This article originally appeared in the Fall 2011 issue of The SRR Journal, published by the financial advisory firm Stout Risius Ross.
Business owners are unlikely to talk about it. And few cases are reported publicly. But ask any lawyer or investment banker who represents middle market companies, and you are likely to find plenty of anecdotal evidence: Many business owners do a poor job of protecting their intellectual property. And while some may do so intentionally, believing the benefits not to outweigh the costs, they may well be vastly underestimating the benefits. Carefully protected intellectual property not only affords a business the right to restrict access by its competitors, it can also provide a substantial boost to enterprise value.
In fact, the evidence suggests that there is a direct link between recognizable enterprise value and wellsecured intellectual property. Consider, for example, the research of Professor David Hsu, of the University of Pennsylvania’s Wharton School, and Professor Rosemarie Ziedonis, of the University of Michigan’s Ross School of Business. Professors Hsu and Ziedonis have shown that, at least for start-ups in technologyintensive sectors, having a larger number of patent applications increases the likelihood of securing initial funding from a prominent venture capitalist, and increases the likelihood of a successful exit through an initial public offering.1 Using regression analysis, they have also shown that within this subject group, a doubling of patent application stock is, on average, associated with a 92 percent increase in pre-money valuation.2 Moreover, financing and sale transactions sometimes collapse because of inadequately protected intellectual property.3 Clearly, business owners should be paying greater attention to intellectual property.
The terms “intellectual property” or “IP” refer to a collection of distinct legal rights, each of which protects a different aspect of creative endeavors. Broadly speaking, patents protect inventions, trademark rights protect those things that distinguish a company’s goods and services in the marketplace, and copyrights protect original works of authorship, such as books, music, art, software, and certain other intellectual works. Another type of IP, trade secret rights, may attach to closely guarded confidential information that gives a business an advantage over its competitors. And some states recognize a “right of publicity,” giving individuals the right to control the commercial use of their name, image, and likeness. A business owner can benefit from a review of the IP landscape as it relates to his or her own business, to better understand the value that the company could reap from each type of IP protection, and the particular steps it should take to obtain these protections. Here is a quick summary of the three principal types of intellectual property.
Patents: The Right to Exclude Others from Exploiting Your Inventions
The U.S. patent law seeks to encourage investment in research and development by rewarding inventors with potentially lucrative rights. If a patent application is filed with the United States Patent and Trademark Office (the “USPTO”) in a timely manner, the inventor makes full disclosure of the invention to the USPTO, and the USPTO determines that the invention constitutes patentable subject matter and is novel and non-obvious, then the USPTO will issue a patent to the owner of the invention. Upon the issuance of the patent, the owner is entitled to exclude all others from making, using, selling, or importing the patented invention in the U.S. for a period of 20 years. As you can imagine, depending on the nature of the invention, this right can be extraordinarily valuable. Conversely, the failure to take any of the steps required for the issuance of a patent can leave the invention in the public domain, subject to exploitation by any and all competitors. Of course, since a U.S. patent affords protection only within the U.S., the owner of an invention frequently also secures patents for the invention in other countries where it intends to use or market the invention. If a business has, or may develop, an invention that may be protectable under one of the three types of patents (a utility patent, a design patent, or a plant patent), it should establish the following types of policies and procedures:
Preserving Secrecy: Under U.S. law, a patent application must be filed within one year after the invention is first disclosed to any person in a nonconfidential manner, offered for sale, or sold. In fact, in other countries around the world, this one-year grace period is not recognized, and any disclosure, offer of sale, or actual sale of the invention will immediately preclude the issuance of a patent outside of the U.S. For these reasons, preservation of secrecy is critical. To accomplish this goal, companies establish appropriate security and secrecy procedures, and require engineers and other inventors to sign non-disclosure agreements as a condition of their employment.
Assuring Ownership: A company does not necessarily have ownership of the ideas and inventions generated by its employees. This is a matter of state law, and there are no uniform rules on the subject. To avoid uncertainty, many companies require that each of its engineers and other inventors sign an agreement as a condition of his or her employment, pursuant to which the inventor expressly assigns to the company ownership of all ideas and inventions that the inventor creates on the job. This agreement is frequently combined with the non-disclosure agreement described above.
Keeping Records: A company needs to be able to identify the inventions that have been made by its employees, and to pinpoint the identity of the inventors. And it needs to be able to prove these underlying facts. So careful and thorough record keeping is a critical matter. Inventors should be required to document their work in a fixed manner, such as in bound notebooks stamped “confidential,” with numbered pages and regular signed acknowledgements of authenticity and completeness. These notebooks should be kept in a physically secure location and carefully indexed. Inventors should be required to complete “invention disclosure forms” to document their inventions and to provide a tool for the drafting of patent applications.
