Be Sure Your ‘Cannabusiness’ Avoids this Tax Pitfall

By: Gio Brackbill

Marijuana remains illegal under federal law. Despite this, eleven states fully legalized it, including for recreational use. Fifteen states chose to keep it illegal. The remaining twenty-four fall in between, some which have begun decriminalizing it and others partially legalizing it for medicinal use. As marijuana gains broader legal status each year, cannabis entrepreneurs have jumped at the chance to enter the market and capitalize on the new opportunities that the industry brings. Regardless of its legality, the IRS still expects cannabusinesses to pay federal taxes on all of their revenue. But under Section 280E, cannabis entrepreneurs are not entitled to the same benefits when writing-off business expenses as other companies that are unrestricted by Section 280E.

Section 280E Tax Provisions and Cannabis Entrepreneurs

Congress enacted Section 280E of the tax code in 1982. It applies to expenditures in connection with the illegal sale of drugs. Even if a cannabis company is given legalization by the state, cannabis is still a controlled substance under federal law. Businesses that fall under this category cannot claim deductions, except for the cost of goods sold. This means that cannabis entrepreneurs need to be conscious of the law and take steps to prevent this accounting nightmare before tax season rolls around.

How to Claim Federal Deductions with the Two-Business Strategy

Smart accounting can help cannabis companies to comply with the law while also claiming their deductions. The business structuring strategy that has been upheld in federal court in the case C​HAMP v. Commissioner allows companies to maximize deductions by dividing the business according to 1) activities that are unrestricted under federal tax law and 2) activities, such as producing and distributing a controlled substance, that are not deductible under the law. Essentially, dividing the business accounts creates a loophole and allows the legal side of the business to claim deductions that would not be allowed if the activities were all under one entity.

The Short End of the Stick for Cannabusinesses

Cannabis companies that do not follow the two-business structure may face detrimental consequences as a result of the 1980’s tax code while predates the legalize marijuana reform that is sweeping the nation. Without the ability to deduct business expenses, many companies will operate at a loss and be forced to close their doors before they ever have a fighting chance to get off the ground.

Some states with legalized marijuana are approaching the issue by passing legislation to make it easier for entrepreneurs in this industry to deduct full business expenses. However, this creates complications for companies that want to take advantage of the state laws. While a marijuana company may benefit from the state law, unfortunately they are soon to face the federal barricade head on. The IRS responded to states with a ​memo clarifying that when there is conflict between state and federal law, they must follow the federal law. Hence, cannabusinesses that do not separate their legal and illegal activities are doomed to face the unforgiving federal tax code.

See the case below for an example of a worst case scenario that can befall a cannabis company facing the tax courts for a Section 280E violation.

In C​anna Care v. Commissioner,​ the court held that all of the cannabis company’s arguments for why they should be allowed deductions were irrelevant, moot or meritless. Canna Care failed to use the two business strategy, therefore they were considered to be trafficking a controlled substance for the purposes of Section 280E and effectively not entitled to any business deductions other than the cost of goods sold. Let this case be an example to other cannabis companies on how not to structure their business if they want to deduct normal business expenses.

Consider Yourself Warned, Cannabis Entrepreneurs

Take it from Senior Partner at Cannabis Practice Group, Jonathan Barlow. He regularly advocates the importance of compliance at the state and federal level to entrepreneurs who are interested in entering the industry. While the startup costs are high, compliance is an absolute must because you can not escape the regulatory tax or legal requirements. You must be strict with auditing and keeping up with the rules. “Otherwise, don’t go into this business,” Barlow advises.

The last thing you want for your cannabis startup is to be forced to pay penalties and the back taxes on business deductions that were not allowed under Section 280E.

*This post was authored February 5, 2019 and is posted with Ms. Brackbill’s permission.  The original post can be found here.


Gio is a second year law student at the Dickinson School of Law. She is passionate about fighting for global access to justice and she is actively involved as the treasurer of the Latinx Law Student Association, coordinator for the Bethesda Mission Legal Intake Clinic, and member of the Public Interest Law Fund auction committee. She is co-owner of a wedding photography company based out of Lancaster, PA.

Sources:

  1. https://www.irs.gov/pub/irs-wd/201504011.pdf
  2. https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10586 
  3. https://disa.com/map-ofmarijuana-legality-by-state
  4. https://marijuanaretailreport.com/irs-code-section-280e-means-cannabusinesses/
  5. https://www.forbes.com/sites/theyec/2018/07/24/what-cannabis-entrepreneurs-should-know-about-tax-section-280e/#4f7727937377
  6. https://www.forbes.com/sites/meimeifox/2018/04/20/two-cannabis-entrepreneurs-share-their-secrets-for-success/#3e40293e4fbd
  7. https://theaccountingpath.org/accounting-careers-marijuana-industry-exploring-cannabusiness/

Art-repreneurs: The Business Side of Selling Art

By: Marisa Halm

(http://clipart-library.com/clipart/di4oMLABT.htm)

One of the most rewarding parts of being a solo artist is selling your first piece to people who love it just as much as you do. However, before you make that first sale you should take the time to consider that your art will be your business. You will have a spectrum of issues to address—profits to account for, taxes to consider, etc.— and may become more involved with entrepreneurship than originally anticipated. Congratulations! You have grown from a solo artist into an art-repreneur.

An art-repreneur is an artist who creates and sells art from within their own business entity. As an art-repreneur, it is important to recognize the benefits of having a separate business entity. The term “business entity” encompasses the many forms a business can take. This post will discuss the two most appropriate entities for budding solo artists: the sole proprietorship and the Limited Liability Company (LLC). It will also explore the benefits and drawbacks that online galleries and rent-to-own websites present to the art-repreneur.

Top 3 Benefits of Having a Sole Proprietorship

  • Sole Proprietorships require no paperwork and are the easiest type of business entity to create. In fact, if you are creating art by yourself and you have already sold some pieces, you are already a sole proprietor!
  • Taxes are complicated, but in most cases a sole proprietorship does not require extra paperwork come April. You will have to claim your profits, but that is to be expected.
  • DaVinci. Warhol. Banksy. There is something to be said for name recognition in art. Since you can maintain a sole proprietorship directly under your name (or under a pseudonym if you prefer), you can associate your name directly with your art. Keeping that personal touch can also make people feel more inclined to do business with you, as some customers buy art because they enjoy that personal connection.

Top 3 Benefits of Having a LLC

  • A LLC requires separate banking accounts. This can be beneficial in many ways; separate accounts can keep you aware of profit margins and expenditures that may get lost in a personal account.
  • When conducting business with people that you don’t meet face-to-face, working as a separate business can have multiple marketing effects. It can inspire trust in transactions and give you negotiating clout, as it detracts from the “desperate, starving artist” stereotype that some may associate with budding artists.
  • It may sound strange, but even artists have risks and liabilities to consider. For instance, is there insurance on your studio? What if you get sued for breach of contract/selling agreement, or someone gets hurt from your piece? With LLCs, your personal responsibility, or personal liability, is held separately from what may happen in the course of your art business. This can protect your personal assets if something goes wrong.

