Blog Archives - Page 5 of 12

Decriminalization in New York: A Half-Baked Measure?

By: Rob Griffitts and Jordan M. Steele

Passed in the twilight hours of New York’s last legislative session, months of negotiations produced a reform that will further decriminalize possession of marijuana. Advocates celebrate the bill for providing vital relief to individuals through expungement of prior misdemeanor convictions for marijuana possession. However, both proponents and critics remain dissatisfied with the compromise. Critics of the bill rail against it for softening the State’s position on possession, while many of those in favor of ratification remain disappointed with its scope. Despite being “decriminalized”, marijuana remains prohibited in the state of New York. This distinction is critical for the burgeoning cannabis industry; distribution will remain a criminal activity, and as a result, there remain substantive health concerns when the product is produced in the absence of oversight.

The New York Reform

While marijuana possession has been decriminalized in New York for decades, this reform expands upon existing law and provides a means for individuals to have their prior criminal records expunged. The prior law, passed in 1977, decriminalized possession of marijuana for amounts up to 25 grams (approximately one ounce). The new bill does several things, including raising the limit for possession. First, the penalty for possession of less than one ounce will be lowered from $100 to $50 and this amount will not increase because of prior criminal history. Second, the bill provides that possession of one to two ounces, previously a Class B misdemeanor, will become a violation, punishable by a fine of $200. More than two ounces will still be considered a crime, not a violation. Third, smoking marijuana in public will now be considered a violation. It had previously been considered a misdemeanor, a loophole which legalization advocates claimed was used to target racial minorities.

The Effect of the New Bill on Individuals

On the individual level, the bill is a major step forward. Early estimates show that nearly 600,000 New Yorkers could benefit from the expungement of past marijuana convictions. The bill’s sponsor, Senator Jamaal Bailey, has stated that prior convictions for marijuana possession had adversely affected his constituents in the Bronx. Those convictions were “limiting [New Yorkers’] access to housing, access to education, [and] affecting their ability to obtain employment.” In a radio interview on WAMC, Governor Cuomo commented that “it makes the situation much better especially for the black and brown community that has paid such a high price.” Politicians are hopeful that this bill will reduce the disparate impact of the war on drugs on minority communities.

Persisting Prohibition of the Cannabis Industry

Despite the relief the bill offers to individuals, decriminalization is not legalization, and many harms accompanying the prohibition of marijuana still persist. The prohibition continues to fuel an illicit underground distribution network, estimated to be worth $40 billion or more in the U.S. Profits from marijuana distribution in New York continue to go untaxed, and as a result, the state is foregoing a valuable source of revenue. The new bill also misses the opportunity to regulate the industry in order to ensure consumer safety. A regulated market could ensure that marijuana products are free of contamination, labeled for potency, provide adequate warnings to address health concerns and be contained in child-proof packaging. There also still persists the fear of the unequal application of the laws towards minority groups traditionally targeted for drug-related offenses. If history repeats itself, New York could ultimately see certain marijuana arrests increase, which was the result after the first bill decriminalizing marijuana was enacted in 1977. While the bill leaves these issues unaddressed, those in the cannabis industry remain hopeful that this reform provides a step in the right direction on the road to legalization.

Blockchain and Insolvency: How Blockchain Can Make Matters Easier for Creditors, Debtors, and Bankruptcy Courts

By: Rob Griffitts

Digital currencies on a blockchain ledger provide enormous flexibility when conducting commercial transactions. In the capital markets, lenders and borrowers can structure credit transactions at arms-length since the lending amount need not be examined by a financial institution.

On the other hand, if a prospective borrower obtains a loan and files for bankruptcy, a creditor might face trouble in recovering the principal on the loan he or she issued to the debtor. Debtors may attempt to circumvent repayment of loan principals by exploiting the current loopholes in the U.S. Bankruptcy Code pertaining to blockchain-based digital assets. These loopholes have put bankruptcy courts, U.S. Trustees, and estates in a precarious position, as these courts have struggled to compartmentalize digital assets, credit, and blockchain-based currency into a legal framework. This uncertainty, however, allows lawyers to provide bankruptcy courts, prospective lenders and borrowers, and perhaps Congress with a schematic for ascertaining repayment and streamlining bankruptcy proceedings.

The issue with blockchain-based resources in bankruptcy proceedings begins with how to identify these resources; the SEC and the CFTC have provided a starting point as they have, respectively, defined these resources as either monies or commodities. The problem amplifies, however, when a bankruptcy court incorrectly defines the resource at issue, which could effectively prevent the trustee or creditor from recuperating the full value of the resource.

