Chapter

Intellectual Property and Other Legal Issues for the Entrepreneur

McGraw-Hill/Irwin Entrepreneurship, 7/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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Intellectual Property
Includes:
Patents. Trademarks. Copyrights. Trade secrets.

Represents important assets to the entrepreneur. Should be understood even before engaging the services of an attorney.

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Selecting a Lawyer
Lawyer may work on a:
Retainer basis. One-time fee.

A good working relationship with a lawyer:

Eases some of the risk in starting a new business. Gives the entrepreneur necessary confidence.

Entrepreneur can offer lawyer stock in exchange for the services.

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Types of Patents
Patent: grants holder protection from others making, using, or selling similar idea; issued by the PTO.
Utility patent: grants owner protection from anyone else making, using, and/or selling the identified invention. Design patent: provide inventor with a negative right excluding others from making, using, or selling an article having the ornamental appearance given in the drawings included in the patent. Plant patent: given for new varieties of plants, represent a limited area of interest.

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International Patents
The Patent Cooperation Treaty (PCT) was established to provide firms protection in global markets.
Has over 100 participants. Facilitates patent filings in multiple countries in one office. Administered by the World Intellectual Property Organization (WIPO) in Geneva, Switzerland. Provides a preliminary search that assesses whether filing firm will face infringements in any country.

Significant differences may exists in patent laws in each of these countries.

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The Disclosure Document

Statement to U.S. Patent and Trademark Office by inventor disclosing intent to patent idea.
Establish a date of conception of the invention. Important when two entrepreneurs file patents on similar inventions. Relevant when foreign companies are involved.

To file a disclosure document:

Prepare a clear and concise description of the invention. Include photographs. Include a cover letter and a duplicate with the description.
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The Patent Application (1 of 2)

Introduction
Background. Advantages of the invention and the nature of problems that it overcomes. States how the invention differs from existing offerings.

Description of invention
Description of the drawings that accompany it. Detailed description of the invention.

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The Patent Application (2 of 2)

Claims
Serve to specify what the entrepreneur is trying to patent. Essential parts of the invention should be described in broad terms
Claims must not be too general either.

Application should contain a declaration or oath signed by the inventor or inventors.

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Patent Infringement
Many businesses, inventions, or innovations are results of improvements on, or modifications of, existing products. Copying and improving on a product:
May be perfectly legal A good business strategy.

Products can be licensed from the patent holder. Advisable to hire a patent attorney to ensure no possibility of patent infringement.
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Checklist for Minimizing Patent Risks

Seek a patent attorney who has expertise in your product line. The entrepreneur should consider a design patent to protect the product design or product look. Before making an external disclosure of an invention at a conference or to the media, or before setting up a beta site, the entrepreneur should seek legal counsel since this external disclosure may negate a subsequent patent application. Evaluate competitor patents to gain insight into what they may be developing. If you think your product infringes on the patent of another firm, seek legal counsel. Verify that all employment contracts with individuals who may contribute new products have clauses assigning those inventions or new products to the venture. Be sure to properly mark all products granted a patent. Not having products marked could result in loss or damages in a patent suit. Consider licensing your patents. This can enhance the investment in a patent by creating new market opportunities and can increase long-term revenue.

Table 6.2

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Business Method Patents

Growth of Internet use and software development has given rise to use of business method patents.
E.g. Amazon.com.

Firms that hold these patents use them to assault competitors.

Subsequently provide a steady stream of income from royalties or licensing fees.

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Trademarks
A distinguishing word, name, or symbol used to identify a product.
Can last indefinitely. Can be filed solely on intent to use the trademark in interstate or foreign commerce. Can also be filed with intent to use in the future.

Categories:
Coined marks. Arbitrary marks. Suggestive marks. Descriptive marks.
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Registering the Trademark (1 of 2)

Federal registration of trademarks PTO. Filing must meet four requirements:
Completion of the written form. A drawing of the mark. Five specimens showing actual use of the mark. The fee.

Initial determination of suitability takes 3 months.

Objections must be raise within six months, or application is considered abandoned. Right to appeal in case of refusal.
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Registering the Trademark (2 of 2)

Once accepted, trademark is published in the Trademark Official Gazette to allow any party:
30 days to oppose. Request an extension to oppose. Registration issued if no opposition is filed. Procedure takes about 13 months from initial filing.

