Early Stage Protection of IP
Starting a new business is exciting and fun, but too often founders overlook basic Intellectual property (IP) protection. While high tech businesses are aware of patent possibilities, they too often overlook more affordable, and often more valuable, forms of IP protection. Besides patents, intellectual property includes securing rights to valuable assets like the company name, brands, slogans, trademarks, copyrights artistic works, and the most often overlooked aspect of IP protection: trade secrets – which broadly include any information having a business value that is important to its function and would be compromised if made public or stolen. Trade secrets include client lists, suppliers, secret ingredients and formulas, process details, company know-how and other confidential materials that cannot be adequately protected by patent, trademark or copyright laws.
It Starts with the Name
We often ask our new clients if they are aware of Nike’s first patent. For those of you too young to remember it was the waffle pattern running shoe, US Patent No. 3,793,750, granted in 1974. Notice how that patent expired, but the Nike name and iconic swoosh logo live on. Nike’s trademarks, which embody the brand equity of the company, are significantly more valuable than its patent. That is true for most companies today. Protecting trademarks protects the overall value of the brand and the business.
The marketplace has shown that name recognition is everything to a brand, and the many successful ones either used words that had no special meaning (but sounded good, like Kodak and Xerox) or suggest the benefit of the company’s product, for example, Speedo swimwear, Acura for accuracy, or Nike for the god of victory. Once name recognition is achieved, a business owns the exclusive rights to a unique, easily searchable brand that stands out from the crowd.
Choosing a good company name is critical, so being too conservative and choosing a common name or using common words is appealing but is often a poor choice. One is tempted with the allure of instant recognition of your business or service, such as “East Bay Pools,” but this may not be trade-markable and could be confused with similar companies offering the same products or services. Spend the time to map out the new company’s benefits and possible names – it is worth it.
As a practical matter, a first step to secure a business name is acquiring the domain (URL) and simultaneously securing the name with a trademark application to reserve the name until commercial use is commenced. One common issue is that once you start searching for the domain, the cost of the domain will increase precipitously, triggered by your search, so if the domain is available buy it before the price goes up.
Owning Your IP – Get it in Writing
Imagine a disgruntled ex-employee suing you for copyright infringement for the software they wrote or the logo they designed for you. Yes, it happens and the only way to protect a business is to make sure those IP rights are transferred with a writing. This is especially true with contract employees because you cannot always rely on shop rights (an implied license under which a company may use IP created by an employee who was working within the scope of their employment). The time to get co-founders, employees, and contractors to sign over their IP rights is when employment first begins.
When onboarding an employee or contractor, it is not sufficient to merely have them agree to transfer their IP rights, you must effectuate a present transfer – even if that IP has not yet been created (see Filmtec Corp. v. Allied Signal, 939 F.2d 1568 (Fed. Cir. 1991). The key is to have the employment agreement contain the phrase “hereby assigns” to make sure there is no room for dispute. Besides the assignment, an employment agreement should include an obligation to assist in obtaining IP rights and to preserve confidential information. This includes signing the necessary forms and documents and releasing interest in any IP, even if the person is no longer an employee of the company at the time. Also, when an employee leaves, remind them of their duty to preserve confidences.
The Big Secret
A growing area of significance is trade secrets; therefore the business owner’s task is to secure important information, label it confidential as appropriate, limit access and distribution, or in other words, take steps to keep it secret. Labeling as confidential with a suitable warning and date is the first step. Securing the information in a safe place, such as a locked filing cabinet, room or on-line with encryption and a passkey with limited access is the next step. Limit sharing of confidential information to just those who need the information. Having procedures in place for acquiring, updating and controlling access is important and affordable. Have a contractual obligation in place, either through an employment or engagement agreement specifically calling out a duty to protect this information. This makes the party legally responsible for improper use or theft of the information. Something as simple as a customer list for example enables a departing employee with this information to usurp your business by attempting to steal customers away. Numerous examples of high-tech theft abound in the computer and phone industries where competition is fierce. In addition, many countries like China have poor legal enforcement of IP theft, so control of this information is even more important.
It’s relatively easy to take steps to protect IP for a startup, but sometimes, the biggest obstacle is the founders themselves. There is a reluctance to asking cofounders and early employees to sign over rights to an entity that is in the process of being born. It’s like signing a prenuptial agreement on your wedding day. However, the company is well served and has a greater chance of success if IP issues are addressed early and are incorporated into the company’s regular operations.