Under 11 U.S.C.A. § 550(a) (the U.S. Bankruptcy Code), a trustee may recover the property transferred or if the court so orders, the value of such property. When the item transferred is currency, the trustee would be entitled to only the historical value at the time of the transfer; when property is transferred, however, the trustee would be entitled to receive the value of the property at the transfer date or the time of recovery, whichever is greater. The uncertainty in both the identification and valuation of these assets directly impacts how much—or how little—one might recover. For example, a Chapter 11 debtor whose primary asset is bitcoin may have sufficient assets to satisfy creditors in full one day, but the debtor may be insolvent the next.

Inevitably, this uncertainty creates some trepidation for prospective borrowers; blockchain, bankruptcy, and securities lawyers, however, should seize this opportunity to structure loan term sheets and credit arrangements for digital assets with two objectives in mind: 1) to put debtors on notice if debtors attempt to circumvent repayment by exploiting the loopholes in the U.S. Bankruptcy Code; and 2) to streamline potential in-court and out-of-court bankruptcy proceedings. Structuring these arrangements to address blockchain-related gaps in the law, such as asset valuation, identification, and ownership, are just several ways in which practitioners can help both creditors and debtors transact with reassurance and efficiency. The question, then, is how?

First, if the debt contract or credit arrangement between the creditor and debtor involves a digital asset, the contract must have a rigid classification of whether the asset will be qualified as a “currency,” “security” or a “commodity.” This classification, moreover, should include the valuation and timing mechanics of U.S.C.A. § 550(a) to place a floor and limit on the amount at issue. If a dispute based on this contract or arrangement were to make it to court, the lawyers for the parties at interest have eliminated tasking the court with this responsibility, as a distorted classification or valuation of the resource at issue may leave a party with either an insufficient recovery or a potential windfall.

Second, during due diligence, the lawyers for both parties must emphasize access to a blockchain ledger for the parties at interest so they can: 1) validate transactions and ownership of assets simply by accessing the blockchain ledger; 2) track any manipulation or transfer of these assets; 3) create a qualifying bid schematic for any potential asset sales; and 4) structure an outline for claims administration prioritizing lenders in the order, and amount, which they lent. This structure would allow trustees and fiduciaries to track assets more efficiently than fiat money, as digital assets on a blockchain ledger are incorruptible. This structure would also be more cost efficient than it would be for tracing fiat money, as gaining access to bank documents in the event of a bankruptcy proceeding may significantly delay the process.

Lastly, to avoid the fear of fraud, Bankruptcy Rule 2004, Section 341 allows for a meeting of creditors and examinations where a trustee will examine a debtor’s assets, liabilities, and bank records—a meeting of this nature should be implemented into the debt contract and subject any potential fraudulent debtor to consequences, either civil or criminal, if a debtor materially omits a fact in the representations and warranties phase that is later uncovered in a bankruptcy proceeding. While debtors may be apprehensive to agree to this provision at first, it substantially deters the possibility of a debtor circumventing repayment based on fraudulent representations.

Although courts have yet to peg a uniform definition to blockchain-based digital assets, that does not mean that financing arrangements involving these assets must stall. In fact, practitioners should use this gap to their advantage since it creates an opportunity to provide creditors, debtors, bankruptcy courts, trustees, and fiduciaries with reassurance through a flexible, digital-asset based credit and lending agenda.

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We would like to thank Armando E. Martinez for his contribution to this article.

Can Blockchain be the Driving Force for Autonomous Vehicles?

By: Jon Avidor

A key issue in today’s automotive industry is that many processes and data storage are manual and paper-based, leading to inaccuracies, disputes, and high transaction costs. Out of 1,314 automotive executives surveyed across 10 countries, 62% of these executives reported that blockchain would be a “disruptive force” in the automotive industry within three years. Equipment manufacturers and suppliers are looking to create privacy safeguards and change how they store information. The need for blockchain technology stems from the change in the once linear structure of the automotive industry, which was simply between suppliers, manufacturers, and dealers. Through globalization, regulation and technological advancements, the automotive industry has expanded so significantly that industry executives believe it calls for a shared ledger to centralize all of its intertwined processes.

