|
COMMON IP MISTAKES
By David Hayes, Partner, Dorsey & Whitney LLP
The practice
of intellectual property law often entails dealing with the consequences
of past mistakes that are made at the formation or early stages
of a company, when the primary focus is on the company's growth
and survival, and resources for legal advice are scarce. At such
times, companies often overlook or are unaware of intellectual property
issues that can give rise to liability and undermine the protection
of their intellectual property.
Following is an outline of some of the most common intellectual
property mistakes made by start-up firms, along with some suggestions
for avoiding them.
1. Choosing
the wrong names for products and services.
Among the earliest mistakes made by a start-up company is not paying
attention to its product and service names. All too often, the founders
consider alternative product and service names solely from a marketing
perspective, giving little thought to the name's legal consequences.
This approach can lead both to liability and marketing setbacks
if the names selected are "confusingly similar" to those
already in use by another company. Indeed, it may lead to liability
for trademark infringement or unfair competition. While a young
company often will simply acquiesce to a "cease and desist"
letter from another company with a superior claim to the name, the
resultant name change and accompanying loss of goodwill and marketing
momentum can be a significant obstacle to company growth. It also
can create unexpected expenses in the redevelopment of advertising
materials and even letterhead.
All product and service names should be screened by counsel experienced
in trademark matters to identify any obstacles to the company's
envisioned use. Related "marks" such as company logos
and Internet domain names also should be screened. Having ascertained
that the name is available, the company should register its trademarks
with the appropriate agency. While state protection is available,
federal registration provides broader protection. Furthermore, having
a registered U.S. trademark makes it easier to obtain registration
in other countries.
Selection of a trademark involves considerations beyond mere availability
for registration. Even where a chosen product or service name is
not infringing, it is still easy to make mistakes in selecting a
mark. The most common one is selecting a "weak" trademark.
Trademark law offers a continuum of protection based upon the type
of mark selected ranging from weak, descriptive marks to strong,
arbitrary, coined and fanciful marks. The weakest trademark is one
that is purely descriptive – it does no more than describe
a class of goods (e.g. "Raisin Bran."). Descriptive marks
receive little or no protection under trademark law. The strongest
marks are distinctive in some way. They may be arbitrary (e.g. "Crown
Books"), coined (e.g. "Xerox") or fanciful (e.g.
"Curl Up and Dye, a hair salon"). It is critical for a
company to select strong marks and register them since they will
provide the broadest protection under trademark law and pay dividends
as the company's brand matures.
2. Failing to document ownership of technology developed by persons
other than employees.
Start-ups often utilize technology that was developed by a company's
founders prior to its formal formation. And sometimes, due to limited
and uncertain financial resources, consultants rather than company
employees do early technology development. Even if these people
eventually join the company, ownership of the technology they developed
prior to their employment must be dealt with separately, as intellectual
property developed by consultants. The key issue in this area is
ownership of the developed property, and mistakes are common because
the law is counter-intuitive.
Companies often assume that they own the intellectual property embodied
in the technology since they paid for its development. However,
generally the "inventor" or "creator" of the
intellectual property is the owner. Thus, without a written assignment
of rights to the company, the consultant will normally own any technology
he or she has developed, even though the company has financed that
development.
To preserve their rights in intellectual property, companies should
insist on consultant agreements that include, at a minimum, provisions
that: (1) assign all developed technology to the company, (2) prohibit
reuse of the technology developed by the consultant, by others (3)
protect the company's confidential information and (4) oblige the
consultant to sign documents and to take such other steps as are
necessary for the company to perfect its intellectual property rights
through registration and other means.
3. Entering into Problematic Exclusive Licensing Arrangements.
Early-stage companies often enter into license agreements with others
to facilitate their growth. Frequently a business makes the mistake
of granting exclusive, long-term licenses without appropriate controls
and limits on the licensee. Granting exclusive licenses without
a strategic plan often can restrict a company's ability to exploit
its intellectual property.
Typically a company will enter into an exclusive license arrangement
with someone who will market or distribute its technology in some
way. However, all too often, exclusive licensees fail to adequately
fulfill their obligations in this regard and, unless the agreement
includes appropriate contractual language, the company will not
be able to contract with another party to take on this responsibility.
The company's technology languishes, as the crucial window of opportunity
to develop a market advantage is lost. To avoid this outcome, an
exclusive license agreement should compel the licensee to move quickly
and effectively to market and distribute the technology by including
requirements of minimum quotas, minimum marketing expenditures,
minimum royalties, or minimum market share goals. The terms of the
license agreement should state that if these obligations are not
met, the company might at its option either terminate the exclusive
license or convert it to a non-exclusive license. This will allow
the company to engage a new and hopefully more effective licensee
to assist in the exploitation of its intellectual property before
it becomes obsolete.
4. Failing to identify and protect intellectual property.
Start-up companies necessarily focus on technology development and
marketing in the early days. The importance of implementing an intellectual
property protection plan is often marginalized, based on the rationale
that until the marketplace validates the technology and there is
something of value to protect, exploring plan options would be premature.
However, this can have very serious and sometimes irreversible consequences.
Certain types of protection must be secured before certain actions
are taken or they will be lost forever. For example, to preserve
the company's rights regarding patent protection in the United States,
filings must be made within one year of: (i) publication of the
invention in any periodical anywhere in the world, or (ii) exploitation
of the invention in the United States by selling it or placing it
in public use. If filings are not made in a timely manner the ability
to protect the technology under patent law is permanently lost.
To avoid this, patent practitioners often recommend that certain
filings be made before any public disclosure.
While patents are an effective way to protect a company's intellectual
property, they are not the only option. Despite the fact that trade
secret protection can offer marked advantages over patents and copyrights
to a start-up company, their value often is overlooked. First, unlike
patent and copyright protection, trade secret protection requires
no formalities, no registration, and no disclosure. Second, trade
secret law protects types of intellectual property not otherwise
protected, such as ideas, facts, lists, and databases. Third, trade
secret law can protect intellectual property indefinitely. It is
not bound by the statutory durational limits that constrain patents
and trademarks.
The key to having courts recognize intellectual property as a trade
secret is quite simple. Reasonable efforts must be made to keep
it secret. First, identify the trade secrets – defined as information
that gives the company a competitive advantage and is not known
by others in the industry. Second, take reasonable steps to keep
this information confidential. Exactly what constitutes "reasonable
steps" depends on a variety of factors including the type and
value of the information. At a minimum the company should: (i) limit
access to the material to those who need it to perform their duties
for the company, and (ii) enter into confidentiality agreements
with those who will have access to trade secret information such
as employees, consultants, vendors and suppliers. Additional measures
may be warranted to protect the company's confidential information
and should be discussed with company's counsel.
As critical as it is to protect a company's intellectual property,
it does not have to be costly or time consuming. Counsel that is
broadly versed in intellectual property law relating to patents,
copyrights and trade secrets and knowledgeable about a company's
technology area is well positioned to help it develop a strategic
plan to efficiently protect its valuable intellectual property assets.
David Hayes is in the corporate department at Dorsey & Whitney's
office in Irvine, California and Co-head of the firm’s technology
commerce practice group. David can be reached at (949) 932-3660
or hayes.david@dorsey.com
|
