Voices: StartUps and Intellectual Property: Early action is required to protect it
March 13, 2017
Startups are commonly founded to bring something new to the market. That something new may be a new product, a new service, or a new way of doing business.
Commonly, the startup founders charge ahead with developing and deploying their novel subject matter, to try to generate revenue as soon as possible. Many legal matters, particularly those involving intellectual property ("IP," such as patents, trademarks, trade secrets, confidential information, and copyrights), are put off as these early startup activities take place.
That common strategy is often a serious mistake. At the very least, it can cause loss of valuable intellectual property rights. Often this loss can prevent the startup from procuring needed investment, allow competitors to copy the startup's new subject matter, and crush the value of the startup.
These types of losses can be far greater today than in the past. Consider that intangible assets, which include IP, were 13 percent of the market cap of the S&P 500 in 1975. Today, intangible assets constitute about 87 percent of the S&P 500's market cap (2015 Annual Study of Intangible Asset Market Value by Kristi Stathis; Ocean Tomo Releases). It is thus no surprise that, when PureStorage went public successfully in 2015, its assets, including its portfolio of over 200 issued patents and 150 applications pending, were valued at over $336,000,000.
Commonly, the startup founders charge ahead with developing and deploying their novel subject matter, to try to generate revenue as soon as possible. Many legal matters, particularly those involving intellectual property (“IP,” such as patents, trademarks, trade secrets, confidential information, and copyrights), are put off as these early startup activities take place.
So, how can a startup take action to protect IP?
The term "Trademarks" often refers to trademarks as well as service marks and trade names. A "mark" is a source indicator and when used with a product is called a "trademark" and when used with a service is a "service mark. A "trade name" is the name of a business entity. Examples include the trademark "Coke" to refer to a drink; the service mark "Midas" to refer to an auto repair service; and "Microsoft" to refer to a company.
Trademarks (all three categories) are provided some level of protection, sometimes called "common law" rights, from their use in the market place. Most states, including Nevada, further define such rights by statute. Rights from mere use are generally limited to the scope of geographic use.
Significantly greater trademark protection is provided by state or federal registration when available. State registration can provide state-wide protection as of the date of filing for registration. Federal registration, which is only available for trade and service marks, can provide nationwide protection as of the date of filing for registration. As a result, if a startup plans to grow use of a mark nationally, a federal registration application should be filed preferably before sharing the mark with others on a non-confidential basis.
Note however that neither state nor federal registration preempt prior rights of third parties. For this reason too, earlier registration is better.
U.S. patents provide the right to exclude others from making, using, selling, offering for sale, or importing a patented useful invention or ornamental design. More recently, Congress has passed laws making it more imperative than ever to file a patent application early or risk loss of right to patent. The legal rules governing loss of patent right are complicated and vary by country or region. For example, a startup's compliance with invention publication rules that appear to allow additional time to file a patent application in the U.S. can cause, among other things: (i) loss of right to patent abroad; and (ii) loss of right to a U.S. patent by being second to file.
It is therefore best to file an adequate U.S. patent application (i) as soon as possible and (ii) at least prior to any disclosure of the invention to a third party not under a suitable, and honored, obligation to keep the invention confidential. In any event, to seek to preserve U.S. patent rights at least, the patent application must be filed within one year of first public use, publication, or offer for sale or lease of the invention.
Trade Secrets and Confidential Information
Generally speaking, a trade secret is information that (i) an entity adequately protects as confidential and (ii) provides value by reason of its being so protected. Other information can be protected by maintaining confidentiality of the information. Consequently, it can be imperative to put procedures and contracts in place early to preserve trade secret or confidential status.
Note that contracts providing that confidentiality obligations expire after a period time can destroy trade secret or confidentiality status.
Also note: Nevada law provides that all information marked as Confidential or Private is presumed to be so in court. Using this marking technique can make enforcing trade secret or confidentiality rights much easier.
The Copyright laws protect "original works of authorship," such as writings (including software), art, music, and architectural works. Copyrights exist from the first creation of the work. However, copyrights may not be enforced in court by the owner until an application has been filed to register the copyrights. Also, early copyright registration can provide substantial enforcement hammers such as statutory damages and an attorney fee award against the infringer. Consequently, at least for critical copyrights such as in software, engineering drawings, and user manuals, copyright registration should be sought promptly after first creation of the work.
So, startups, and others, should protect their IP early or be prepared to face the serious consequences of loss of IP rights due to delay.
Robert Ryan, partner, and Jennifer Junkin, associate, are both registered patent attorneys with the law firm Holland & Hart, LLP.