While the automotive industry has not yet implemented blockchain technology, research and development of certain technologies are starting to take place. The University of Nevada, Reno’s Intelligent Mobility Initiative is working with the Nevada Center for Applied Research and Filament to develop blockchain internet of things (“IoT”) technology to create greater safety for autonomous vehicles, which market is expected to increase exponentially between 2019 and 2026. IoT applications maintain a ledger of how devices interact. Testing is scheduled to begin soon, where Filament’s Blocklet Technology will be integrated into an autonomous vehicle, and the surrounding infrastructure will be placed with sensory functions. The sensory technology includes light detection and ranging (“LIDAR”) and dedicated short-range communications (“DSRC”). The testing phase aims to confirm this technology’s use in accurately documenting events and enabling data exchange through blockchain transactions.

This isn’t Filament’s only involvement in revolutionizing the automotive industry. The remanufactured automotive parts industry estimated by a U.S. International Trade Administration’s Industry Assessment to be approximately a $100 billion global industry. However, the business logistics of these operations make this subset of the automotive industry incredibly complicated and expensive. Filament’s Blocklet Technology is also helping manufacturers create new remanufacturing opportunities through reduced costs and increased efficiency. This technology aids in payment processing and implements smart contracts. The U.S. Department of Transportation (“DOT”) estimated that certain safety applications using vehicle-to-infrastructure (“V2X”) and vehicle-to-vehicle (“V2V”) communications could alleviate or eradicate up to 80% of non-impaired crashes. Since as early as 2014 the DOT has been exploring the use of V2X and V2V technology to allow vehicles to communicate with infrastructure and each other to prevent car accidents. The technology in cars today includes sensors that have a limited range and a delay in relaying data. V2V technology is a step-up because it shares information in real time. However, V2X uses blockchain technology to enable these communications.

Companies are taking note of the use of blockchain-based sensory functions in automated vehicles and are moving forward in filing patents. In April, IBM received a patent for a blockchain application that will manage data and interactions for autonomous vehicles. This V2X technology will intake sensory data from the vehicle and surrounding infrastructure and store the data into a private blockchain system. General Motors filed a similar patent in December. General Motors, BMW, Ford, Honda, and Renault are only a few members of the Mobility Open Blockchain Initiative (“MOBI”) – a non-profit organization created to support the creation and implementation of blockchain technology in the mobility industry.

Car manufacturers aren’t only utilizing blockchain for autonomous driving data and safety. Hyundai is developing a program that allows drivers to connect their Hyundai electric vehicles with their smartphones to customize certain vehicle functions. The application will allow drivers to adjust performance features of the vehicle from their phone. Blockchain technology and its variety of uses in the automotive industry is well on its way to becoming a reality.

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We would like to thank Rachel Behar for her contribution to this article.

Is Ethereum a Security?

By: Steve Masur

SEC Chairman Jay Clayton recently confirmed in a letter that Ethereum and similar cryptocurrencies are not securities. This letter was in response to Representative Ted Budd’s letter asking the SEC to clarify the criteria used in determining whether a digital token offered or sold is an investment contract and thus is an offer or sale of a security. Ever since SEC Director William Hinman’s June 2018 speech, where he announced Ethereum and other similar cryptocurrencies are not securities, the crypto community has been wondering whether these remarks, in fact, reflect the beliefs and policies of the SEC – despite his disclaimer that his statements reflect his own opinions only. Generally, his speech concerns when a digital asset is offered as an investment contract and is thus a security.

There were several key takeaways from Director Hinman’s speech:
1. A token itself is not a security, but the transactions pursuant to which a token is distributed may be a securities transaction.
2. The Bitcoin and Ethereum networks are currently decentralized enough that the disclosure rules in federal securities laws would add little value. Further, other networks could become decentralized enough such that the tokens that are on these networks do not need to be regulated as securities.
3. Drawing on the well-known Howey Test, the form of a transaction is less important than the economic reality of it. The sale of tokens may qualify as a securities transaction where the tokens are sold in efforts to fund an enterprise, and where the token purchasers rely on the efforts of a third party to see a profit.
4. Lists of relevant factors in assessing whether a third party is driving the expectation of a return on a digital asset, and in determining when the sale of tokens may be a securities transaction.
5. The way that securities laws are applied to token distributions may impact the securities treatment of the token or sale in secondary transactions.

Chairman Clayton reiterated that whether a digital asset is an investment contract, and thus a security, depends on the application of the Howey Test and its progeny, including the Forman Test. While he didn’t specifically mention the consumption/consumer use test from Forman – finding that when a purchaser is motivated by a desire to use or consume the item purchased – it is assumed that this test applies. Chairman Clayton agreed with Director Hinman that the analysis of whether a digital asset is offered or sold as a security can change over time – that a digital asset may be initially offered or sold as a security, but that this designation as a security can change if the digital asset is offered or sold in a way that no longer meets the definition of an investment contract. He further agreed with Director Hinman that a digital asset transaction may no longer qualify as an investment contract if a purchaser no longer reasonably expects a third party to generate a return.

