New California Law Requires Disclosure When Using A Chatbot

Beginning on July 1, 2019, a new California law will require websites that use chatbots to clearly disclose that it is a bot communicating online, and not a person.

The use of online chatting with ecommerce and other types of websites is becoming more widespread on a daily basis. Online chat tools allow potential customers to ask questions about products and services and get answers on a real-time basis. These tools also enable companies to address service and support issues on a real-time basis. I’ve used these tools to get help from wide spectrum of websites, ranging from the Delaware Secretary of State, when I needed guidance on a corporate filing on behalf of a client, to Goulet Pens, when I dropped an expensive fountain pen and needed guidance on a replacement nib.

The new California law makes it “unlawful for any person to use a bot to communicate or interact with another person in California online, with the intent to mislead the person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize a purchase or sale of goods or services in a commercial transaction or to influence a vote in an election.”

However, there’s no liability if the person using the bot discloses that it is, in fact, a bot. The disclosure must be “clear, conspicuous, and reasonably designed” to inform persons that they are communicating with a bot. While the law doesn’t provide any more specific information on how a disclosure can comply with that standard, we can look to some general principles and Federal Trade Commission (FTC) guidelines that have evolved over the past few years. For example:

  1. Placement and prominence of the disclosure
  2. How close the disclosure is to the related claim
  3. Whether the disclosure can be avoided
  4. Whether other parts of the advertisement distract from the disclosure
  5. Whether the language is understandable

 

Considering that more than 39 million people live in California, it is highly likely that some California resident is using your website, no matter where your company is based, and no matter whether you sell to businesses or consumers. Consequently, we strongly recommend that all companies that sell goods or services and that use online chat tools comply with the California law. As mentioned at the top, this law goes into effect on July 1, 2019.

California’s Subscription Renewal Law About To Change

On July 1, 2018, California’s subscription auto-renewal law is about to change in a couple of important ways. This law applies to e-commerce vendors who sell to consumers on a subscription basis, where the subscription renews automatically. For example, companies that offer subscription box services are generally subject to this law. Under the law as it currently stands, vendors must disclose the terms of the automatic renewal policy in a clear and conspicuous manner at the time of the original purchase, get the consumer’s affirmative consent before charging the consumer, and explain how to cancel the subscription.

Beginning July 1, vendors will have to allow online cancellation if the subscription was originally commenced online. Such vendors cannot require that their customers use phone or snail-mail to cancel. Also, if the subscription offer includes a free gift, trial subscription, or promotional pricing, vendors must notify consumers how to cancel before they are charged (or before the promotional pricing expires and they are charged full price). Vendors must explain the price to be charged when the promotion or free trial ends. If the initial offer is at a promotional price that will increase later, the vendor must obtain the consumer’s consent to the non-discounted price prior to billing.

Auto-renewing subscriptions have been fertile ground for California class action attorneys, who have made a cottage industry out of shaking down vendors that fail to comply with the state law. Consequently, it’s important for any company whose business model is based on consumer subscriptions that renew automatically to update their terms of service and selling processes before the new law takes effect. It doesn’t matter if the company isn’t based in California, either – the law applies if the consumer is a resident of California. Finally, keep in mind that more than half of US states have a law dealing with auto-renewing subscriptions.

Trump Administration Jeopardizes Legal Cannabis Industry

News sources are reporting that Attorney General Jeff Sessions plans on rescinding the Cole Memo, an Obama-administration policy statement that essentially took a federal hands-off approach toward cannabis businesses that are legal and compliant under state law. The Cole Memo provided a moderate amount of predictability for these medical and recreational cannabis businesses, allowing them to operate without too much concern that DEA agents would roll up their operations. Marijuana is still classified as a Schedule 1 drug, and therefore is illegal under federal law. According to the news reports, the new approach will allow federal prosecutors in states where cannabis is legal decide how aggressively they want to enforce federal laws relating to marijuana.

