Intellectual Property in the United States: Myths and Realities (English version) Part 2/1

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startup, startupdate, pitch, pitching, vc, legalThis article was written by Ian Bennett, an exceptional lawyer and friend in San Francisco, truly committed to startups and highly experienced in corporate law and intellectual property. Ladies and Gentlemen, here comes some unique insights crafted exclusively for all of the innovative readers of  Startupdate Blog. – Peter Kadas

Dear Readers, to those of you who viewed the title of this article and have not yet run screaming in the other direction…I would like to begin by posing a simple set of questions:  When you were five years old did you have a blanket or a favorite toy that could protect you from the Boogey Man?  I certainly did.  And if the Boogey Man had really materialized one dark and stormy night, would your chosen item have protected you from being ripped to shreds?  Probably not 🙂

Well, intellectual property presents a similar scenario.  It can make you feel very secure if you have it, or you think you can get it, but if you don’t truly understand its nature and its good points and bad points, well, when the boogey man comes, you may find yourself with a snot-covered piece of cloth when in fact you could use a howitzer.

So to reduce your chances of getting ripped to shreds, let’s talk a little bit about some of the more common myths and misconceptions about US intellectual property and discuss some of the realities which you may actually face.

Myth Number One:  Having a great idea or a great concept amounts to intellectual property.

Reality:  Ideas alone do not amount to intellectual property and normally concepts do not either, unless they are significantly developed.  Having intellectual property in the US results in substantial rights under federal law, and for this reason among others, intellectual property is not handed out freely for ideas or abstract concepts; in the case of every type of IP, significant requirements are involved.

  • Copyrights are often the easiest to obtain; by simply fixing any form of creative expression in a tangible medium, the creator (commonly called “author”) automatically obtains what is called a ‘copyright at common law.’  No federal registration or application is required for obtaining a common law copyright, but if you want to enforce your rights, you will need to apply for and register a federal copyright.
  • Trade Secrets essentially only come into existence when the concerned item or items are developed in a confidential fashion.  But that is not enough; once developed, a trade secret only endures so long as proper efforts to protect it from disclosure are maintained.  In many cases this means substantial legal safeguards through confidentiality agreements or non-disclosure policies, as well as rigorous business protocols and security.  Famously, for many years the original recipe for Kentucky Fried Chicken was kept in a vault and transported by armored car.
  • Trademark rights only exist when a distinctive brand, slogan, name or form of marketing is used in commerce in relation to a specific good or service in a meaningful, consistent and not nominal fashion.  So what the hell does that mean?  Well basically you have to be selling your product with regularity to have trademark rights…so if you’re a pro athlete, your “trademarked” move probably doesn’t count.  Further, if you want enforceable federal rights, you’ll have to actually register your trademark, submit proof of use in commerce or intent to use, and then properly enforce it against infringers…all good reasons to have an attorney (insert shameless plug here).
  • Patents…okay, we will dive into this topic in much greater detail during a future article, but to sum it up, patents are expensive to get and more expensive to keep, you don’t have one automatically because you have an idea for an invention, and even if you’ve actually invented something you still need to file an appropriate application to obtain the rights, for which you will probably need the help of experienced counsel…online document preparation sites just aren’t the same and usually won’t provide you with strategic advice concerning your risk or options.  Also, bear in mind that patentable material has numerous requirements and must generally be a system, method, process, machine, apparatus, device or technique which is reduced to practice (meaning actually made or conceived in great detail), and which is novel and nonobvious.

Still reading?  Fantastic!

Myth Number Two:  Having intellectual property creates inherent business value.

Reality:  This is a common issue that our law firm runs into.  An inventor or a business owner has some form of intellectual property, or has material with the potential to be intellectual property, and automatically makes the assumption that having this IP will result in increased business value and a greater incentive for investment or means for licensing or sales.  The reality is that one’s IP is often only as valuable as one’s business or one’s resources.  Copyrights and trademarks may only be valuable if you have a creative work that others want to buy or use, or you have a business or a brand that others want to emulate or associate with.  Trade secrets may only be valuable if you have a confidential piece of information that gives your business an advantage, or that your competitors would like to get a hold of.  Patents may only be valuable if you have a business that is otherwise worth in investing in and you can actually practice your patent without conflicting with the patent rights of others.

Now of course, there is always the view that value is just about having protection or the freedom to create and invent without being ripped off.  Well, this is an absolutely valid point.  But the unfortunate reality of US intellectual property law is that the protection you can get is usually only as good as the amount of money you have to back it up.  Starving musicians and mad scientists…can be 100% deserving of rights, but maintaining them may require a couple hundred thousand dollars (copyright and trademark litigation) or a couple million dollars (trade secret and patent litigation)…or more!

Myth Number Three:  If I get a patent its primary value will be to incentivize investment

Reality:  For most startup companies, a typical investor is not going to be primarily motivated to commit money on the basis of a patent.  As discussed above, in most cases single patents do not have a ton of inherent value and enforcing patents is big business.  Rather, most investors will look at a patent as a form of reassurance that the competitive and prior art space has been reasonably considered and that the likelihood of some future dispute between inventors or partners in the concerned business is minimal because the IP has been accounted for.  So if you pursue a patent, in terms of value, think about ‘investor reassurance’ as opposed ‘investor incentive,’ and remember that creating a barrier to entry or establishing a licensing program often requires significant leverage beyond a patent itself.