Modern Means

Though the traditional art collector may appreciate the nostalgia of walking around a gallery in person, many modern consumers do not want to spend time in traditional galleries. Nowadays, people look for everything online- clothes, groceries, love – and art is no exception. Art-repreneurs need to be tech-savvy to keep their sales up. Online galleries and rent-to-own websites offer a transformative and accessible way to reach customers. However, the art-repreneur should be aware of the legal issues that may accompany these new means of reaching customers and understand how a sole proprietorship or LLC can be used to address some of these concerns.

Online Galleries /Marketplaces

There are many types of online galleries and marketplaces for today’s artist. These websites provide artists the opportunity to sell their work by uploading high-quality pictures of their artwork for interested buyers to view. It is an effective way for sole proprietors to reach an audience that is particularly interested in your artwork.

That being said, there have been accounts of artists who struggle to maintain the value of their original pieces after putting pictures online. The same people who are willing to online shop for art may also fall prey to a copycat- someone who prints off the high-quality picture you uploaded and is profiting off the resulting copy. This can raise significant problems for the art-repreneur. Having an LLC or business name may intimidate some from committing fraud, but it will not prevent those who are particularly set on cheating the system. If you find this has happened, you should always seek the advice of an attorney. There are serious legal consequences at state and federal levels for intellectual property violations and art fraud.

Rent-to-Own Websites

Rent-to-own websites propose a relatively new concept that is quickly gaining popularity. The website is based on an agreement between the website and the artist in which the artist allows the website to advertise and rent their piece, and the website will take a portion of the following profits. The customer then has an opportunity to view the artwork to determine if the piece is a good fit or not. If the customer likes it, he or she can purchase the piece; if the customer does not like it, the piece can be returned at the end of a month. This can be a huge advantage for the artist because customers often have trouble visualizing where the piece may go when they view it in a gallery, and the option to view it in their space can push the hesitant buyer to make the purchase. Even if the sale is not completed, the artist still receives “rent”.

Yet this may bring the artist to a new level of anxiety. What if the sculpture is damaged in transit? What if the piece falls and injures someone? Can you be personally sued (if you’ve prioritized liability as a business entity consideration and operating as an LLC, the answer should be no!) or will the website be liable for the injuries? The vigilant art-repreneur should closely review the terms of the agreement with the website for details that address such issues, as these questions are best asked while negotiating your contract, not after something has happened. It’s always good to check in with your attorney whenever you have questions.

Being mindful of business considerations may be cumbersome, but it pays off in the long run because your focus can remain where it should be: on your art.


*This post was authored on February 6, 2019 and can be found here.

Marisa Halm, at the time of this post,  is a second year law student at Penn State’s Dickinson Law. She is from a small town near Greensboro, North Carolina and went to Allegheny College before coming to Dickinson.  Marisa has taken several different business law related courses.  Her interests in this area likely stem from having entrepreneurial parents.  You can find out more about Marisa here.

 

 

Sources

GetArtUp, http://www.getartup.com/ (last visited Feb. 1, 2019).

Interview of Lawrence M. Shindell, AiA Newsl. (Authentication in Art, The Hague, Neth.), July 2017, at 2. http://authenticationinart.org/pdf/newsletter/AiA-Newsletter-July.pdf.

Klaus Esterluss, The art of selling art: Young artists navigate the digital world, DW (Apr. 15, 2015), https://www.dw.com/en/the-art-of-selling-art-young-artists-navigate-the-digital-world/a-18382841.

Start Your Art, http://www.startyourart.de/sya_welcome.php?lan=EN (last visited Feb. 1, 2019).

Photo Credit

http://clipart-library.com/clipart/di4oMLABT.htm

  • Remaining photos sourced from personal collection.

Dickinson Law Students on the Road | Penn State Mont Alto Launchbox

By: Samantha Prince

Chambersburg, PA.

On February 28, 2019, three Dickinson Law student members of the Business Law Society and I went on the road to the Penn State Mont Alto Launchbox to lead a workshop.  The workshop included a 40-minute presentation entitled Should I Enter into a Franchise? which was led by Ian Brinkman ’19.  Following the presentation, Ian, Greg Archibald ’20 and Alexis Shovel ’21 chatted with attendees and answered their questions. (For those who have authored blog posts, hyperlinks are provided.)

Chancellor Dr. Francis Achampong of Penn State Mont Alto commented after the workshop: “Thank you so much for making the workshop on franchising possible.  Ian did a fantastic job. We hope to continue collaborating; perhaps offer a workshop per year courtesy of the Business Law Society.”

First year law student, Alexis Shovel had this to say: “This workshop provided an
overview of every step of the process, from completing the initial franchising paperwork to who pays for the daily costs of running the franchise. Not only were the benefits of owning and operating a franchise highlighted, but the drawbacks or potential weaknesses were also
emphasized as well.”

Our entrepreneurship law students and the BLS members are ambitious and well positioned to help entrepreneurs and the community through a variety of methods.  Many of the students write for this blog.  Others participate in workshops and provide lectures in classrooms.  All three of these activities further our service and community missions by providing ways that entrepreneurs can gain valuable insight about different areas of the law.  If your organization or class is interested in hosting a workshop or lecture, please either contact us at: https://dickinsonlaw.psu.edu/entrepreneurship-workshops or me directly at sjp15@psu.edu.

The Mont Alto Launchbox is part of the Invent Penn State initiative.  The vision of the LaunchBox is to be a catalyst for entrepreneurship in Franklin County.  Its mission is to: connect, inspire, motivate, assist, and de-risk the efforts of entrepreneurs.  We, at Dickinson Law, are proud to serve as resource and partner of the Mont Alto LaunchBox and the entrepreneurs it works with!

Kevin Harter | Entrepreneur of the Month | March 2019

By: Arther Hart

I have the great honor to introduce you to Kevin Harter, our March Entrepreneur of the Month. Kevin is an experienced healthcare and technology executive, board member, serial entrepreneur, and long-time volunteer for education-related initiatives.

Kevin has more than 35 years of experience in new life science and technology businesses. He has held more than two dozen board seats in healthcare, technology and financial companies. Kevin has served as chairman, president, and CEO of Saladax Biomedical Inc., a leader in personalized diagnostics. He co-founded the Life Sciences Greenhouse of Central Pennsylvania and Keystone Medical Systems.