Chairman Clayton said that networks such as Ethereum and similar coins are sufficiently decentralized such that they are not investment contracts, and thus not securities. Although he didn’t specifically say it in his letter, he has mentioned in the past that Bitcoin is not a security. It is clear that a coin, alone, is not a security. It’s about the method in which the coin is offered or sold that makes it a security. If a coin is sold to fund an enterprise and the purchasers of the coin are relying on the efforts of a third party to make a profit, the coin is likely to be deemed a security. While this increased clarity is helpful in providing some general rules of thumb to consider in determining whether a digital asset could be considered a security by the SEC, it has also left open many questions that would need to be answered for this to achieve the level of real guidance.

What is the meaning of sufficiently decentralized, and at what point does a network become sufficiently decentralized? Networks will want to know more from the SEC on what this looks like, so they know what to expect. What does the SEC consider to be a similar coin, and what factors do they use to determine this? This is still an open question, and it may be wise to wait and see what coins the SEC deems to be similar to Ethereum, before assuming that a coin is not a security. The main takeaway from the letter is that the SEC is going to move slowly and carefully in providing guidance. So for the time being, it is safest to presume a new digital asset might be considered to be a security in the US unless you are confident you can prove otherwise if tested in a court of law.

If you have further questions about a digital asset you plan to create, we can help you develop a good legal strategy for how to remain compliant when releasing it, both in the US and abroad.

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We would like to thank Rachel Behar for her contribution to this article.

Wyoming’s New Frontier for Blockchain and Digital Assets

By: Steve Masur

Wyoming, generally known for its great skiing and cowboy culture, is also quickly becoming an oasis for blockchain technology-based companies. The Wyoming legislature recently passed three blockchain-friendly laws—totaling 13 in the past two legislative sessions—that allow corporations structured under the Wyoming Business Corporations Act (“WBCA”) to facilitate transactions involving digital assets. By defining digital assets as both “virtual currency” and “utility tokens,” Wyoming is now the first state to place blockchain-based assets into their own distinct asset class, seemingly positioning itself as the go-to destination for blockchain-based commercial activity.

Wyoming’s blockchain-friendly ecosystem entices companies to incorporate in its state, such that competition with Delaware is imminent. Although Delaware still offers a tax and corporate-friendly environment for businesses, it has yet to establish a friendly legal framework for companies engineered around digital assets and virtual currencies. Other states have either labeled digital assets and virtual currencies as a “security” or a “commodity.” Since the Securities Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have defined virtual currencies as “securities” and “virtual commodities”, respectively, businesses that are incorporated under Delaware law or transact with virtual currencies face the specter of answering to these agencies, potentially jeopardizing their operations.

The Wyoming legislature, by contrast, has taken the reins on defining digital assets as “virtual currencies” and “utility tokens”, placing these mediums of exchange into their own unique terminology buckets under Wyoming law. Since these benefits under Wyoming law only apply to businesses incorporated under the WBCA, blockchain-based companies have begun heavily considering Wyoming as their entities’ state of organization. Should Wyoming keep its current pace of enacting blockchain-friendly legislation, we can expect a paradigmatic shift in the number of companies, especially blockchain-based ones, spurning Delaware to incorporate in Wyoming.

Wyoming’s legal classification of digital assets as “virtual currencies” and “utility tokens” provides these assets with the same legal treatment as money under Article 9 of the Uniform Commercial Code (“the UCC”). Under UCC 9-332(a), “[a] transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Eliminating the security interest requirement allows blockchain-based companies to issue, lend, and borrow virtual currency without the need of a financial intermediary, such as a bank. In the context of issuing blockchain-based tokenized assets, cutting out the middle person may incentivize Wyoming-based companies to conduct more token offerings as a capital raising strategy.

The lack of clarity in defining these tokens at the federal level puts digital currency exchanges, such as Coinbase and Gemini, under vast scrutiny when conducting token-based offerings, since courts have interchangeably classified these currencies as both “securities” and “commodities.” This has impeded courts’ ability to clearly establish the rights of investors in these offerings, as many have received a fraction or nothing of what they were promised in the offering. By treating virtual currency and fiat currency as the same, legally speaking, Wyoming has legitimized token-based offerings bilaterally for issuers and consumers, as Wyoming-based exchanges may now conduct token-based offerings sans a financial intermediary and provide consumers with established rights under these offerings. Eliminating the hassle of dealing with a financial intermediary, while also providing greater security for prospective token offering investors, makes Wyoming an attractive destination for future digital currency exchange startups.

