent precedents, streamline documents, and allow for routine tasks to be taken on by machines. These developments will ultimately allow lawyers to focus on less menial tasks, and instead, focus their energies on “the tricky stuff that calls for judgment, creativity, and empathy.”

Proceed with Caution:

The Best Ways to Use the Legal Advice Websites

While the legal advice websites may have many benefits, there is a certain way to use them.

Below is a general step-by-step process to follow:

·         First, look at the various websites to get a lay of the legal land. If you are unsure whether you want to form a C-Corp or an LLC, look at the websites to inform you. You will be able to gain a better sense of the language and the issues relevant to your business.

·         Once you believe that you have hit a wall in your research, try contacting a law firm or one of the free local legal clinics listed below.

·         At that point, get the conversation started: you can provide the clinic or the lawyer with the information that you have at that time and let them know your future goals. You want to paint a clear picture so that the experts have all the relevant information.

·         Then, allow the experts to provide you with their analysis and advice.

·         In the end, you can combine your research in conjunction with the experts’ advice to help you land on the best results.

In forming your business, hiring employees, granting stock options, and selling your product, you have put in a lot of time and energy to create your business. Thus, you want to ensure that all your I’s are dotted and T’s are crossed.

In conclusion, this is not the reckoning moment for the legal industry. Lawyers can work in conjunction with automation; and start-ups can work in conjunction with lawyers. There should be a symbiotic and successful relationship amongst these parties.  

Next Steps for Entrepreneurs

If you are an entrepreneur or young start-up looking for free legal advice in the Boston-area, here are some legal clinics at the local law schools:

o   Boston College Law School Entrepreneurship & Innovation Clinic

o   Boston College Law School Community Enterprise Clinic

o   Boston University Law School Entrepreneurship & Intellectual Property Law Clinic

o   Northeastern University School of Law Community Business Clinic

o   Suffolk Law School Intellectual Property & Entrepreneurship Clinic

o   UMass Law Community Development Clinic

o   Harvard Law School Community Enterprise Clinic

o   Harvard Law School Transactional Clinic

Please make sure that the clinic’s type of legal service is relevant to your business.

We wish you the best of luck on the success of your business.

“The Need for Speed” in Regulating Digital Health

By: EIC Student

December 2017

The first half of 2017 saw a record $3.5 billion invested in more than 180 digital health startups.[1]  With seven deals exceeding the $100 million mark, and with an average investment of more than $18 million, investors are putting a considerable amount of capital in digital health.[2]  As the digital health industry continues to mature and more investment floods into the space, the entrepreneurs pioneering these new technologies are ultimately tasked with positioning their startups, and their respective investors, for a handsome exit.  Like other industries, these startups will need to flawlessly execute a product launch and successfully differentiate themselves in order to drive revenue and gain market share.  Yet, unlike other industries, the U.S. health care system is one of the most heavily regulated.  Political risk and regulatory ambiguity can stymy a go-to-market strategy and derail a product launch.  Leaving the former to those on the “Hill,” the FDA has started to address the latter in their recently announced Digital Health Innovation Plan.

What is Digital Health?

Consumers are becoming more engaged in their own health care in many ways—often through technology-enabled innovations that provide new personalized insights.[3]  And, depending on who you ask, the term “digital health” may be defined as a mobile app that counts their steps and tracks their heart rates; an IT solution that enables their family doctor and emergency room physician to view the same medical record; or even, tech-enabled exercise equipment.  In other words, digital health is a term used in a wide range of contexts.  Similarly, the FDA’s characterization is broad and expansive.  Digital health is described as a class of products spanning categories such as mobile health, health information technology, wearable devices, telehealth and telemedicine, and personalized medicine.[4]

The FDA recognizes the power of digital health to reduce system inefficiencies and costs, improve access to care and increase quality, while also making medicine more personalized.[5]  And, in recent years, the agency has designed policies that allow lower risk technologies, such as mobile medical applications and general wellness products, “[t]o be readily available to [consumers] while assuring these connected products continue to be high-quality, safe and effective.”[6]  For example, the agency has stated it will not focus regulatory oversight on products that simply “[p]romote a healthy lifestyle”—which may include exercise equipment, video games, or software programs.[7]  While a step in the right direction, this did not alleviate the regulatory ambiguity entrepreneurs face when their rapidly evolving innovations are subjected to the traditional FDA regulatory framework.