As of September 14, 2017, 29 states plus the District of Columbia had legalized marijuana in some form. Most of those states had legalized medical marijuana, but 8 states have legalized marijuana for recreational use. California’s recreational marijuana law became effective January 1, 2018. Ohio, which recently legalized medical marijuana, has already started evaluating and issuing permits for cultivation, processing, and retail. According to Arcview Market Research, legal marijuana sales in North America were approximately $9.7 billion in 2017, an increase of 33% over 2016. Arcview also predicts that the entire legal cannabis market could reach $24.5 billion in sales by 2021. In Colorado, where recreational marijuana is legal, sales now exceed $1 billion a year, and thousands of people have jobs in cannabis-related businesses. Moreover, a Gallup poll released in October 2017 indicates that 64% of Americans support legalizing marijuana for both recreational and medicinal use. That includes support from 51% of Republicans, an increase from 43% Republican support during the previous year’s poll.

Consequently, the new action jeopardizes an economic sector that is showing dramatic growth and potential. Even if federal prosecutors decide to pursue more important priorities, like illegal opioid sales, the uncertainty could chill potential investment in cannabis-related businesses. For example, a Legal 1 cultivator application fee for Ohio costs $20,000. The initial Level 1 cultivator license fee is $180,000, and the annual license renewal fee is $200,000. Investors are going to be reluctant to commit that level of funds to an operation that could be raided by an overly-zealous federal prosecutor.

How To Tell If Your Startup Ecosystem Is Sick

I had an interesting lunch with some fellow lawyers the other day. I know, “interesting” and “lawyers” shouldn’t be used together in a sentence, but bear with me. We were discussing venture capital deal terms we had encountered with various startup financings we had worked on. One of the other lawyers mentioned that in two deals he had worked on recently involving local Midwestern startups and investors, the investors had insisted on a 3X participating liquidation preference. I was really taken aback by this. In a Series A financing I had worked on a couple of months ago, involving a startup and VC firm that are both in the San Francisco bay area, there was a 1X non-participating liquidation preference. The VC didn’t even try to get something more.

To understand why this is important to startups and to the health of a startup ecosystem, let me explain what a liquidation preference is, and how it works. A liquidation preference is money that the investors take off the top, when a startup they have invested in goes through an exit. For example, suppose a startup is being acquired by Facebook. If a VC that has invested $3 million in the startup has a 1X participating liquidation preference, that means that the VC takes the first $3 million off the top, leaving less money for everyone else. Since the liquidation preference is participating, the VC then gets to share in the remaining proceeds with the common stockholders, pro rata. Essentially, the VC gets to double-dip. In a small transaction, this could be devastating to the founders. For example, look at what happens if Facebook is paying only $5 million for the startup. The VC gets $3 million off the top, leaving only $2 million for everyone else. Because the liquidation preference is participating, the VC may also get a share of that remaining $2 million. And that’s just with a 1X liquidation preference.

Typically, the VC may only use the 1X liquidation preference in a smaller exit transaction, as it protects his downside. In a larger exit transaction, the economics may favor converting the preferred stock to common stock and sharing in the proceeds that way. A liquidation preference greater than 1X, however, may skew those decisions.

Now let’s look at how a 3X participating liquidation preference would impact the deal. Suppose the sale price of the startup is $10 million, and the VC invested $3 million. Now the VC gets $9 million off the top, leaving $1 million for everyone else. Because the liquidation preference is participating, the VC will get a share of that $1 million, too. The founders and any employees holding stock and/or stock options get screwed, to put it politely.

What are the implications of this for startups and a startup ecosystem? When you have a vibrant ecosystem with lots of strong startups and many angel and VC investors, you have competition for deals. As a result, the deals tend to be fairer to the startups. A strong startup has some bargaining leverage when seeking financing, and investors are eager to invest in such companies. When the investors have to compete for deals, they offer more favorable terms to the startups, lest they miss out. FOMO is a powerful force.

You see this at work in Silicon Valley, which has a well-established startup ecosystem with many VC investors and some of the most promising startups. In the Fenwick & West Silicon Valley Venture Capital Survey for the first quarter of 2017, only 16% of the deals involved multiple liquidation preferences. This is actually a steady rise over the past year; in the first quarter of 2017, the number was about 7%. Of those multiple liquidation preferences during 2017Q1, two-thirds were in the 1X to 2X range, and one-third were in the 2X to 3X range. Also, for 2017Q1, only 22% of the financings provided for participation; the remaining 78% were non-participating.