In addition to being named as our Entrepreneur of the Month, Kevin has been the recipient of numerous awards for his professional and volunteer achievements. These awards include the Entrepreneur of the Year Award from Ernst & Young/Inc. Magazine, Outstanding Leadership in Technology Award from the Technology Council of Central PA, and the Alumni Fellow and Philip Philip Mitchell Service Award from the Pennsylvania State University.

Kevin has a passion for mentoring and teaching young entrepreneurs. He has taught classes for Penn State Harrisburg and continues to teach business skills through the Penn State Hershey College of Medicine. Entrepreneurs, and law students that are interested in representing entrepreneurs, can learn a great deal from Kevin’s experience.

What does it take to be an entrepreneur?

“It does take some level of courage to jump into the uncertainty and definitely takes a lot of hard work.”

When I asked Kevin what his greatest accomplishment was, I was surprised by his answer. It wasn’t about any of his great business deals or the impressive amount money he raised, it was having the courage to start in spite of the financial risks. Courage, according to Kevin, is an essential part of becoming a successful entrepreneur.

Click here to watch the interview.

The other absolutely essential part of becoming a successful entrepreneur is hard work. It is not enough to have the dream of becoming a successful entrepreneur, it takes a lot of hard work to get there. An entrepreneur should treat startups like they are training for a marathon.

Click here to hear Kevin elaborate.

Many businesses follow what Kevin calls “The Startup Curve.” At some point after the initial enthusiasm has worn off, there will be a period called the “Trough of Sorrow.” Hard work is absolutely necessary to pulling a startup out of the “Trough of Sorrow.”

Thinking like an Entrepreneur

“Don’t think of entrepreneurship as getting a job managing a business.”

Kevin emphasizes that entrepreneurs need to recognize that entrepreneurship is not the same as management. While it is true that entrepreneurs are managers, they are not confined to that role. Kevin explained the difference between the two is that entrepreneurship is identifying, creating, and acting upon an innovative opportunity to create value while management is the administration of an organization.

Entrepreneurs, according to Kevin, should have a 2-stage mental process. One side is very creative and optimistic while the other side is risk averse and pessimistic. An entrepreneur has to be very optimistic about the opportunities and where they are going to take the business while at the same time being careful and looking out for the things that can go wrong.

Watch the interview here.

Risk and Uncertainty

You’re going to deal, in entrepreneurship, with a great deal of uncertainty. Your ability to manage that uncertainty is going to determine your level of success in entrepreneurship.”

During a lecture to Dickinson Law’s Company Creation class, Kevin made a surprising point about the relationship between entrepreneurs and risk. Contrary to popular belief, entrepreneurs are not, or at least should not be, chronic risk takers. Rather, successful entrepreneurs learn how to mitigate the risk involved by effectively dealing with uncertainty. To effectively manage the uncertainty, successful entrepreneurs learn to make good, informed judgment calls and not dwell on past mistakes.

For these and more entrepreneurial tips click here.

Startup Finance

“The first question I would ask myself is, do I need money?”

Kevin’s first bit of advice when it comes to raising capital is that an entrepreneur must ask whether they need money. There are a few things an entrepreneur needs to do before seeking money: clearly identify who your customer is, what they want, and what the value is that you can provide them. Then, if you are able to calculate how much money you need to create the business, you can look at raising it. According to Kevin, 79% of businesses fail because they haven’t properly identified their customer, and end up building or developing the wrong thing.

Customer discovery is key to avoiding this pitfall. During the early stages of a business, entrepreneurs should be spending as little as they can with the goal of testing a hypothesis. The hypothesis being that the entrepreneur has built a repeatable and profitable business loop. Once an entrepreneur has proven all of their hypotheses, they can begin to look for additional funding to grow their business.

Watch Kevin’s explanation here.

Advice for Law Students

“You are going to need to provide information in a way that entrepreneurs can make judgment calls that are very difficult and frequently wrong.”

The best startup lawyers become good partners with the entrepreneurs they represent. Entrepreneurs deal with a large amount of uncertainty and they often need the help of an attorney to make the best decisions they can. The best thing an attorney can do for entrepreneurs is give good advice, in context. They should learn to ask the question “why” and seek to understand their client’s motives as well as objectives.

Click here to hear Kevin elaborate.

Kevin’s Recommended Reading for Entrepreneurs

Talking to Humans

Business Model Generation

Value Proposition Design

The Startup Owner’s Manual

 

Videos containing Kevin Harter’s great advice and insights can be viewed through links in the above article.

Photo Source: Penn State Hershey College of Medicine


Arther Hart is a second-year law student at Penn State’s Dickinson Law. He is from Northern Utah and an interest in Health and Technology Law. He has a degree in biological engineering from Utah State University.  Currently, Arther is interning at the Center for Medical Innovation.

U.S. Department of Agriculture Makes Funding Available for Small Businesses in Rural America

By: Zach Gihorski

Did you know the United States Department of Agriculture (USDA) offers several funding opportunities targeted at both small business owners and non-profits who serve businesses in rural communities? Probably not. These USDA programs provide assistance to growing businesses in rural communities via loans and grants. You are probably asking yourself why you have never heard of this program before, which is completely understandable. There are numerous programs provided by the government that business owners never hear of. The truth is, these programs just do not come with any marketing or promotional dollars attached to them to spread the word.

USDA MicRo-entrepreneur Assistance Grant Program

The Rural Micro-Entrepreneur Assistance Program (RMAP) is designed to give funding to non-profit organizations servicing rural businesses, or as USDA calls them, Microenterprise Development Organizations (MDOs), who in turn administer and manage the funds given out to micro-entrepreneurs.

What is a Microenterprise Development Organization (MDO)?

There are three type of entities qualified to receive the RMAP funding from USDA-Non-profits, Federally-recognized Tribes, and Institutions of higher learning. These organizations receive the funding from the USDA and then use those funds to support rural micro-entrepreneurs. MDOs are charged with making their funds available to their local rural micro-entrepreneurs. MDOs must also manage the administration of the grants and loans to the micro-entrepreneurs, and do the required reporting back to USDA.

Who are Micro-Entrepreneurs?

These are the intended users of the USDA funds. While it is true that the USDA first disburses the initial funding to MDOs for their expertise in supporting micro-entrepreneurs in their local areas, the MDOs must then make those funds available to qualified micro-entrepreneurs.  According to the USDA, a micro-entrepreneur is a business that is located in a rural community, with less than 10 full-time employees. If you are curious to see if your business is in eligible rural area, check here.

What type of funding does RMAP provide?

The RMAP provides aid in the form of both grants and loans. In regard to grants, the program allows both micro-entrepreneurs and MDOs to receive aid for technical assistance. However, a minimum of 15 percent of the requested aid must have matching funds from the applicant.

The loans provided by the RMAP program for micro-entrepreneurs have a few specific restrictions according to USDA. The loans can be up to $50,000, they must have a fixed interest rate, and the loans are limited to 75 percent of the total project cost.