Wyoming’s legislative treatment of digital assets as money under the UCC has exempted owners of blockchain-based digital assets from paying property taxes on these assets. That is, Wyoming will treat these assets like fiat currency, but they will not have the same tax implications of United States currency, as the legislature does not recognize digital mediums of exchange as legal United States fiat currency. This is the icing on the cake for Wyoming-based blockchain companies, as their digital assets can be placed in a Wyoming bank as a store of value, free of any state property tax concerns.

Given Wyoming’s friendly treatment and definition of digital consumer assets, we will likely see a sharp increase in blockchain-related commercial activity in the state. In fact, Wyoming’s flurry of blockchain-friendly legislation indicates that the state is positioning itself to be the virtual currency hub of the United States. Should other states follow suit? If Wyoming’s economy creates a gold rush environment, we could see a legislative arms race among the different states to emulate Wyoming’s virtual currency legislation.

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We would like to thank Armando E. Martinez for his contribution to this article.

FaceCoin: Facebook to Launch a Private Stablecoin for Whatsapp Users

By: Jon Avidor and Rachel Behar

Facebook is reportedly working on making a digital coin called FaceCoin for users of Whatsapp, a messaging application owned by Facebook. Its value would be derived from that of several different fiat currencies, not only the U.S. dollar.

FaceCoin would allow Whatsapp users to send and receive money, otherwise known as remittances. To put things into perspective, over $69 billion was sent to India in 2017 in remittances according to the World Bank. With over 200 million Whatsapp users, Facebook has access to a groundbreaking number of potential market participants.

FaceCoin would be a stablecoin– a safe, risk averse cryptocurrency designed to maintain a stable value against an asset of fiat currency. The current problem faced by stablecoins for payment is that since most businesses don’t accept them, stablecoins have to be converted to a fiat currency to be used as a form of payment. Additionally, Basis recently shut down its stablecoin because the company could not prove that its stablecoin was not a security. SEC regulation of stablecoins could make it less attractive to potential buyers.

This is not Facebook’s first venture with virtual currencies. As far back as 2007, Facebook was pursuing patents related to digital currency when it applied for a patent which is likely what led to the creation of Facebook Credits and Facebook Gifts. Facebook began developing its own virtual currency in 2011 with Facebook Credits, then moved onto Facebook Gifts in 2012. Each application was shut down within two years because Facebook reportedly encountered issues with distance and localization problems to allow these payments to be made across borders. In 2015, Facebook Messenger Payments was launched in the U.S. and ultimately expanded to France and the UK in 2017.

Last year, Facebook created a new policy banning ads for ICOs and cryptocurrency. Facebook’s rationale was that they wanted to prevent misleading or deceptive ads. Nearly six months later, Facebook reversed its ban on ads related to cryptocurrency, now requiring advertisers to apply and be pre-approved to advertise cryptocurrencies. In these application, advertisers must disclose certain business information to Facebook, including the company’s name, whether the company has any regulatory certification, or if the company is publicly traded.

If WhatsApp users have to convert their coins to a fiat currency to make payments, FaceCoin will have a much smaller market of users. Think about the users in third world countries – this would be more of a hassle than a utility. If this issue is still present, Facebook could offer goods and services for purchase. In that case, FaceCoin would be functionally similar to Facebook Credits and would have less utility than if it could be used for remittances.

Potential regulation of FaceCoin as a security is a potential hurdle, but likely not one that Facebook can’t handle. Facebook will have to keep in mind SEC regulations when developing FaceCoin. Facebook has more resources to deal with regulatory obstacles in comparison to smaller companies that have recently failed in releasing stablecoins due to this issue.

Given that Facebook has been under fire for privacy issues for some time now, users may be less keen on using FaceCoin if they don’t trust that their privacy will be protected.

Facebook still has banned ICO ads. It’s understandable to want to block any scam ads, but there are surely compliant ICOs that are blocked from advertising on Facebook. This begs the question – is Facebook trying to cut out ICO competition in light of their own upcoming token offering? If so, is that could potentially mean trouble with the FTC.

If Facebook can overcome regulatory and technological hurdles, FaceCoin could very well open up the cryptocurrency market to millions of people that were not already market participants.