That is, until now.  The 21st Century Cures Act—a bipartisan initiative signed into law late last year—aims to “[a]ccelerate medical product development and bring new innovations and advances to patients who need them faster and more efficiently.”[8]  One way this groundbreaking legislation seeks to achieve this objective is through re-thinking what a “device” actually is.  More specifically, the Cures Act—as those in the know commonly refer to it—amends the term “device” in section 201(h) of the Food Drug & Cosmetic Act (“FD&C Act”) to exclude certain software functionality, such as software for administrative support and managing a healthy lifestyle.[9]  The FDA has recognized that the traditional regulatory approach to “[h]ardware-based medical devices is not well suited for…software-based medical technologies.”[10]  And, pursuant to the Cures Act, the FDA is required to—and is currently in the midst of—implementing new policies to shape the way “[l]ower risk digital health technology including software” will be regulated.[11]

Digital Health Innovation Plan

In response to the Cures Act and the rapidly evolving digital health industry, the FDA has outlined its regulatory approach as a balance between two core policy principles: fostering digital health innovation and protecting public health.[12]  This vision is embodied in the recently announced Digital Health Innovation Action Plan, which takes an integrated approach to refining polices and providing guidance, growing expertise in digital health and software development, and re-thinking digital health product oversight.[13]  As the FDA Commissioner has stated, “FDA’s traditional approach to medical devices is not well-suited to these products.”[14]

The cornerstone to this new regulatory approach is the Pre-Certification Pilot program, which marks a fundamental shift from the traditional regulatory framework.  Instead of primarily focusing on the specific product to be launched into the market place, the FDA will first look at the software or digital health technology developer.[15]  In other words, the FDA will review and approve the company, not the specific product.  Therefore, once a company is “pre-certified”—hence the pilot’s namesake—their subsequent products will be exempt from pre-market review, and will allow for an almost immediate product launch and collection of post-market data.[16]

Tell Me More

Software-as-a-medical-device, or “SaMD” for short, includes software used for one or more medical purposes that are not part of the device’s intended use, and does not control the device’s hardware.[17]  For example, SaMD may utilize a device’s microphone to detect abnormal breathing patterns.[18]  This category of digital health remains subject to the section 201(h) “device” definition, and is the focal point of the Pre-Certification Pilot.[19]

The pilot is designed to be a learning process for all stakeholders.  Staying true to the twin policy underpinnings guiding FDA’s larger digital health plan (i.e., fostering innovation and protecting public health), the pilot seeks to inform the development of a regulatory framework that balances the reduction of time and cost to market entry with ensuring the safety and effectiveness of these technologies.[20]  At first, the FDA will be working with just nine (9) initial participants, ranging from small startups, such as Pear Therapeutics, to large enterprises, such as Apple and Samsung.[21]  Participants will have the ability to get their products to market faster, capture and utilize real-world evidence in product iterations, and gain regulatory predictability, while providing the FDA with feedback on how best to design, test, and evaluate the benefits and risks of digital health products.[22]

The Bottom-line

The recently announced Digital Health Innovation Action Plan and Pre-Certification Pilot provides digital health startups—and their respective investors—with clarity on how the agency intends to regulate the space.  This pilot will continue the trend of industry collaboration and introducing practical policies, which in turn should translate to more predictability for startups—especially with the development and execution of a go-to-market strategy.  And, with the level of recent investment in the space, coupled with the broad and expansive digital health category, this pilot illuminates the agency’s approach to regulating these new technologies.  This brief overview of the evolving digital health regulatory framework highlights FDA’s approach to removing regulatory ambiguity, and the role startups can play in guiding the ever-changing landscape.

[1] Rock Health Mid-Year Funding Report

[2] Rock Health Mid-Year Funding Report

[3] FDA Announcement July 2017

[4] FDA Digital Health overview

[5] FDA Digital Health overview

[6] FDA Digital Health Innovation Plan

[7] FDA General Wellness Products Guidance

[8] FDA 21st Century Cures Overview

[9] FDA Digital Health Innovation Plan

[10] FDA Digital Health Innovation Plan

[11] FDA Digital Health Innovation Plan

[12] FDA Digital Health Innovation Plan

[13] FDA Webcast

[14] FDA Announcement July 2017

[15] FDA Announcement July 2017

[16] FDA Webcast

[17] FDA Digital Health Criteria

[18] FDA Digital Health Criteria

[19] FDA Webcast

[20] FDA Digital Health Innovation Plan

[21] FDA Announcement September 2017

[22] FDA Webcast

Balancing profits and purpose in a marketplace where investors, consumers and talent demand it

By: Benjamin Ruano

November 2017

Social good, it’s in your (business’s) DNA

Social and environmental missions are driving entrepreneurship activity in the United States—in fact, nationally, 12% of entrepreneurs are currently leading and, in many cases, trying to start a social enterprise.1 These entrepreneurs often place social objectives above profits; however economic benefits for investors also flow strongly from creating new social value.  For instance, in marketplaces with increasingly discerning consumers, the ubiquity of often dubious certification marks—such as “all natural,” “made in U.S.A.,” or “fair trade”—has diluted the persuasiveness such marks once enjoyed.  Consumers and swaths of investors, alike, are becoming increasingly conscious of not merely the socially or environmentally additive nature of a company’s products or services, but also of the moral compass and constitution of the entity itself. 