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Benefits of a Registered Trademark

Seek a patent attorney who has expertise in your product line. It provides notice to everyone that you have exclusive rights to the use of the mark throughout the territorial limits of the United States. It entitles you to sue in federal court for trademark infringement, which can result in recovery of profits, damages, and costs. It establishes incontestable rights regarding the commercial use of the mark. It establishes the right to deposit registration with customs to prevent importation of goods with a similar mark. It entitles you to use the notice of registration. It provides a basis for filing trademark application in foreign countries.

Table 6.2

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Copyrights
Right given to prevent others from printing, copying, or publishing any original works of authorship
Issues surrounding access to material on the Internet have led to major legal battles for the entertainment industry. Example: Napster.

Copyrights are registered with the Library of Congress

Usually do not require an attorney. Term of the copyright is the life of the author plus 70 years.
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Trade Secrets
Protection against others revealing or disclosing information that could be damaging to business.
Have a life as long as the idea or process remains a secret. Not covered by any federal law but is recognized under a governing body of common laws in each state.

Entrepreneur needs to take proper precautions. Legal action can be taken only after the secret has been revealed.

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Licensing (1 of 2)
Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Type of licensing:
Patent license agreement: specifies how the licensee would have access to the patent. Trademark: involves a franchising agreement. Copyrights.

Licensing has become a revenue boom for many Fortune 500 companies.

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Licensing (2 of 2)
Question to be considered by an entrepreneur:
Will customers recognize licensed property? How well does the licensed property complement my products or services? How much experience do I have with the licensed property? What is the long-term outlook for the licensed property? What kind of protection does the licensing agreement provide? What commitment do I have in terms of payment of royalties, sales quotas, and so on? Are renewal options possible and under what terms?
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Product Safety and Liability (1 of 2)

Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act.
First passed in 1972. Created a five-member commission with:
Power to prescribe safety standards. Responsibility and power to identify substantial hazards and bar products it considers unsafe.

Act was amended and signed into law in 1990.

Establishes stricter guidelines for reporting product defects and any injury or death resulting from such defects.
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Product Safety and Liability (2 of 2)

Claims regarding product liability usually fall under one of the following categories:
Negligence. Warranty. Strict liability. Misrepresentation.

Best protection against product liability is to:

Produce safe products. Warn consumers of any potential hazards.

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Insurance
Provides a means of managing risk in the new business.
Entrepreneurs usually have limited resources in the beginning.
Some insurances are required by law and cannot be avoided. Other insurances are not required but may be necessary to protect the financial net worth of the venture.

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Types of Insurance and Possible Coverage

<<Insert Table 6.4>>

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Sarbanes-Oxley Act (1 of 3)
Congress passed the Act in 2002.
Has provided a mechanism for greater control over the financial activities of public companies. Has created some difficulties for start-ups and smaller companies.

Under this law:

CEOs need to vouch for financial statements through a series of internal control mechanisms and reports. Directors must meet background, length of service, and responsibilities requirements regarding internal auditing and control.
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Sarbanes-Oxley Act (2 of 3)
Attempt to influence the auditor or impede the internal auditing process is considered a criminal act.
Law covers bank fraud.

Passage of this law has been of some concern due to:

Interpretation of this law. Subsequent directors liability.

Foreign companies that trade on U.S. stock exchanges often delist.

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Sarbanes-Oxley Act (3 of 3)
Though private companies are not included, they are subject to control if:
They consult with a public company. Influence that public company in any wrongdoing established by the Sarbanes-Oxley Act.

Entrepreneurs can set up a board of advisors instead of an extended board of directors.

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Contracts (1 of 2)
A legally binding agreement between two parties.
Business deals are concluded with a handshake, but in case of disagreements, entrepreneurs:
May find that there is no deal. May be liable for something never intended.

Rule is to not to rely on a handshake if deal cannot be completed within one year. Courts insist on a written contract for all transactions over $500.
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Contracts (2 of 2)
Four essential items in an agreement to provide the best legal protection:
All parties involved should be named and specific roles in the transaction specified. Transaction should be described in detail. Exact value of the transaction should be specified. Signature(s) of the person(s) involved in the deal should be obtained.

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