While Startup founders are becoming increasingly aware of the financing opportunities provided by venture capital funds, there was a consensus that not enough attention is paid to the protection of intellectual property (“IP”) and avoiding third party IP infringement. Failure to properly protect IP could result in a negative value impact and could eventually result in complete loss of value.
In our general experience, the VC industry does recognize the importance of protecting IP, but this is often limited to traditional protections such as trademarks and patents, and there is usually no comprehensive IP strategy. A few examples of the aspects we usually consider when conducting an IP audit, or participating in the planning are:
Identifying the IP
IP can take many forms, which may vary based on jurisdiction. In Hungary, IP can be a work under copyright protection, a registered industrial property right or a domain name, and/or can exist in unregistered form, such as know-how or a trade name. Recognizing the IP is essential, as different forms require different security measures. While copyright protection exists from the moment the work is created, industrial property rights require registration. Some IP requires a special approach; this is the case with inventions, which cannot be disclosed or published before filing. To keep track of the company’s IP assets, it is worth creating an internal IP register.
IP is not always assigned automatically
The startup needs to keep in mind that IP is not created by the company itself, but therefore through its contractors, suppliers, partners and employees. The company should have proper agreements in place with its external partners to obtain the necessary IP rights to the work created for its benefit. This may be very difficult to ensure when stock materials, for example, are used or when using content published on social media sites. The rights to IP created by employees are automatically assigned to the company by virtue of law; however, there are still several issues, which need to be regulated. It is therefore highly recommended that IP-based companies adopt internal IP codes (e.g. corporate patent policy), or at least regulate critical issues in the employment contracts. Needless to say, if the company is using external (or in some cases internal) IP without a proper license, then this might give rise to third party claims.
Focus on key IP first
IP protection can consume a significant part of the startup’s budget. The company should not rush to protect every identifiable IP, and especially should not start with defensive protection (e.g. protecting combinations of domain names the company actually does not want to use). The IP, which comprises the core value of the company (the key IP), must be identified and protected first. The company should draw up an IP protection plan matching its business plan, and as the company’s activities pick up speed, so too should the protection afforded to its IP.
Searching for prior rights before building
It may take only a few clicks on the internet to find significant prior rights. If the company does not look for them, then the competitors and investors almost certainly will. It is highly advisable to use an IP specialist for prior rights (prior art) searches (especially when searching the patent and trademark databases), who can assess the results in light of the local court practice. Failing to conduct a prior art search could result in the infringement of third party rights. This can have severe consequences in the later startup stages when a significant amount of money is already invested in the affected IP. It is essential that the contractors of the startup also meet this criterion and provide the startup with “clean” IP. It is important to note that the startup may be acting in good faith, but could still be unknowingly infringing third party rights.
Local specialties cannot be ignored
The principles governing IP regulation might be similar in certain jurisdictions, but there can be significant differences in the details. A very good example of such difference is the provision of the Civil Code of Hungary, which only recognizes information held in a form enabling identification as know-how. Local companies should therefore create a know-how register, and update it regularly.