Monitoring the Products and Inventions of Others: A company should monitor the product developments in its industry and the USPTO’s lists of newly published patent applications and newly issued patents, both to minimize the risk of infringing the rights of others and to identify any “prior art” that might prevent the company from persuading the USPTO that the company’s own inventions are “novel.” Similar lists are published by patent offices in virtually every foreign country, and these lists should also be monitored as appropriate.
Conducting Appropriate Patent Searches: Patent searches can be conducted for a variety of purposes. A general search can be conducted with respect to a specific subject matter during early development stages to get an initial sense of what others are doing and what rights they are claiming. A more focused search can be done to assess the patentability of a newly developed apparatus or method. To gain comfort against infringement of the rights of others before going to market, a broader search can be conducted.
Filing Well-Drafted Patent Applications on a Timely Basis: Finally, the patent application must be filed on a timely basis – prior to the expiration of the one-year grace period for U.S. applications and prior to any disclosure, public use, or sale for any foreign applications. Each application should be drafted carefully and precisely to maximize the likelihood of broad protection and to navigate around the prior art.
Trademarks: Identifying the Company as the Source of Particular Goods or Services
Trademarks are among the most valuable assets of a business. They identify the company as the origin of its goods and services, and are the name by which these goods and services are known. They communicate to the consumer the character and the level of quality of these goods and services, and represent the company’s reputation and goodwill. Here are a few key steps to take to protect your trademarks:
Selection of Strong Trademarks: The strength of a trademark – the extent to which the owner can prevent others from using similar marks with similar goods or services – depends in part on the nature of the trademark itself. The strongest marks are fanciful or arbitrary, having no intrinsic association with the goods or services. Think Xerox for copiers, or Amazon for an online retailer. Marks that are suggestive of the goods or services, but that don’t fully describe them – Facebook for online social media might be one example – are slightly less strong but still generally enforceable. A descriptive mark, on the other hand, is protectable only if the owner can establish that it has acquired distinctiveness. That is, the owner must show that a secondary meaning has been developed in the minds of consumers, who now associate it with the company. Best Buy, for retail store services, is in this category. A common descriptive term for goods or services, such as “Chair” for an office chair, is not eligible for trademark protection.
Conducting Searches to Avoid Confusion with Existing Trademarks of Third Parties: A trademark will not be protectable if someone else is already using a confusingly similar mark in association with confusingly similar goods or services. This is a matter of factual analysis on a case-by-case basis, so a complete trademark search should generally be ordered with respect to each proposed new trademark in order to generate the necessary information on potentially conflicting use. Review of this data should be performed by trademark counsel, and a judgment made by the company based on the level of risk identified.
Using Trademarks Properly: Though not required by law, the display of a trademark symbol (e.g., ™ or, for a registered trademark, ®) puts others on notice that the company is claiming trademark rights in the mark. The mark should always be displayed in the same manner, without variations in spelling, spacing, capitalization, or font. Trademarks should always be used as adjectives, not nouns.
Filing Trademark Applications: Although certain common law trademark rights will arise based solely on trademark use, there is a variety of reasons to file trademark applications with the USPTO. For example, the owner of a registered trademark enjoys a presumption of the exclusive right to use the mark on the specified goods or services throughout the entire U.S. Applications may even be filed before actual use has commenced to establish the earliest possible priority date.
Copyrights: Protection of Forms of Expression
For businesses that create software or other works of authorship, the protection of copyrights can be vital. Copyright protection extends to both published and unpublished work, and gives the owner the exclusive right to reproduce the work, to distribute the work, and to prepare derivative works based on the work. Copyrights in a work come into existence as soon as the work is created in a fixed form, whether or not it carries a copyright notice and whether or not it has been registered with the Copyright Office. However, there are benefits that derive from affixing a copyright notice, and certain rights attach only once the work has been registered. Here are some good practices for the protection of copyrights:
Use a Copyright Notice: Every important work of authorship should carry a valid copyright notice, placed where it provides reasonable notice to third parties. The notice should include three elements: (i) the symbol ©, the word “Copyright” or the abbreviation “Copr.,” (ii) the year of first publication of the work, and (iii) the name of the copyright owner.
Copyright Registration: A copyrighted work must be registered with the Copyright Office before an action may be filed to enforce the copyrights. In addition, if the registration was made within three months of the publication or prior to its infringement, then statutory damages and attorneys’ fees may be recovered against an infringer. For this reason, it is prudent to register all works of authorship that have sufficient value to the business that it would be moved to seek enforcement against infringing parties. By following these simple procedures and policies to secure patents, trademarks, and copyrights, many companies can reduce the risk of infringement of third-party rights, contribute to increases in business valuation, improve the chance of attracting investment capital, and make a successful IPO more likely. It is an investment well worth making.