What can the funding be used for?

USDA lists four specific examples, but goes on to explain that funding for micro-entrepreneurs is not limited to these categories. The listed examples are: working capital, debt refinancing, purchasing of equipment and supplies, and improvements to real estate. Allocating sufficient capital for these types of projects are huge obstacles for many entrepreneurs for which the program has made funding available.

When can you apply for the RMAP Program?

Right now! USDA is currently accepting applications. Reach out to your local USDA office for more information on how to apply.

Other USDA Programs Available

The Rural Micro-Entrepreneur Assistance Program is just one of the many programs that USDA has that is looking to invest in American businesses. From assisting with broadband access to investing in renewable energy sources, the USDA has a robust portfolio of resources available to businesses. For a more detailed list, look here.

Still have questions?

USDA has a great reputation for being responsive to the needs of local communities. Please do not hesitate to reach out to your local USDA office any time. You can reach out to your state USDA Office and ask a program specialist who can assist you. To locate your local USDA Office, click here. To go directly to the USDA page for the RMAP Program and get all the details here.


*This post was authored February 6, 2019.

Zachary is a 2nd year law student at the Dickinson School of Law. Where he is an active student leader, actively cultivating relationships with outside resources to give opportunities to his classmates. He is passionate about using his experiences in both the private and public sector to find innovative solutions for the world’s agricultural, energy, and environmental needs.

Sources:

  1. Electronic Copy of the Federal Regulations creating the Program: https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=e3aa598058a8b3fdb184d9b72e7b8101&n=pt7.15.4280&r=PART&ty=HTML#sp7.15.4280.d
  2. Rural Development Fact Sheet on RMAP Progam: https://www.rd.usda.gov/files/RD-FactSheet-RBS-RMAP.pdf
  3. List of Services and Programs for Businesses at USDA: https://www.rd.usda.gov/programs-services/programs-services-businesses
  4. USDA Website Page on the Rural Micro-Entrepreneur Assistance Program:https://www.rd.usda.gov/programs-services/rural-microentrepreneur-assistance-program

Photo Sources:

  1. https://smallbiztrends.com/2010/01/2010-rural-small-business-trends.html
  2. https://www.flickr.com/photos/usdagov/44239779574/in/album-72157698591256222/

 

 

The Health Care Entrepreneur’s Quick Guide to Important Laws: Part 2

By: Anahita Anvari

Health Care Entrepreneurs need to know about the False Claims Act, Qui Tam Provisions and HIPAA. At a recent event, “Health Law 101: Key Legal Issues for Health Care Companies,” speakers identified the top five legal and regulatory issues for health care entrepreneurs to be aware of: The Anti-Kickback Statute, Stark Law, False Claims Act, Qui Tam Provisions, and HIPAA.

This post aims to provide a general overview of the latter three laws: False Claims Act, Qui Tam Provisions, and HIPAA. The Anti-Kickback Statute and Stark Law were addressed in Part 1 of this two-part post.

WHAT ARE THE FALSE CLAIMS ACT (FCA) AND QUI TAM PROVISIONS, AND WHAT DO THEY MEAN FOR ME?

The FCA protects the federal government from paying false or fraudulent claims. You should take steps to comply with the FCA if your business serves patients of government health care programs such as Medicare or Medicaid.

claim, defined generally, is a request or demand for money or property from the government. Under the FCA, it is illegal to submit claims for payment to the government that you know or should know are false or fraudulent. The FCA also imposes liability when one acts to inappropriately avoid paying money to the government or conspires to violate the FCA. Therefore, you should not submit a claim for payment if, for example, the claim reflects a service that was not truly performed, the bill price is higher than the true price, or the claim incorrectly lists the provider who performed the services. There are no exceptions to this rule.

a. How Are FCA Violations Filed and What Are the Consequences?

Lawsuits for FCA violations may be filed by private citizens (also known as “Relators”) on behalf of the federal government. These lawsuits are permitted under the Qui Tam provisions of the FCA. Relators may receive statutory rewards for filing these lawsuits.

FCA liability may result in a civil monetary penalty for each false claim. Because each false claim is its own penalty, these fines can be detrimental. For example, the Office of Inspector General recently settled a case with a Connecticut provider for violating the FCA. The provider had billed Medicare for procedures that were already included in another billed item, essentially double-billing the government. The settlement was for $792,076.76.

B. How Can I Comply with the FCA?

You should take appropriate steps to comply with FCA by maintaining and implementing an effective compliance program. The seven essential elements to create an effective compliance program are detailed in Part 1 of this post.

Be aware that some states have their own false claims acts. These state laws may differ from the federal law. You should consult with an attorney regarding the laws in your state.

WHAT IS HIPAA AND WHAT DOES IT MEAN FOR ME?

The Health Insurance Portability and Accountability Act of 1996 (HIPAA”) is a federal regulation that governs the privacy and security of protected health information. Protected health information (PHI) is individually identifiable health information in any form (electronic, paper, or verbal) that relates to an individual’s physical or mental health condition, or to the provision and payment of health care to the individual. HIPAA protects PHI when it is transmitted by a covered entity or its business associate. Therefore, your business must comply with HIPAA if it qualifies as a covered entity or business associate. Click here to determine if your business qualifies as a covered entity or a business associate.

A. Are There Exceptions to HIPAA?

There are some limited exceptions to HIPAA. Covered entities may use or disclose PHI without authorization for treatment, payment, and healthcare operations, such as utilization review and credentialing. Other examples include judicial and administrative proceedings, research, or public health emergencies. You should consult with an attorney or compliance professional to be sure the use or disclosure falls within an exception.

B. I Am a Covered Entity or a Business Associate…Now What?

A covered entity or business associate must comply with HIPAA. You should be familiar with the major HIPAA rules and take measures to comply with them:

  • The Privacy Rule establishes criteria for protecting PHI, gives patients certain rights to their health information, and permits use and disclosure of PHI under specific circumstances.
  • The Security Rule requires covered entities and business associates to develop and implement safeguards to protect the confidentiality, integrity, and availability of electronic PHI.
  • The Breach Notification Rule sets forth notification requirements should a breach of unsecured PHI occur.
  • The Enforcement Rule outlines the procedures for investigating potential HIPAA violations and imposing liability.

C. What Are Examples and Consequences of HIPAA Violations?

Generally, HIPAA requires you to protect PHI from unauthorized access, use, or disclosure. Examples of violations include lost or stolen devices that contain PHI, posting PHI on social media, or an employee disclosing PHI to friends or coworkers.