Even our largest institutions feel this cultural shift. When the CEO of Walmart says that “business exists to serve society,” and the CEO of Blackrock, the world’s largest asset manager, says the “interests of business must align with the interests of society in order to generate long-term value,” they are reflecting a shift in the debate about the role of business in society.2 The essence of this trend is in the aesthetic and emotive differences between having a good product and having a good company. 

It is with the aforesaid in mind that social entrepreneurs should strongly consider Benefit Corporations (“B-Corp.” or “B-Corporations,” for short) as a great way to capitalize on socially-conscious consumers and impact investors, stand-out among the cacophonous competition, and differentiate their company to future employees.  Ultimately, meeting the legal and certification requirements for a B-Corp. bakes sustainability and the pursuit of social good into the very DNA of your company as it grows, brings in outside capital, or plans succession.3

Rocking the boat

With a handful of well-worn vehicles available to house your next great business idea—e.g., C-Corporations, LLCs, sole partnerships—why rock the boat?  For starters, rocking the boat is the archetypal role entrepreneurs play in business and the capital markets.  Moreover, your company would not stand alone: there are 2,263 B-Corporations in 50 countries representing 130 industries—all of which share one unifying goal.  Notwithstanding, many prudent entrepreneurs may still feel apprehensive about the downstream effects of such a fundamental decision.

“How will it impact our ability to raise capital and command higher valuations?”

Impact investors generally wish to invest in companies that achieve a certain social or environmental impact, and are structured to maintain their mission after the next financing, sale, or IPO.  Conveniently, the legal requirements for B-Corporations in States that have passed legislation allowing for their creation4 already gear your organization to meet these objectives.  Additionally, numerous investors and financial services firms are currently scouring the marketplace for B-Corporations as part of the due diligence, portfolio management, and portfolio mandates of existing funds or funds raising capital (e.g., Mission Markets, Good Capital, RSF Social Finance, Investors’ Circle, New Resource Bank, and TBL Capital).  Moreover, many Certified B-Corporations already have had sophisticated investors vet and approve the overarching B-Corp. legal framework (e.g., Method, Seventh Generation, IceStone). 

B-Corporations also often command higher valuations since they can more easily foster resilient goodwill with customers and are trusted by their employees and suppliers.  The independent third-party certification, and the transparent legal and performance standards further maintain that trust and minimize the loss of brand equity post-sale.6

Will the legal framework create additional liability for our Board of Directors and Officers?     

By custom, the operating principle of business and of the capital markets is to increase profits, even if it functions to the detriment of society.  The general corporate laws of the various States have often adhered to the same principle. For instance, in Ebay Domestic Holdings Inc., v. Craig the Delaware Chancery Court—a paragon of business-savvy state courts—found that “promoting, protecting or pursuing [considerations other than financial value maximization] must lead at some point to value for stockholders.”  This principle of value maximization is arguably embedded in a Board of Directors’ fiduciary duty to act in the “best interest” of the corporation. B Lab—the nonprofit organization overseeing the certification of B-Corporations—and their lawyers opine that adopting the B-Corp. legal framework serves to expand the definition of the “best interests” of the corporation and should reduce the liability for Directors and Officers by creating legal protection (called “safe harbor”) for them to take into consideration the interests of multiple stakeholders when making decisions, particularly when considering financing and liquidity scenarios.  Adopting the B-Corp. legal framework will, however, give shareholders additional rights to hold Directors and Officers accountable for taking into consideration these same interests when making decisions—and that, of course, is the whole point of a B-Corporation.7

What will current and potential employees think?

Recently, Harvard Business Review found that millennials, which represent roughly 50% of the global workforce, want work that connects them to a larger purpose.  Perhaps this is why companies with higher levels of employee engagement posted total shareholder returns 22% higher than the broader stock market.8  On the other hand, companies with low engagement had a total shareholder return that was 28% lower than the market average. According to Aon Hewitt, brand alignment—which is the harnessing of the whole company to deliver the brand and company promises—was one of the top 3 drivers of employee engagement.  Never doubt that a small group of dedicated people can change the world … while also outperforming the broader market.

Conclusion

Benefit Corporations represent a watershed moment for business.  Companies that exclude from their operating principles social and environmental considerations now risk losing market share and undermining shareholder value.  Those companies that instead balance profit and purpose, however, stand to gain in myriad ways from contributing solutions to some of our most pressing problems.  As Patagonia founder Yvon Chounard has written: “[Benefit Corporations] enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”9

Entrepreneurship Law Worldwide, Worldwide

By: Esteban Múnera

November 2017

The Pivot

Before ever sitting down and studying for the LSAT, I was warned that the legal market was shrinking.  Not really knowing what this entailed, I proceeded to my logical reasoning and logic game assignments.  Now, as a 3L at Boston College Law School, I am coming to terms with this ominous warning.