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We would like to thank Rachel Behar for her contribution to this article.

Can Roland Claim Trade Dress Protection for its TB-303 and TR-808 Designs?

By: Lauren Mack and Sasha Safavi

Roland, an electronic musical instrument manufacturer, recently registered with the German Patent and Trademark Office the design used in two of their signature products – the TB-303 synthesizer and TR-808 drum machine. Commonly referred to as an “808”, the Roland TR-808 Rhythm Composer was one of the first drum machines to allow rhythms to be programmed into it (rather than only allowing for pre-set beats), leading to its now-iconic status in electronic and hip-hop music. Roland claims trade dress protection in the layout of the keyboard and knobs used on the 303 and the sequence of colored keys present on the 808 as distinctive elements in its German registration, which was granted in January 2019. Music technology website Create Digital Media notes that that the timing of Roland’s applications suggest that Roland may be gearing up to squash lookalike gear in response to the announcement of an 808 clone created by Roland rival Behringer.

Roland recently filed applications for the same designs in the United States, perhaps confirming suspicions of a crackdown on those who copy the distinguishing characteristics of Roland’s products. But how successful will Roland be in seeking trade dress protection in the United States?

What is Trade Dress?

Trade dress is a type of trademark protection that protects products with a distinctive design or packaging from being copied by competitors. The primary purpose of trade dress protection, as with trademark protection of words, logos, sounds, and other signifiers, is to protect consumers from being confused as to the source of a product, as well as to protect business from unfair competition. Protectable trade dress must be distinctive and applies to design elements such as color, shape, and other branding motifs. Trade dress protection may sometimes extend beyond product design and packaging, as was determined in a landmark United States Supreme Court decision where the interior color scheme of a restaurant was found to be inherently distinctive of its brand and worthy of trade dress protection.

In addition to being distinctive, the claimed trade dress must not be a functional element of the underlying product. If an element of the product design or packaging is essential to its purpose or affects the cost or quality of the product, then that element is deemed functional. This is because granting exclusive rights to functional elements would award monopolies to product designers and prohibit competition in the marketplace.

What Does Trade Dress Look Like?

A well-known example of distinctive trade dress is the shape of the classic Coca-Cola bottle – ribbed edges, wide base, narrow top, and a logo slightly higher-than-center, sitting cozy by the hand’s grip. Some of these elements are not unique to a Coke bottle – wide bases and narrow openings in bottles have practical spill prevention functionality. But other elements, namely the distinctive ribbing and logo placement give way to its art deco inspired, cocoa bean-inspired design that proved to become recognizable of the Coca-Cola brand.

The fashion world tested the distinctiveness requirement with red-bottomed stilettos in 2008, when Christian Louboutin, S.A. registered for trade dress protection in the bright-red lacquered outsole of its high-heel shoes with the United States Patent and Trademark Office. When Yves Saint Laurent released heels in a similar, monochrome red color (including the outsole), Louboutin filed a lawsuit against Yves Saint Laurent claiming trade dress infringement. The dispute made its way to the the Second Circuit, where the court ruled that Louboutin had failed to show distinctive trade dress rights in a shoe that was entirely the bright-red color it claimed in its trademark registration. However, the court went on to say that Louboutin had proven that its shoes were widely recognizable by the public when the bright-red lacquered outsole contrasted with the color of the rest of the shoe. As a result of the court’s ruling, Louboutin’s registration was amended to narrowly phrase the protected element as a “red outsole [that] contrasts with the color of the adjoining upper portion of the shoe”.

Will Roland Have Trade Dress Protection in the United States?

Roland may face some challenges in claiming trade dress protection for the design of its 303 and 808 drum machines in the United States. Certain elements of the 303 and 808 machines serve a purpose that is functional to the underlying product, such as the layout of piano keys and the close proximity of knobs and dials to those keys. For this reason, the design of the 303 claimed by Roland may not receive trade dress protection in the United States unless Roland can show that there are numerous other ways that a synthesizer may be designed and that its design in particular is associated by the public as Roland’s. Roland may be able to successfully claim trade dress rights in the color pattern design of the 808’s buttons, provided that it is determined that the pattern of red, orange, yellow, and white key colors are generally known by the public to be those of Roland’s drum machines (much in the way that bright-red contrasting outsoles are associated with Louboutin). Of course, there is an argument to be made that allowing trade dress protection in either of these instances would unreasonably stifle the production of competing synthesizers and drum machines.