Myth Number Four:  Intellectual Property doesn’t always need to be an early business consideration

Reality:  When starting a business or a venture, intellectual property should always been among the earliest considerations.  Just because you sit down and have a sensible conversation about your current IP or potential IP, does not mean that you are then locked into spending money that you do not have to develop or implement it.  In reality, early strategic consideration may end up costing you a couple thousand dollars in legal fees, but failing to undertake such consideration and then plan and implement accordingly can come at a far greater price.  Here are three examples:

1. You start a business with a creative product aimed towards kids.  You don’t register a copyright for your products or keep records of who you market to.  One day a franchise is launched upon the basis of your original creations and you ultimately fail to obtain any recourse because of a lack of evidence.

  • Cost of proper consideration and preparation:  Copyright Registration, $300-$800 per copyright on average; maintaining records of access and having an NDA, typically $1000-$2000.
  • Cost failing to do so:  The above scenario is roughly what happened with regard to the business empires of both Bratz Dolls and Build-a-Bear Workshop; both are billion-dollar ventures.

2. You develop and launch a venture that includes a software suite with several catchy product titles.  You experience reasonably successful growth and ultimately enter into negotiation with a potential investor for securing a capital raise; however you never register trademarks for any of your products or company name.  During the course of due diligence it is discovered that there is a company which provides similar services to yours and which utilizes some similar trademarks that are registered.

  • Cost of proper consideration and preparation:  Trademark Registration, $650-$1000 per mark on average; preemptive rebranding, a mere inconvenience usually nominal cost.
  • Cost of failing to do so:  Post Launch Rebranding, at least several thousand dollars; trademark litigation, usually $100,000 and up; loss of investor confidence, detrimental to business future.

3. You invent a fantastically effective new toy for couples.  You give out a few for free to your married friends just so you can sure there are no kinks in the invention (of course if there are kinks you may not have many friends left), then later you ask those friends if they would consider buying such a product.  You never have any of your friends sign an NDA (because that would simply ruin the mood) and you don’t think about filing for a patent until one-year later when you decide to start a mail-order business.

  • Cost of proper consideration and preparation:  Provisional Patent, $3000-$5000 on average.
  • Cost of failing to do so:  Since you “published” your invention when testing marketability, you then had one year to file for at least provisional rights, at the end of that year you became barred from filing and now essentially neither you nor your business will be getting lucky.

Myth Number Five:  The biggest threats to your intellectual property are infringement or bullying from large companies.

Reality:  In most cases actionable infringement of your IP is not as likely to occur as you may think and even if it does, you may be best served considering options other than suing.  For copyrights some amount of infringement can almost be inevitable (particularly in the digital media space), but in most situations filing suit is not efficient and there is no real reason to do so unless you are losing significant sales as a result.  This said; there are numerous methods of administrative action which may serve as an effective form or resolution or deterrent.   For trademarks, infringement can be a bigger issue because US law dictates that if you don’t enforce your marks, you may lose them.  Failure to use and failure to monitor are often more dangerous than actual infringement.   For patents, frankly if you’re a startup you likely can’t afford to litigate so a much bigger concern should be how you can position yourself through business strategy and careful patent application to minimize the risk of conflict ever even occurring.

Regarding large companies, the bottom line is that if you attract the attention of a big operation you are probably doing things right (unless you are doing something to infringe their IP), but in most situations a major corporation is not going to act like a troll and try to force you out of the space because if they want your IP it will likely be a lower risk for them acquire you, seek a license or simply compete.

The real key to maintaining your intellectual property in a safe and cost effective fashion is to consider it in the context of both your business and the overall market space on a regular basis and be aware that the biggest threats to your IP are likely your own actions or those of your employees, contractors or partners or clients…so manage your relationships carefully!

Myth Number Six:  No startup venture can afford to enforce its intellectual property

Reality:  As a startup what you can’t afford is to litigate claims that don’t have good potential value or that aren’t based upon solid evidence.  Now in many cases this may not be very comforting because for many small ventures an average dispute may not be over any intellectual property of significant value or any major occurrence of infringement.  In small cases such as these, the US legal system is unfortunately under-equipped to help as it does not have many cost-effective options.  However, if you have well established IP with any significant amount of value or potential value and you have monitored it carefully¸ then in any case of major infringement it is likely that you will be able to find effective counsel to represent you on contingency.  Just bear in mind that legal fees are not the only cost-driving element in litigation; if for example you make a patent claim, you will most likely immediately become subject to a reexamination proceeding, for which the administrative fee alone is over $30,000.  Well established law firms may front some costs on your behalf, but win or lose, you will have to pay them back!

Intermission

Alright guys and gals, that’s it for this this portion of the article.  Thank you so much for your attention thus far, and if you’ve stopped paying attention don’t worry, the thugs have already been dispatched.  For Myths 7-10 and some bonus tips, as well as the secret to eternal life, please read my next installment.  And joking aside, inquiries are always welcome:  visit www.bounkovabennett.com  Thanks!

The artcile has a second part, and as in every Myths, the end of the story is the most interesting. To be continued soon…

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