The 2017 Report on the State of the Legal Industry, “The Georgetown Report,” as it is commonly referred to, confirms that corporate legal buyers are directing more work away from large law firms, electing to take it in-house or to legal service providers.  The Report provides a broad range of data analytics that confirm the weaknesses in the traditional partnership model, the allure of alternatives legal sources, and an alarming market dynamic.  In short, the Report concludes that the traditional law firm franchise has “eroded.”  I will not dispute this analysis.  Instead, I aim to reinforce the notion that given this predicament, all lawyers must think entrepreneurially.

Both within law school and in private practice, the focus for “start-up” attorneys is on local markets.  This is a no-brainer given the large concentration of human capital in neighboring areas such as Silicon Valley and Cambridge.  However, this myopic approach fails to address the needs of international start-ups.  What if corporate counsel were equally dedicated in nurturing young, international start-ups that may be the next Google or Facebook?

In general, the legal industry is not only ripe for entrepreneurial attorneys but will actually depend upon them for survival.  Accordingly, more U.S. law firms need to think and act entrepreneurially by pivoting towards an untapped international resource.

Coming to America

Countless technology and other companies were founded in the United States by entrepreneurs with strong ties to foreign countries and regions such as Russia, India, Israel, China and Latin America.  For tech companies, many times the decision to incorporate in the United States, and specifically in Delaware, is driven by the preference of U.S.-based venture capital firms and other investors to invest in companies incorporated in Delaware.

After reviewing tax and other considerations, founders may decide to incorporate the company or the parent entity in the United States, while some or all of the founders, employees or services still operate in a foreign country.  According to the U.S. tax code, a corporation is “domestic” if it is “created or organized in the United States or under the law of the United States or of any state.”  Therefore in the U.S., a corporation’s residency is determined by a company’s place of legal incorporation, not by the location of its headquarters, employees or activities.

Foreign operations incorporated in the U.S. present legal issues for companies of all sizes.  First, the new company must comply with the laws of its place of incorporation and where it conducts business in the United States.  While this may seem obvious, some founders and foreign counsel may not be fully aware of local requirements and legal differences between the specific foreign country and the state where compliance is required.  Furthermore, arrangements regarding foreign employees may still be subject to compliance with certain U.S. laws. 

If this seems like a lot to handle for a still wet-behind-the-ears startup, it’s because it is.

Disruptive Emergence of New Tech    

Off the success of its online payments upstart, Stripe, Irish brothers John and Patrick Collison set out to take the complexity out of incorporating in the U.S., and thereby “render geography irrelevant in the process.”  The proposed solution is called, Stripe Atlas, a one-stop-shop startup service toolkit.  Patrick Collison says he was inspired to give non-US entrepreneurs an equal chance and compete on the same playing field as companies based in Silicon Valley.  Atlas’ suite of services offers entrepreneurs the ability to incorporate their business in Delaware, establish a U.S. bank account, and receive a tax identification number.  In addition, they will get access to legal advice from international law firm Orrick, $150,000 in computing services from Amazon Web Services, and tax advice from PwC.  The entire process will take less than a week.

Entrepreneurs pride themselves on solutions, or, in this case, technological work-arounds.  Now law firms, like Orrick, lawyers must act entrepreneurially and recognize disruptive innovations.  Stripe Atlas’ service (and its presumably its forthcoming competitors) allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or skill.  As the Collison brothers recognized, “corporate jurisdictions and headquarters are becoming more fluid in the era of the Internet,” and as such, “physical geography matters less.”  Through services like Stripe Atlas, law firms may now easily counsel international entrepreneurs to get their startups off the ground.

What Now?

It is safe to say that all attorneys want to avoid The Georgetown Report’s apocalyptic prophecy of the legal industry.  Consequently, major changes are needed.

In the short term, there is a dire need to lessen the learning curve faced by young corporate attorneys by teaching about entrepreneurship in law school.  As the legal industry recovers from the recent recession, it is in a fundamentally different place than it was ten years ago.  Yet, despite this radically shifting market place, legal education has remained fundamentally unchanged.

In the long run, the goal is to close the access to legal representation gap.  Through innovations like Stripe Atlas, the legal profession will slowly chip away at his its delivery problem and continue to develop sustainable models for delivering legal services.  As a result, legal entrepreneurs will be able to provide a more efficient and holistic service to both their domestic and international clients. 

The time has come for legal services to be affordable, accessible, and adopted widely. The market for law and technology has been described as an “unpopulated multi-billion dollar industry.”   The question for today’s law students and professional is whether they will be left behind as others fill the gap, or whether they will seize the opportunity for innovation and entrepreneurship, pioneer new legal services delivery models, and help find a solution.