Common Intellectual Property Mistakes of Start-Up Firms

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.

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David Hayes is in the corporate department at Dorsey & Whitney's office in Irvine, California and Co-head of the firms technology commerce practice group.

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