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

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startup, startupdate, pitch, legal, vcThis article is the second part of Intellectual Property (IP) in the United States: Myths and Realities. In the first part Ian Bennett introduced us to the basics of the regulations of Intellectual Property in the United States and busted the first six myths. In this second part Ian will reinstate the remaining three myths of IP and provides some bonus insights as well…and the secret of eternal life, of course. – Peter Kadas

Myth Number Seven:  United States and European Intellectual Property cannot be enforced in China

Reality:  China has a robust system of intellectual property and a system to address infringement of foreign rights.  The real challenge for anyone attempting to establish or enforce IP in China is the crucial need for localized connections who can navigate the legal and business systems on your behalf, and then having the money to engage in such proceedings.

Myth Number Eight:  Having an NDA will provide adequate protection from intellectual property infringement.

Reality:  An NDA is a fantastic start to protecting your IP and generally providing yourself with a good basis for proceeding with product testing, marketing or solicitation of services, joint ventures or investments, but you should never assume that an NDA is the only thing you need to adequately protect your IP.  The reality from a business standpoint is that an NDA only provides you as much protection as the amount of damages you can legally extract from someone who violates it, and unfortunately, more often than not people who violate NDAs don’t always have that much to lose in recoverable damages.  For most startups, it is unlikely that you will ever encounter a situation in which a company will violate a provision of your NDA to the detriment of your intellectual property and that violator will have significant amounts of money for you to recover; the simple truth is that well established companies don’t run these sort of risks, especially when dealing with small players in the market.

The best approach to really safeguarding your intellectual property is to manage your relationships and disclosures carefully and rely on NDA as more of a deterrent.  Do your homework before you give out confidential information to anyone and then if you do, consider from the beginning what resources and information you will realistically need to monitor compliance with an NDA and to enforce it if need be.

Lastly, remember that an NDA can serve other very useful purposes in relation to intellectual property other than as a form of outright protection, for example if you carefully monitor your disclosure of pre-patented inventions and have an NDA signed by any party with whom you share such information, you can successfully avoid unintended publication and the accidental beginning of that critical 1-year time period which we discussed above.  Another example would be utilizing NDAs in regular fashion both internally and with outside parties involved in your business if you have any trade-secrets to protect, because absent such basic confidentiality assurance, your trade-secrets could be ruled by a court to be inadequately protected and thus not enforceable if improperly disclosed.

Myth Number Nine:  If you have intellectual property in Europe, your IP is applicable in the US.

Reality:  If you have intellectual property in Europe you do not necessarily have any of the same rights in the US and you cannot gain such rights by simply “transferring” your IP.  In almost all cases, intellectual property is jurisdiction specific, though in some cases such as patent registrations through the Patent Cooperation Treaty (PCT) or European Community trademark registrations, a single filing can be utilized to establish a very broad jurisdiction in which such rights may be applied, and multiple countries can be included.  However, for most European startups considering establishment in the US, it will be necessary to begin with new registrations that are specific to the United States.  In some cases, such as with international patents, having a registration in Europe can actually prohibit the opportunity for a congruent US filing if that filing is not undertaken within a certain period of time.  On the other hand, having such preexisting filings can also provide for expedited processing of US applications if certain mechanisms like ‘patent prosecution highways’ are available and are used in a timely fashion.  For such reasons, any business which is even remotely considering establishment in the US should consult with experienced intellectual property counsel as early as possible (insert second shameless plug).

Myth Number 10:  A startup must have intellectual property to be successful

Reality:  A startup does not necessarily need to have intellectual property to succeed.  What every startup can and should do is simply consider its potential for intellectual property or how its business may come into contact with the intellectual property of others, and such consideration should be done as early in the process of starting-up as is possible.  However, there are plenty of situations in which having IP may just not create enough justifiable value to pursue it.  For example, if you develop an application in a crowded market space such as social/business networking or item/service resale, your application may simply not be original or novel enough to support a software patent, and you may not even have adequate funds to pursue one or even need one in the first place.  Likewise, maybe the name of your products and/or business is relatively generic or maybe your business and products utilize potential trademarks and/or code materials which are substantially in the public domain or subject to strict licensing requirements upon the basis of open-source platforms.  In all such cases, you still may be able to get intellectual property, but the extent of its enforceability or actual value may be so limited that expending any significant money to obtain it just isn’t worth it.

Now this said; the decision to not pursue intellectual property in any regard should never be made upon an assumption or without careful consideration.  At the end of the day it is just about knowing what your options are and knowing them as quickly as possible so you can make intelligent decisions.  You may not need IP to protect your business adequately or to increase its value in any significant way, but you damn well better be aware if your business may come into conflict with the IP of others and you damn well better be able to explain any lack of intellectual property to any potential investor or strategic partner in an articulate and confident fashion.

 Epilogue

So, for those of you who read this whole thing and have not poked out your own eyes…congratulations on your fortitude!  To the ones without eyes, I am sorry, but I believe Peter offers a comprehensive holistic recovery program…you’ll have to check with him.  To the survivors, here is a short list of bonus myths and realities to keep in mind!

M:  Copyrights and copyright assignments last forever.

R:  Nope, copyrights last in most cases for the life of the author plus 70 years and copyright assignments may be revoked under US law by statute after a certain number of years.  Entities and anonymous authors have slightly different rules.

M:  Patents and other forms of IP inhibit innovation.

R:  No, they don’t really; it’s just that some people use them like assholes.

M:  Google or Apple is going to piss on your IP if you even come close to their business spaces.

R:  Most of you will probably never be important enough to get their attention in a negative or competitive fashion unless you do something to infringe their own IP or significantly detract from their business interests…in which case, yes they can afford to piss on your IP, or buy you out, or do both in no particular order.

M:  Watching out for your intellectual property is like watching out for your children.

R:  You only have to be responsible for your kids for 18 years…patent monopolies last for 20.

For those who reached that far, take my appreciation, since this is not just the usual easy language. If you’re thinking on dealing with patents, I highly recommend  the San Francisco law firm Bounkova&Bennett founded by Ian and his Partner, Boyana Bounkova, because – as maybe it became clear from this article – they’re highly professional and working with flat rates. – Peter Kadas


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…