HIPAA violations may result in civil monetary penalties (CMPs), criminal penalties, or mandatory exclusions from participating in Medicare. CMPs range from $100 per violation to $50,000 per violation, depending on the severity. Criminal penalties can result in jail time from one to ten years. For example, a hospital in Texas agreed to a $2.4 million settlement for violating HIPAA after it released the name of a patient to multiple media outlets in a press release.

D. How Do I Comply with HIPAA?

You should comply with HIPAA by implementing safeguards to protect PHI from unauthorized use and disclosure. Examples of safeguards include proper training of employees, use of encryption and decryption of electronic messages, conducting audits, keeping inventory of hardware and electronic devices, conducting periodic risk assessments, reviewing Business Associate Agreements, reporting any security incidents, and consulting with an attorney.

This post was authored February 4, 2019 and reproduced with the author’s consent from here.


Anahita Anvari, at the time of this post, is a second-year law student at Penn State’s Dickinson Law. She is from Southern California and is interested in health care law. Anahita founded the Health Law and Policy Society and is currently serving as an Associate Editor of the Dickinson Law Review.

Sources:
  • For a complete list of sources, see original post here.
  • https://www.justice.gov/sites/default/files/civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf
  • https://www.hhs.gov/hipaa/for-professionals/faq/covered-entities/index.html
  • https://www.hhs.gov/hipaa/for-professionals/privacy/guidance/business-associates/index.html
  • https://hipaaqsportal.hhs.gov/a/index
  • https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/HIPAAPrivacyandSecurity.pdf
  • https://sites.psu.edu/entrepreneurshiplaw/2018/11/05/health-care-entrepreneurs-guide-to-important-laws/
  • https://www.govinfo.gov/app/details/USCODE-2010-title31/USCODE-2010-title31-subtitleIII-chap37-subchapIII-sec3729
  • https://www.law.cornell.edu/uscode/text/31/3730
  • https://www.hipaajournal.com/what-are-the-penalties-for-hipaa-violations-7096/
  • https://www.hipaajournal.com/hipaa-compliance-checklist/
Photo Sources:
  • http://fcpablog.squarespace.com/blog/2014/11/6/the-false-claims-act-a-primer-for-whistleblowers.html
  • http://www.vhha.com/programs/event/webinar-hipaa-and-new-technologies-using-texting-and-social-media-within-the-rules/
  • https://blog.v-comply.com/compliance-healthcare-industry/

 

Data Security Update: What Businesses Need to Know About a Growing Trend

By: Ian Brinkman
https://www.secupi.com/ccpa-mini-gdpr/

The most recent EU General Data Protection Regulation (“GDPR”) penalty assessed against Google provides a reminder to all businesses that the data protection landscape is changing, fast.[1]  Not only can data protection regulations cross international borders, but similar schemes are popping up in the United States at the state level. Furthermore, data protection requirements no longer just apply to a business’s customers’ data. The Pennsylvania Supreme Court made this fact known in its most recent decision requiring employers to protect their employees’ data as well.

State Mirrors the Global Model: California Copies Europe

In mid-2018, California enacted AB 375, the California Consumer Privacy Act of 2018 (“CCPA”).[2] This new, sweeping data privacy law will take effect January 1, 2020. Just like with the GDPR, businesses need to start thinking about the steps that need to be taken to be in compliance with the CCPA. The CCPA has similar tenets as the GDPR, but its finer points differ to benefit both businesses and consumers.

   What is the CCPA?

The California Legislature enacted the CCPA in response to the rampant political and commercial misuse of consumers’ personal data. Like the GDPR, the CCPA provides consumers the right:

(1) to know what information is being collected, (2) to know whether their information is sold or disclosed, (3) to opt out of sale or disclosure, (4) to access their information, (5) to non-discrimination on price and service for exercising their privacy rights.[3]

Businesses must implement policies and procedures to make sure customers may reasonably exercise these rights. The CCPA extends a private cause of action to consumers, providing them with the option of either statutory damages ($100-$750) or actual damages, whichever is greater, for each violation. Furthermore, the California Attorney General can levy fines from $2,500-$7,500 for each violation.[4]

   What are the differences between the CCPA and the GDPR?
https://threatpost.com/chilis-doesnt-leave-data-breach-on-the-back-burner/131955/

While the general contours of the CCPA may appear to heavily favor consumers, the law is balanced in its application. First, unlike the GDPR (see more on the GDPR here), only personal data of California residents in California fall under the new law. Thus, businesses servicing only out-of-state travelers do not need to worry about complying with the law. The CCPA is also less broad in application in that only certain businesses need to comply, those that:

(1) earn $25 million in revenue; (2) sell or share, for profit, personal information of 50,000 consumers, households, or devices; or (3) derive 50 percent of revenue from selling personal information.[5]

There is more good news for businesses. The private cause of action is only triggered upon an unauthorized data breach. Also, statutory damages are unavailable if the business cures its violation within 30 days after it receives notice.[6] Finally, the California Attorney General has yet to release the mandated regulations that the law requires, which may offer further clarification and amendment on some of the law’s more burdensome provisions.

Right Here at Home TooPennsylvania Supreme Court Brings Employees’ Data into the Foray in Dittman v. UPMC.

On November 21, 2018, the Pennsylvania Supreme Court left its own mark on the cybersecurity landscape affecting businesses. Before November 21, two things were true: (1) an employer owed no special duty regarding employees’ data, and (2) employees needed to show more than a mere economic loss, from the misuse of their data, to recover damages from their employer.

However, the Supreme Court of Pennsylvania recently made it clear that employers have an independent legal duty to use reasonable care to protect employees’ data that are stored electronically and accessible via the internet. [7]  Furthermore, if an employee can show the employer breached its legal duty, rather than an action based on a contractual relationship, he or she can sue for purely economic damages.[8]

Dittman v. UPMC also sets forth a nightmare scenario for an employer. The employees, as a condition of their employment, were required to provide their Pittsburgh based medical employer with certain data. When 62,000 employees’ data was stolen in a breach, and then used to file fraudulent tax returns, those employees commenced a class action lawsuit against their employer. In addition, the court held that the duty extended to former employees, along with those currently on the payroll.[9]

Taking Action and What is Ahead

  • Once new entrepreneurs have concluded that their companies need to comply with the growing regime of data protection laws, they can be proactive without risking unnecessary expenditures due to fear-driven over compliance. Most of these laws require, or at least encourage, creating a data protection plan. Part of this planning forces a business to know the extent of the data they collect and what they intend to do with it. Businesses can get a head start by sitting down with their IT department, third-party vendors, and management teams to outline detailed goals, deliverables, and implementation strategies. Once these items are in place, companies can implement other measures new laws might require or ones that the companies find useful.  Here is a blog post that elaborates.
  • Companies can also help themselves by understanding that these types of data protection laws are a sign of a wider trend stemming from governments and regulators trying to get a handle on the interconnectedness between businesses, data, and consumers. What is apparent is that the number, scope, and reach of these laws is only increasing. 2019 will usher in not only new data protection standards, but also new laws affecting businesses that traditionally did not need to worry about the laws outside of their state.