Time will tell whether Roland’s trademark applications for the 303 and 808 designs will be registered by the United States Patent and Trademark Office and why Roland is now seeking trade dress protection more than thirty years after they were first introduced.

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We would like to thank Sasha Safavi for his contribution to this article.

Smart Contracts 101 Workshop on Wednesday, Feb 20 Presented by Legal Hackers

On Wednesday, Feb 20 at 7pm ET, NY Legal Hackers are partnering with OpenLaw for an informational workshop on how to build legal agreements using blockchain technology. This workshop is free to attend but RSVP is required. Instructors will demonstrate how to create an agreement on the OpenLaw platform and answer your questions, including:

– What does a smart contract look like?
– What basic concepts and terminology should I know before I build a smart contract?
– What types of legal agreements and other related projects can be built using blockchain technology?

Workshop Leaders:
Michael Chan, Legal Engineer, OpenLaw
Anne Griffin, Lead Project Manager, OpenLaw
Ross Campbell, Legal Lead at OMGPool

NOTE: Laptops are OPTIONAL for this event.

Legal Hackers is Co-Founded by MG+ Attorney Lauren Mack. Legal Hackers works to foster the global movement of lawyers, policymakers, technologists, and academics who explore and develop creative solutions at the intersection of law and technology. Legal Hackers is also the largest grassroots legal innovation community in the world, with more than 75 chapters on 6 continents and more than 10,000 members.

CBD Between the Lines

By: Steve Masur and Kristen Kennedy

Cannabidiol, or CBD, has been making headlines the past few years for its potential to deliver many health benefits. Proponents claim that CBD can, among other things, relieve pain, ease anxiety and depression, and even benefit pets. This summer, the FDA approved the first CBD-based drug, and sales of CBD in forms like edibles and oils are expected to pass 1 billion dollars in 2020. Understandably, many people are interested in doing business in the CBD space, but one question stands in the way: is CBD legal? It depends on two things: the state(s) it’s being bought and/or marketed in, and the source of the CBD.

CBD, State-by-State

Every state has its own rules regarding CBD, found naturally in the cannabis plant, and THC, CBD’s psychoactive cousin found in marijuana. At the more permissive end of the continuum, states like California and Nevada have given the green light to adult use of cannabis for either medical or recreational use. In the middle of the spectrum are many states that have medical cannabis laws, which may also include the use of CBD. The least-permissive states provide no protection whatsoever for CBD sellers or purchasers. However, CBD continues to be widely sold and purchased in many states which do not permit it, and enforcement on the whole is sporadic. Therefore, the crucial first step in establishing a CBD business is to become well acquainted with the law in your state and any state you plan to do business in.

Know the Source

A big part of operating within the law is determining the source of the CBD being offered for sale. Ensuring the CBD is either sourced from industrial hemp or portions of the cannabis plant exempt from the definition of “marijuana” in the Controlled Substances Act (CSA) is crucial to staying within the law. Sellers of industrial hemp, defined as any cannabis plant containing less than 0.3 percent THC, must confirm that the cultivator is operating within a state that has an agricultural pilot program, complying with Section 7606 of the 2014 Farm Bill. (Industrial hemp is widely expected to be removed from the CSA and thus become fully legal with the passage of the 2018 Farm Bill, so this pilot program requirement will no longer exist in the future.) Sellers of CBD derived from exempt plant material must verify that the CBD was derived from mature stalks or seeds incapable of germination, as exempted from the CSA. These distinctions should be laid out in a carefully-worded purchase and sales agreement between you and your supplier, with representations and warranties to this effect to protect your business.

Find a Reliable Supplier

The importance of using a reputable supplier can’t be overstated. In a study carried out last year, researchers found that less than one-third of CBD products purchased online contained the amount of CBD they claimed to have. It may be in your best interest to source CBD from a state where marijuana is regulated, as CBD companies in states like Washington are required to test their products and accurately label them. Some things to look for in a wholesaler include a certificate of analysis that provides information on the levels of CBD, THC, and other compounds in a CBD product, what sorts of claims they make on their web site, and what type of extraction method they use.

Don’t Overstate the Claims

Once you set up your CBD business, be sure not to make unfounded claims about what it can do. The FDA has warned companies that have made dubious claims, such as that CBD could combat and prevent the spread of cancer and inhibit cancer cell growth. References to legitimate medical studies, however, are a safe way to highlight CBD’s potential benefits, as are third-party testimonials that don’t stray into the realm of unfounded medical claims. And be sure to include an FDA disclaimer on your web site, which is required by law.