In smaller and new startup ecosystems, you don’t have a lot of strong startups, and you may only have a handful of investors operating. This is frequently the case in some of the emerging Midwestern startup ecosystems, like Louisville, Indianapolis, Columbus, Pittsburgh, and Cincinnati, where I’m located. As a result, the investors feel more emboldened, or more risk-averse, so they demand terms that are way out of the norm for places like San Francisco and New York. I emphasize the word “demand,” because that’s what these investors do – they demand these terms, with a “take it or leave it” attitude. If you don’t like what Investor A is offering, good luck with Investor B – they probably are offering the same terms. There is no Investor C.

As long as this persists, these smaller ecosystems will be weak. In order to improve and strengthen the ecosystem, you need stronger startups to attract more investors who will offer fair terms. These weak ecosystems, however, risk losing the best startups to more favorable ecosystems. Also, startups have to be prepared to look outside their community for funding. If you are a startup in a place like Cincinnati, and you aren’t trying to raise funds from investors in Chicago, New York, Austin, San Francisco, and LA, you are putting yourself at the mercy of your local investors. You may say that you can’t afford to fly all over the country seeking out investors, but the truth is that you can’t afford not to. Your obligations are to the shareholders, to produce the highest returns. If you give away a 3X participating liquidation preference to a local investor because you didn’t seek out investors in stronger ecosystems, you are basically taking the money out of your pocket and putting it in your investors’ pockets.

Medical Marijuana Now Legal In Ohio

Ohio’s new medical marijuana law recently took effect, on September 8, 2016. This law, passed by the Ohio legislature, followed a failed ballot initiative that would have legalized marijuana in Ohio for recreational use, as well. The new law permits doctors to prescribe marijuana as treatment for a lengthly list of ailments, but patients will not be able to purchase smokeable marijuana. Instead, the treatment must either be ingested via an edible product, absorbed through a skin patch, or “vaped.”

There is an extensive list of qualifying conditions: AIDS, Alzheimers, amyotrophic lateral sclerosis (also known as ALS and Lou Gehrig’s Syndrome), cancer, epilepsy, fibromyalgia, glaucoma, hepatitis C, multiple sclerosis, parkinson’s, chronic or intractable pain, HIV+, post-traumatic stress disorder, sickle cell anemia, spinal cord disease or injury, traumatic brain injury, ulcerative colitis, and inflammatory bowel disease, among others. There is also a mechanism to add diseases and conditions to the list.

Physicians must obtain a special certificate from the state medical board in order to recommend medical marijuana. Doctors also must have a bona fide doctor-patient relationship with persons for whom they write prescriptions. Doctors must provide an annual report describing their observations of the effectiveness of medical marijuana on their patients, and will have immunity from prosecution for recommending medical marijuana.

There is an extensive regulatory scheme set up for all parts of the value chain – retail dispensaries, growers, distributors, and laboratories.

Initially, the Ohio Supreme Court’s Board of Professional Conduct issued an opinion ruling that because marijuana was still illegal under federal law, attorney’s could not advise clients on how to properly set up and operate a business under the state medical marijuana law without violating their professional ethics. Since that opinion was issued in August, the state Supreme Court has amended the Rules of Professional Conduct to allow attorneys to advise clients on compliance with the new law.

Because marijuana is still illegal under federal law, new medical marijuana businesses will face difficulties with financial transactions. Banks may be reluctant to allow such businesses to open accounts, and the businesses may not be able to take payment by credit cards. This means a variety of transactions will necessarily be cash transactions. In addition, the IRS requires payroll taxes to be paid electronically, which will present a problem when paying employees. While the Department of Justice has said that its policy is not to interfere with medical marijuana if state law is effectively regulating the market, that may not be enough for traditionally conservative and risk-averse banks and merchant card processors.