Ian R. Brinkman, at the time of this post, is a third-year law student at Penn State’s Dickinson Law. He is originally from Central Pennsylvania and will start his legal career at Gibbel, Kraybill and Hess in Lancaster, PA as an associate in their Corporate practice group. He also helps coordinate the Volunteer Income Tax Assistance clinic at the law school.

Sources:

[1]Matt Jeweler, Massive GDPR Fine Is a Wake-Up Call to Get Compliance and Cyber Insurance Squared Away, Pillsbury-Policyholder Pulse Blog (Feb. 5, 2019), https://www.jdsupra.com/legalnews/massive-gdpr-fine-is-a-wake-up-call-to-34398/

[2]A.B. 375

[3]A.B. 375, Section 2(i)

[4]A.B. 375, Section 3, Subsection 1798.150

[5]A.B. 375, Section 3, Subsection 1798.140

[6]A.B. 375, Section 3, Subsection 1798.150

[7]Dittman v. UPMC, 196 A.3d 1036, 1056 (Pa. 2018)

[8]Id.

[9]Id. at 1038

 

Forming an S-Corporation: A Good or Bad Idea?

By: Starlin Colon

If you have been thinking about creating your own business, then you probably have read or heard that setting up a Limited Liability Company (LLC) is the best way to go about it. Although an LLC is generally a good option, forming an S-Corporation (S-Corp) could be a viable option as well, depending on the purpose of your future business. In this post, I will outline some of the benefits and drawbacks of forming an S-Corp as compared to the benefits and drawbacks of forming an LLC or other business entity type.

Formation

The first piece of information to look for when deciding to form a business entity is the initial procedures required to form the entity. For an S-Corp, the entrepreneur is required to file the articles of incorporation with the state. Each state sets out its own form for the articles, so they differ on what exactly is included in them. Generally, the articles include items such as the name of the S-Corp, names of the officers and directors, and the name of the individual incorporating the entity.

For an LLC, the entrepreneur must file the certificate of organization with the state. That certificate is similar to the articles of incorporation of an S-Corp as it identifies the company and the members, along with including optional information the member would like to include.

Liability

One of the main benefits of having either an LLC or an S-Corp is the fact that they both provide limited liability to the members or officers, respectively. Limited liability means that the personal assets of the individuals are generally protected in case the company is sued or goes bankrupt. The peace of mind of not having their personal assets at risk is extremely valuable to most entrepreneurs, and it most likely is to you as well.

Limited liability is not absolute, however, and could be lost in two main scenarios. First, an owner of a business may face personal liability through piercing the corporate veil. Courts may apply this remedy when the owner commingles the company’s assets with personal assets. This concept is true for both S-Corps and LLCs. Second, limited liability does not protect an individual from torts committed by that individual. This means that if you own either an S-Corp or an LLC, you will be personally liable for any torts you commit.

Taxation

There are several aspects of taxation that make S-Corps and LLCs very popular. First, both types of companies have pass-through taxation. Pass-through taxation means that the entity itself is not taxed. The profits or losses are passed to the owner and filed with the owner’s personal income tax return. This is a great advantage over other entity types since it prevents double taxation on the income where the company is taxed then the owners are taxed separately.

Self-Employment Tax. The self-employment tax is one big difference in taxation between the S-Corp and the LLC. This tax is the tax that owners of companies must pay for Social Security and Medicare. The current self-employment tax rate is 15.3%. This means that if you own an LLC, you will pay 15.3% of your income to the IRS in self-employment tax. In an S-Corp, the company would pay half (7.65%) and you would pay the other half. Although this may seem like the same amount, since you own the company, the advantage is that an S-Corp does not have to pay all of its profits to its employees in wages. The S-Corp is allowed to give distributions. Consider the following example:

You make a $200,000 profit. As a member of an LLC, 15.3% is paid as self-employment tax, which equals to $30,600. As an S-Corp, you could be paid a reasonable salary of $160,000, with the remaining $40,000 being given as a distribution not subject to self-employment tax. In this case, the company and you would each pay $12,240, for a total of $24,480. This is a tax savings of $6,120.

The self-employment tax benefit is probably the most common reason why a person would decide to form an S-Corp over an LLC.

Ownership

One drawback of forming an S-Corp over an LLC is that the IRS sets restrictions in the ownership and formation of an S-Corp. According to the IRS, an S-Corp:

      • must be domestic;
      • cannot have more than one-hundred (100) shareholders;
      • can only issue shares to individuals, not businesses;
      • must have only one class of stock; and
      • will have any subsidiaries added to the assets of the S-Corp.

These restrictions are very different than LLCs and other business entities. LLCs can have members from anywhere in the world. There is no cap on the number of members, businesses can be members, and there are no restrictions on subsidiaries. If the IRS restrictions are not problematic for your business model, then it may be beneficial to form an S-Corp for the tax benefits.

Conclusion

If you are planning to start a company, think about the purpose of your company in order to better identify which entity would be the most beneficial to form. S-Corps and LLCs are very similar but have some big differences in the self-employment tax amount and the ownership restrictions. It is important to know the distinctions between types of entities in order to make an informed decision and prepare yourself for success.


*This post was checked for currency on February 9, 2019 and reproduced with permission by author Starlin Colon.  Original post can be found here.

Starlin Colon, at the time of this post, is a third year law student from Penn State’s Dickinson Law. Originally from the Dominican Republic, he plans to take the bar exam in Pennsylvania.  A Penn State grad, he is interested in business transactional law.

 

References & Photo Sources

https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

http://uscode.house.gov/view.xhtml?req=(title:26%20section:1361%20edition:prelim)

https://www.corporatedirect.com/start-a-business/entity-types/s-corporation/

http://www.mainesbdc.org/llc-vs-scorp/

 

Trisha Cowart | Entrepreneur of the Month | February 2019

By: Sarah Phillips

I have the great honor to introduce to you Trisha Cowart, our February 2019 Entrepreneur of the Month. Trisha is a co-founder of the innovative law firm Cowart Dizzia LLP. This cloud-based, multi-jurisdictional, all female law firm focuses on providing dynamic solutions in the field of regulatory healthcare counseling for a wide variety of clients. The firm provides healthcare facilities with educational trainings, collaborates with agencies and caseworkers to resolve healthcare eligibility issues, and enforces facilities’ rights under Medicaid laws.