Draft Clear Legal Policies

As you build your CBD business, be sure to stay within the bounds of the law in other ways. Draft legal policies that let your users know how you collect and use their data, and create clear, user-friendly terms and conditions that are easy to find on your web site. It’s also not a bad idea to include a basic and up-to-date statement of CBD laws, which may put customers who are uncertain of the legality of CBD at ease.

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We would like to thank our intern Kristen Kennedy for her contribution to this article.

Are STOs the New ICOs?

By: Jon Avidor, Jaclyn Wishnia and Kristen Kennedy

As the SEC continues to crack down on noncompliant ICOs and token exchanges, many investors and crypto developers are expected to embrace the trend of adopting security token offerings, or STOs, due to the surer regulatory framework in which they operate. Though it’s possible to issue ICOs that conform to SEC guidelines, the use of STOs provides issuers with several advantages over ICOs. Indeed, experts forecast that ICOs will ultimately play a minor part in the blockchain ecosystem, while STOs will become the primary investment vehicle. Which begs the question: what exactly are STOs?

“All STOs are ICOs, but the same isn’t true the other way around.” Unlike ICOs’ user participants, STOs are token offerings made to accredited investors “who pay and receive a security,” such as equity, stock shares, derivatives, etc. Initially, issuers of ICOs had to decide whether to classify a token as a security or a utility, which could have major regulatory implications and potentially expose them to liability. However, because the tokens issued in an STO are already labeled as securities, the offering automatically falls under SEC regulations. Thus, STOs must comply with securities law, including AML/KYC rules, and therefore, provide “liquidity, traceability, and accessibility,” at least within the U.S.

The fact that STOs are definitively regulated makes them less susceptible to scams and vests them with greater credibility than ICOs. For instance, because “STOs are subject to federal security regulations, one of the regulations they need to follow is Regulation D.” Within Regulation D, there are particular rules pertaining to offer limit amounts, the ability to use general solicitation, and investor requirements (i.e., Rule 506(b), Rule 506(c), and Rule 504). These rules require that investors must be accredited, information used to solicit cannot be “false or misleading,” and issuers must continuously verify that tokens are not resold to non-accredited investors. If those regulations had initially applied to ICOs, problems like “pump and dump” schemes and “front running” might have been avoided.

Although one of the primary benefits of STOs is that they provide clearer legal standards and protections, “STOs are regulated according to the jurisdiction in which they are based.” This presents issues of comity, potential trade agreement problems, unfair competition law, lack of uniform standards (or in some countries, no relevant laws at all), foreign tax reporting requirements, and assessing other various security laws associated with the jurisdiction where the STO will be offered. What began as a contained problem—labeling STOs under U.S. law—could become an international dilemma, by having to thoroughly ensure STOs adhere to other countries’ securities laws and practices.

Also, in relation to jurisdictional issues, being subject to another country’s laws and rules means its governing authority will have centralized control over all filed paperwork and information associated with a company’s STO, including its participants. These procedures run contra to the spirit of decentralization, one of the tenets that blockchain and cryptocurrencies were founded upon, and could pose potential privacy or data problems. Additionally, since these technologies remove the component of an intermediary, the duties attached to financial regulations, e.g., “underwriting, preparation of marketing materials in accordance with rules, and high levels of security,” will shift the burden directly to the buyer or seller of the STO, who will then have to remain compliant, as opposed to allowing traditional financial institutions to assume the responsibilities. This could drive up costs for companies, rather than aid them in saving resources.

Regardless of these issues, the STO space is currently seeing high levels of activity and innovation. For example, LXDX, a high-speed cryptocurrency exchange, will become one of the first companies to issue stock through an STO this December. Investors will be permitted to purchase LXDX’s cryptocurrency tokens, which represent direct ownership in the exchange, complete with dividend rights. Investors will be permitted to purchase LXDX’s cryptocurrency tokens, which represent direct ownership in the exchange, complete with dividend rights. This represents an exciting development in this space. On one hand, the regulatory framework which applies to STOs ensures compliance and legitimacy and reduces security risks and legal liability. On the other hand, stricter regulations impede innovation, reestablish the challenges that start-ups face to raise capital, and return the finance marketplace to the status quo, which begs the question: why alter traditional methods in the first place? LXDX’s launch of its new STO exchange may provide a model as to how other STOs might operate in the future, and will hopefully help to move the industry forward in a way that brings STOs closer to worldwide acceptance.

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We would like to thank our interns Jaclyn Wishnia and Kristen Kennedy for their contribution to this article.