Bar News - June 17, 2015
Intellectual Property Law: The Most Common IP Mistakes Startups Make
By: Charles Holoubek
The Granite State has a thriving culture of entrepreneurship, with many startups in high-tech industries. These energetic, passionate businesspeople need the help of lawyers to learn about business entity formation and the legal means and requirements to protect their fledgling business rights and assets.
These days, however, assets are not just machines and lumber. Intangible assets represent more than 80 percent of the S&P 500 market value, and for startups, the assets are normally just the human capital of the founders and its intellectual property. But a business attorney also helps his or her clients understand how to protect the value of their IP. Without becoming an IP attorney, learning the key IP problems startups typically face enables business attorneys to help their startup clients to better position themselves for success. It can transform a budding startup business into a grateful long-term client.
Here are some of the most common IP-related mistakes among startups:
1. Failing to educate about IP. The number one problem we find with startups is failing to self-educate regarding IP law. IP represents the bulk of a startup’s assets. Ignorance of the extent of and how to protect and grow its IP rights can undercut and sabotage a budding business. This first failure is often the root cause of almost all of the remaining problems, but doesn’t need be. There are many free resources offered for startup IP education by federal and state agencies (NH SBDC), colleges, UNH Law, and online.
2. Using an identical or confusingly similar mark of another. This is the most common active failure we encounter, and it affects all startups, not just high-tech. So often, startups will plan, invest, market and launch a business around a brilliant, catchy name… that someone else already owns. Insist strongly that your clients perform a trademark clearance search. Minimal “knock-out” searches are free at www.USPTO.gov and sos.NH.gov.
But – and this is important – being literally different from as another’s mark is not enough. Your clients could infringe if their chosen name 1) looks similar, 2) sounds similar, 3) is spelled similar, 4) has a similar meaning, or even 5) translates into something similar to another’s established mark – even if it is not identical. And although the inner marketer would have them choose a descriptive mark, so their mark informs the customer about the product, your clients should choose a mark that is distinctive. The more distinctive a mark, the legally stronger it is. Your clients’ brand and goodwill are a significant part of their business, but if they are trespassing on the name of another, they may have to abandon all the value they have created, and may be liable for damages under state and federal law.
3. Building a business based on technology owned by someone else. We encounter this failure in three different varieties, each significant and warranting their own article. First, your client may be practicing a technology already patented by a remote third party – a patent clearance search can take care of this.
Second, your clients may base their new business on technology created while working at a previous employer. The previous employer may have claims on the new technology even if it was developed after-hours on a client’s own time. A review of the facts and the former employment agreement is needed.
Third, your client may have employees inventing without a clear obligation to assign the invention to your client’s company. In patent law, the default rule is that the inventor owns the invention. If your clients’ business involves technology at all, they must have their employees sign an invention assignment agreement with key present assignment language. In a similar way, startups must be clear in their contracts with independent contractors over who owns creative works. The magic words “work for hire” rarely works to cover independent contractor work.
4. Waiving valuable IP rights through public disclosure. Patent rights in the US begin to spoil upon first public use, sale, offer for sale, or disclosure, and will die if no application is filed within a year. Basically all potential foreign patent rights die immediately upon public disclosure if no application has been filed. A recent issue, crowdfunding without protection can also trap the unwary client, as a pitch can be a public disclosure. Similarly, trade secret rights evaporate when the information is no longer secret. Forfeiting IP rights due to disclosure is a common rookie mistake that new entrepreneurs make, but you can help your client avoid disclosure and, in turn, a loss in business value.
5. Believing Opens Source Software (OSS) is free – with no strings attached. It’s not. OSS is not free; it is licensed, and your clients’ ability to copy the code is contingent on them complying with the terms of the license. If not, they are infringing on the code author’s copyright. The license’s terms may be simple or onerous. If your clients code or buy code from another, alert them to this fact.
6. Believing all patents are the same and all will lead to increased value. Saying “a patent” is like saying “a drawing.” The Mona Lisa and a kid’s crayon refrigerator art are both “drawings,” but they have vastly different resale values. There are good patents, and there are patents that are so narrow as to be wallpaper. Further, even a strong patent, with amazing technology, may not have a market ready for the technology, or the management, financing, or other elements of a business. A patent is an industrial asset, and it is invaluable in securing market space for many startups, but it must be put to work. Counsel your clients, especially those on more limited budgets, to actively patent core technology that others will want to buy, but to be discerning about the pre-market tech.
By helping your startup clients avoid these common IP mistakes, you will be helping retain and expand real economic value in their new businesses. Making strategic IP moves at the beginning will extrapolate into much higher value years later, and much happier clients.
Charles Holoubek is a registered patent attorney with Davis & Bujold. He teaches, lectures and practices patent and IP law in Concord, NH, and Shreveport, La., and can be reached by email or at www.holoubeklaw.com.