Trisha received her B.A. from the Pennsylvania State University, then graduated from Penn State University’s Dickinson School of Law, and shortly after graduating, began working as a Clinical Professor at the law school’s Elder Law and Consumer Protection Clinic. Before starting Cowart Dizzia LLP, she was a partner at a national law firm, where she focused her practice on Medicaid eligibility, civil litigation, and Medicaid regulatory issues. Trisha was kind enough to sit down and share her business and entrepreneurship story with us.

Elements for Success

The first element of success is finding the right and trusted business partner.

What does Trisha credit for the success of her law firm? That’s easy. Trisha says that the key to the law firm’s success has been the strong and balanced relationship between herself and co-founder of Cowart Dizzia LLP, Gina Dizzia. For Trisha, operating a great business is all about finding the right people to go into business with. Trisha recommends that picking your business partner be a slow and deliberate process; it is important to find a partner with complementary skills, but also a partner who has different strengths and can excel in different areas.

 Creating the right company culture is also crucial to developing a business that people want to be part of. For Trisha and her business partner, this means fostering a work environment where the attorneys are enjoying their work and happy in their personal lives. Allowing the firm’s attorneys to telecommute is unique, but for Cowart Dizzia LLP, it’s what makes them successful.

As our conversation continued, it seemed clear that a big element of Trisha’s success as an innovative entrepreneur is that the law firm she and her business partner created has allowed Trisha to pursue a career she is passionate about. Trisha has devoted countless hours to developing meaningful client relationships and putting in the extra time and care to make sure the business flourished in its early stages-all because she was passionate about the work, her clients, the law firm and truly believed in the mission.

Developing strong relationships with clients is also fundamental to your business’ success. Click here for more on why forming long lasting relationships with your clients matters according to Trisha.

Entrepreneurial Risk

You have to think about taking a risk, but you also need it to be a well thought out and calculated risk.

Inherent to being an entrepreneur is taking risk, but Trisha explained that successful entrepreneurs will take calculated risks. For her, that meant taking a risk and leaving her old firm, but doing enough planning ahead of time to set herself up for success.

Part of that planning involved identifying her market, and also determining if there was room for her growing business in that market. Without growth potential, it can be hard to carve out and sustain a place in the marketplace.

Trisha also strongly believes that entrepreneurs can plan for success by finding ways to utilize each team members’ unique strengths. Hear more from Trisha about the value of risk taking and effective management.

Lessons Learned

Our clients’ needs have changed, and you have to adapt and grow with those needs.

If there was one theme that kept coming into our conversation, it was the importance of accepting that change is an inherent part of running a business. If you can be ready to adapt as your clients’ needs shift, you will be able to better meet those needs or fill that opening in the market. Part of this is also understanding that how your business starts may not be the way it ends, and that can be a good thing if it means that you are changing in a positive direction.

Trisha also learned quickly the value in seeking advice from others, especially in the early stages of starting her business. Trisha and her business partner consulted with an attorney and an accountant to make sure that they took all the necessary steps to establish their law firm correctly.  By consulting with experts, they felt more confident in the potential success of their entrepreneurial endeavor.

Learning to adapt best management practices can also play an integral role in the long-term success of your business. Hear Trisha explain why this is important.

Advice for Today’s Entrepreneurs

Keep your costs in-check.

Finding and using innovative methods to lower costs, especially in the early phases, can be extremely helpful when starting your business. Trisha’s law firm uses cloud-based platforms, shared works spaces and a website creation platform to limit costs where possible. This has allowed them to focus on growing in their market niche and establishing themselves as the leader in their field. Trisha explained that after you’ve solidified your identity and experienced financial success, then you can reinvest for expanding or adding on “extras” to your business.

For more creative ways about how to limit costs, click here.

Advice for Today’s Law Student

Your cover letter is your first chance to make a great impression.

Being open to learning about different areas of the law is important as a law student. Trisha found her passion by accepting an internship opportunity at the school’s Elder Law Clinic. Law school, and your early career, should be focused on finding what makes you happy and discovering which area of the law you can be passionate about. Taking advantage of every new experience that comes along is just one way Trisha hopes current law students will continue to challenge themselves as they work through law school.

Trisha also strongly encourages all law students to learn the value of a personal and well-planned cover letter. The cover letters should reflect interest in the position and should demonstrate that your experiences match well with the firm or business. A cover letter that simply copies and pastes pieces from older versions will not make you stand out, and chances are it will not reflect your best qualities.

Being open to learning about different areas of the law is also important as a law student. Trisha found her passion by accepting an internship opportunity at the school’s Elder Law Clinic.

Hear Trisha explain why taking advantage of new experiences is valuable.

Videos containing Trisha Cowart’s great insights can be viewed through links in the above article.

This post was authored on February 2, 2019.


Sarah Phillips, at the time of this blog post, is a second year law student at Penn State’s Dickinson Law. She is from West Amwell, New Jersey and has interests in agricultural, land use and business transactional law. She is currently serving as a Honor Code Representative and a Law Lion Ambassador.

Photo source: https://www.businessknowhow.com/money/bizexpenses.htm

New USPTO Guidance on Patent Eligibility is Good News to Entrepreneurs

By Michael Kwon

Many successful businesses were started by entrepreneurs who turned an invention into a viable product or service. It is hard to imagine the success of our economy, in fact, our society, without the system of inventions and patent protection. Our Founding Fathers recognized the importance of innovation and added patent protection to our Constitution, in Article I Section 8. From the very first patent that President George Washington signed in 1790 to the ten millionth patent, since the current numbering system started in 1836, issued on June 19, 2018, the patent system has been fueling the technological and economic growth of our nation.

The word “patent” means “open” and by granting an inventor the right to exclude all others from making, using, or selling the invention, the patent allows an inventor to literally open up his invention to the world. Such an open patent publication lets others learn from it and improve upon the idea. Once an improvement is made, the improved invention is then patented and left open to the world for further improvement. This cycle of improvement is the engine of innovation for our technology and economy.

To encourage innovation, the courts held that the threshold for patent eligibility was very low and easy to meet, leaving it to the other patent requirements to determine the invention’s patentability. In recent years, however, the Supreme Court made several imprecise decisions that ended up creating a quandary in the field of patent eligibility.

In response, the U.S. Patent and Trademark Office (USPTO) announced new guidance for determining patent eligibility.

Patentability Requirements and Patent Eligibility

For an invention to be patentable, it must meet certain requirements:

  • “Novelty.” The invention has to be new. It would be hard to convince a patent examiner that one has invented the wooden chopsticks, which have been in general public use for thousands of years. (Incidentally, however, a few dozen patents have been issued for various forms of chopsticks including “gravity chopsticks” that supposedly avoid germs and dirt.)
  • “Utility.” The invention must be useful to the society. One cannot get a patent for a chemical compound whose sole function is to cause a massive headache, for example.
  • “Non-obviousness.” An invention is not patentable if it is an obvious improvement from an existing invention. For instance, one cannot get a patent by taking an existing patent for a bicycle and “improving” it by adding a light for night-time biking. Although no longer the standard, Justice Douglas succinctly described non-obviousness: an invention “must reveal the flash of creative genius!”

