By: Scott M. Hervey
In business, there are numerous opportunities for pitfalls, mistakes and errors and they come up in all different legal areas – from basic formation issues to labor and employment to intellectual property. Mistakes and missteps involving intellectual property can be particularly problematic because IP is a company asset; it constitutes a part of (often a significant part of) a company’s valuation. In my 20 years working with start-up companies – and even fully grown-up companies, I have seen mistakes involving company intellectual property prove to be disastrous. With careful planning and good counsel, these mistakes are completely avoidable.
#1. Failure To Transfer the IP From The Founder Into the Company. It is a foundational item for any company – if the company is being formed around a piece of IP or if a piece of IP is intended for use by a company, the company should make sure the founder that owns the IP must contribute it to the company. While a very basic issue, this problem plagues more start-ups than you can imagine. Most often it happens during the informal, pre-formation time frame when founders are kicking around an idea and developing code and no one has consulted a lawyer. Conflict between the founders develop and there is a divergence of opinion on the value brought to the table by the non-developer founders; the developers decide to split with the IP and form a new company. While this will likely generate lawsuits just as soon as the developer’s company is in a financing round, the non-developer founders will very likely not receive as much as they would have had the IP been properly assigned to the company.
How to Avoid This Pitfall: As soon as the project morphs from “dorm-room chit chat” to something real, it’s time to bring in the lawyer and get the material terms of the deal down on paper and make sure the IP is or will be properly assigned to the company.
#2. Entanglements With a Founder’s Former or Present Employer. Most entrepreneurs working on a start-up still keep a day job in order to pay the bills. This can present a problem, especially for a technical founder. If a founder uses their employer’s facilities, computers, equipment, or other technology during company time to develop a new invention for the start-up, this could raise serious issues over IP ownership, especially if the technology is in the same field as the employer. Additionally, it’s very common for employment agreements to include a clause vesting IP ownership with the employer where IP is created using company equipment or facilities.
How to Avoid This Pitfall: In California, an employee is the owner of any inventions developed entirely on his/her own time without using the employer’s equipment, supplies, facilities or trade secret information except where (i) the invention relates to the employer’s business, or research or development of the employer; or (ii) results from work performed by the employee for the employer. Founders that are still employed (or just your ordinary moonlighter) should not use their employer’s equipment or facilities to work on their start-up or side project. Additionally, the start-up should not be in a line of business that relates to that of the founder’s employer.
#3. Letting IP Ownership Walk Out The Door. One would be surprised at how many companies compromise IP ownership through poor (or no) written agreements. Weekly I review proposed independent contractor development agreements – whether it be for an app or for a website – and most often, these agreements are silent on IP ownership. Inevitably, my clients are shocked when I advise them that without an adequate written provision assigning IP ownership, they only own a copy of the technology delivered and not the underlying IP rights.
Where the inventor is an employee of the start-up, sometimes founders feel a false sense of security and believe that even without a written agreement, the employer owns all IP created by the employee in the course and scope of their employment. While this may be the case for copyright, it is not the case for patent rights. Without a written transfer or assignment of patent rights, the employee/inventor still owns the patent rights in the invention. This could present a big problem where the employee/inventor is no longer employed by the company.
How to Avoid This Pitfall: When working with independent contractor developers, always make sure that engagements are in writing and that the writing includes “work for hire” and assignment provisions. As for employees, companies should always have new employees sign a proprietary rights agreement as part of their new hire paperwork. A well drafted proprietary rights agreement will address company ownership of all forms of IP and in-term and post-term confidentiality requirements as well.
#4. TMI. Over sharing doesn’t just endanger personal relationships, it also may endanger company IP. The detailed public disclosure of a new company IP may impact patentability. Under U.S. Patent law, a company has twelve months from such a disclosure to file its U.S. patent application; however, the right to file a foreign application is lost. Circumstances where I have seen such start-up companies make an unintended disclosure include “pitch competition” presentations, crowdfunding and the accidental posting of research to the Internet.
Over sharing of information – intended or not – can also impact company trade secrets. A trade secret is information that is not generally known by a company’s competitors and derives economic value from it being a secret. A great example of a trade secret is the formula for Coke. For over 90 years, Coca-Cola has kept the Coke formula a trade secret; locked in a vault and known by only a handful of trusted employees. Coca-Cola wouldn’t allow even a small portion of the Coke formula to be up on a whiteboard in the middle of a co-working facility for non-employees to see; yet I am constantly amazed to see companies doing just that.
One of the crucial elements of trade secret protection is that the information remain a secret. Once disclosed, a trade secret is no longer a trade secret. This could have unintended consequences where the company also disclosed the trade secret under an NDA. Most non-disclosure agreements provide that once confidential information is no longer confidential – no longer a trade secret – it is free for the recipient to disclose and use.
How To Avoid This Pitfall: Companies should consult their patent counsel prior to participating in a public presentation of company IP or launching a crowdfunding campaign. A company can participate in these activities without risking its patent rights. As for trade secrets, companies should have protocols in place to maintain the information’s secrecy. Good practice includes limiting internal disclosures and requiring an NDA where the information is disclosed to third parties.
#5. Failing to Due Diligence Trademarks. In today’s brand centric consumer culture, trademarks are extremely important. However, most companies do not take sufficient precautions in selecting or protecting their trademarks It’s amazing how many companies adopt and begin using a trademark without having an adequate trademark search done. (No, a quick search of Google does not cut it.) Sometimes a company will be lucky and nothing will happen. But more often than not the first time a company talks to a trademark lawyer is when they receive a cease and desist letter alleging trademark infringement and face the options of either fighting the claim or rebranding.
How to Avoid This Pitfall. Companies should consult a trademark lawyer before adopting and using a brand. The trademark lawyer will conduct a full trademark search which will identify any potential issues that could arise from the company’s use of the proposed mark.