In addition to meeting the novelty, utility, and non-obviousness requirements, an invention has to be in one of the following four categories to be eligible for patent consideration:

  • “Process” such as a method for conducting secure financial transactions over the internet by authenticating a customer’s identity;
  • “Machine” such as a new vacuum cleaner that roams around a room and cleans it;
  • “Manufacture” such as a new snow shovel that requires less effort to shovel snow; and
  • “Composition of matter” such as a new drug or a new glue.

Since the Patent Act of 1790 through the Patent Act of 1952 and the America Invents Act (or “Patent Reform Act of 2011”), just about any manmade invention was eligible for patent consideration. An inventor had a clear idea of what would qualify as patent eligible. In recent years, however, patent eligibility has become murky and confusing because of a few imprecise decisions by the Supreme Court.

U.S. Supreme Court Decisions

In 2012, the Supreme Court shocked the world of patent law with its ruling in Mayo Collaborative Servs. v. Prometheus Labs. In an opinion by Justice Breyer, the Supreme Court unanimously ruled that “basic tools of scientific and technological work” were not eligible for patent and that “one must do more than simply state” the law of nature. The Court was concerned that granting exclusive rights to natural phenomena would impede innovation.

More shocking than the ruling itself was the Court’s confusing explanation that, to be patent eligible, an invention required an “inventive concept” to ensure that the claim amounts to “significantly more” than a claim upon a natural law itself. The Court did not explain what “inventive concept” was, however.

In 2014, in an opinion by Justice Thomas for Alice Corp. v. CLS Bank Int’l, the Supreme Court doubled down on the Mayo test and expanded it to exclude abstract ideas from patent eligibility. The Court distinguished between basic “building blocks” and inventions that integrate them into “something more,” and created a test for determining patent eligibility: First, determine whether the claims are directed to one of the patent-ineligible concepts. Second, if so, determine whether the claims include additional elements that transform the claims into patent-eligible applications. Unfortunately, however, this two-step Alice test added to the confusion over patent eligibility.

Since the 1952 Patent Act, the courts held that patent eligibility was easy to meet and that the other requirements – novelty, utility, and non-obviousness – would do the necessary screening of claims. By overturning precedent cases and ignoring legislative history, the Supreme Court created confusing restrictions that effectively render some of the most exciting scientific discoveries and technological advances of the twenty-first century ineligible for patent protection. Things like personalized medicine, artificial organs, artificial intelligence, and medical diagnostics are not patent eligible.

Many in the patent field, including several Federal Circuit judges, expressed their deep concerns over this confusion. Some have called the Supreme Court decisions extraordinarily-shortsighted and, specifically, the Mayo opinion the worst opinion issued in patent law.

The USPTO Proposal – Thank you, Mr. Iancu!

Since Alice, the Supreme Court has denied a long line of patent appeals involving the question of patent eligibility, sidestepping opportunities to clarify what some call “unintelligible test for patent eligibility.” As major industry groups such as the American IP Law Association (AIPLA) and Intellectual Property Owners Association (IPO) joined law professors and industry watchers in voicing their concerns, and with no sign of resolution from the Supreme Court or the Congress, the USPTO proposed new guidance on patent eligibility.

In his speech at the IPO Annual Meeting in September 2018, the new director of the USPTO Andrei Iancu proposed the following steps for determining patent eligibility.

First, Iancu defined “basic tools of scientific and technological work” as:

  • “Pure discoveries of nature, such as gravity, electromagnetism, DNA, etc.” (citing Association for Molecular Pathology v. Myriad Genetics, Inc.);
  • “Fundamental mathematics like calculus, geometry, or arithmetic per se” (citing Gottschalk v. Benson);
  • “Basic ‘methods of organizing human activity,’ such as fundamental economic practices like market hedging and escrow transactions” (citing Bilski v. Kappos and Alice); and
  • “Pure mental processes such as forming a judgment or observation.”

Second, Iancu is most concerned with eligibility issues surrounding abstract ideas and he proposed three categories of abstract ideas:

  • “Mathematical concepts like mathematical relationships, formulas, and calculations”;
  • “Certain methods of organizing human interactions, such as fundamental economic practices, commercial and legal interactions; managing relationships or interactions between people; and advertising, marketing, and sales activities”; and
  • “Mental processes, which are concepts performed in the human mind, such as forming an observation, evaluation, judgment, or opinion.”

Third, Iancu explained that once the subject matter of the claims is determined to be a “process, machine, manufacture, or composition of matter,” a patent examiner would determine if the subject matter is within one of the enumerated categories of exceptions. According to Director Iancu, “This is the new approach. . . . If the claims do not recite subject matter falling into one of these categories, then the . . . [patent eligibility] analysis is essentially concluded and the claim is eligible.”

Conclusion

Many in the industry are optimistic and hopeful that the boundaries set by the new guidance will minimize uncertainty and encourage innovation. For inventors and entrepreneurs, this can only be good news.

Each year the USPTO receives over 600,000 patent applications. Although China receives more patent applications (1.38 million) than the U.S., followed by Japan (318,000), South Korea (204,000), and Germany (68,000), the U.S. patent is the most prestigious and coveted patent in the world. It has been a powerful engine for innovation, often with worldwide influence.

The new USPTO guidance on patent eligibility may not be perfect, but, given the constraints of judicial precedent, it is a reasonable approach and a significant step in the right direction. Combined with the creativity and determination of entrepreneurs, the new guidance will help keep the engine of innovation running at full speed.

This post was written on January 25, 2019.


At the time of this post, Michael Kwon is a second year student at Penn State Dickinson Law. Michael founded the Dickinson IP Law Society and served as its inaugural president. He currently serves as an associate editor of Jus Gentium Journal of International Legal History.

 

Sources:

Does the Supreme Court even appreciate the patent eligibility chaos they created? http://www.ipwatchdog.com/2018/11/12/103256/id=103256/

Remarks by Director Iancu at the Intellectual Property Owners Association 46th Annual Meeting https://www.uspto.gov/about-us/news-updates/remarks-director-iancu-intellectual-property-owners-46th-annual-meeting

Confusing Patent Eligibility https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2754323

World Intellectual Property Organization https://www.wipo.int/edocs/infogdocs/en/ipfactsandfigures2018/

The US Patent Office has issued 10 million patents https://www.theverge.com/2018/6/19/17478898/uspto-utility-patents-10-million-issued

Picture Sources:

https://www.kacst.edu.sa/eng/IndustInnov/SPO/Pages/spo.aspx

http://www.ipwatchdog.com/2018/11/12/103256/id=103256/