Intellectual property (IP) is where thoughts and ideas meet the material world and is commonly defined as any work or invention that’s come about as the result of creativity. A strength to the business that owns it, IP is considered an asset in bankruptcy proceedings, can be sold or lost and needs to be protected by the company that owns the property.
“Intellectual property should be viewed as a tool for [business owners] to protect their business assets, to provide the tools to leverage those business assets [and] to protect market share,” said Seaton Curran, Howard & Howard. He added that IP could also be used, “to enter into new markets and leverage products in order to gain access to other technologies and really understand the protections of intellectual property law that can be used to their advantage,” explained Seaton Curran, Howard & Howard.
All businesses have intellectual property concerns, though not necessarily at the same level. For example, the owner of a dog grooming business who wants to trademark the perfect name has different concerns than the owner of a software design company whose copyrighted intellectual property is the entire value of the business.
In addition, trade secret misappropriation and copyright infringement issues can arise when employees leave a company. In other instances, employees may violate non-compete clauses or confidentiality by taking intellectual property, said Michael Rounds, Watson Rounds.
Businesses need to know what to do when customer information is hacked. It’s important to know how the business complies with authorities and notifies customers, and what safeguards are in place to protect the information, which is actually intellectual property. Clearly IP is a topic with a myriad of issues to consider.
“When we get involved with a business, whether small or large, that’s one of the first questions we have, from a trademark sense, said Michael Feder, Dickinson Wright. He asks clients, “What names are you using for your products? Have you authored anything, a book or certain types of instructions, things on your website you don’t want people to cut and paste and duplicate from a copyright perspective, photos you’ve put out there? Have you registered those with the copyright office?”
“I don’t think that people really understand the practical reach of these concepts, because they’re so abstract,” added Kelley Goldberg, Brownstein Hyatt Farber Schreck. “Once they figure out the practical implications of intellectual property they need to figure out, first, what intellectual property they own, second, how do they protect it and third, how to stop others from misusing or stealing it.”
Need to Know
IP falls into different categories with different protections for each. With creative works like written materials, photographs, paintings and dance routines, an automatic common law copyright applies when the work is transcribed into a fixed, tangible medium. A more formal registration with the Library of Congress is recommended, but more expensive.
Trademarks protect words or symbols companies use to describe their products and services and provide a recognizable brand. They’re registered with the United States Patent and Trademark Office (USPTO).
Patents protect inventions and ideas. Filed with USPTO, they’re not cheap and registration renders the invention public. Patents have a limited lifespan, which is why eventually the newest offering from a pharmaceutical company comes out of patent and generic versions become available.
Registering copyrights, trademarks and patents protect a business’ intellectual property. “You want to make sure that you are putting yourself in a position where there’s a legally recognized interest in whatever your intellectual property is, because it will make it easier to enforce your IP against potential infringers,” said Patricia Lee, Hutchison & Steffen. “Probably that’s the most important thing for businesses to know.”
Trade secrets are confidential information held by businesses, often pertaining to operating procedures, customer and vendor lists, pricing structures and recipes. Some highly confidential trade secrets are never patented, said Feder. Coca-Cola, for example, has never patented its formula, because at the end of the patent period, their recipe would go public.
Written materials default to an automatic, common law copyright assigned to the writer, with few exceptions to the rule. One automatic exception is that employees do not own copyright, but contractors do. A work for hire clause in the contractual agreement or an assignment of copyright after the work is complete transfers ownership of the copyright from the writer to the business.
“Copyright law is designed to protect the author, and I think that’s a good thing, but most businesses don’t know that and assume because they’re paying for services they’re getting more rights than they are,” said Goldberg. This is how companies can wind up surprised when it turns out the independent contractor who created their website actually owns the copyright to the website.
Despite knowing their intellectual property has value, most business owners won’t do a valuation unless required by an audit or financial event. The first step for valuation is to look at the amount of sales made under the good or service in question. The more unique the product and the more units sold, the higher the value. There isn’t really a rule of thumb to perform every valuation the same, but the value assigned to licensing intellectual property for use by another company can be taken into account.
Intellectual property is also considered an asset in bankruptcy if it has value. Trademark and copyright registration and patents can all be assigned. “Once you can assign those rights that attach those protections to the company, they become assets of the company and get divided up or considered like everything else in a bankruptcy,” said Curran.
On the creditor’s side, that means keeping hold of any secured interest in patents to make certain it’s protected. From the debtor’s perspective, that means patents, trademarked and copyrighted intellectual property that has a value can be made part of a bankruptcy estate.
Use It or Lose It
In many cases, the value of IP is also dependent on it uniqueness. “I think businesses often don’t really understand the steps they need to take to ensure they keep that information secret,” said Goldberg.
In addition, trade secrets can easily come into play in a highly competitive service industry like Las Vegas. Goldberg gives the example of a nightclub owner who, “comes up with great business methods, great consumer list and branding concepts, runs a stellar business and has an exceptional way of doing business.” All it takes, he says, to weaken the value of trade secrets is one employee heading over to the competitor with all that information.
In many cases, companies aren’t equipped to make certain employees understand what IP belongs to the company and the consequences of stealing it. They may not have the right contracts in place and may not know what to do when it happens or that they can go to court to get an injunction.
One of the easiest protections is to have employees sign confidentiality agreements with their employment agreements. “Often businesses don’t do that. Without belaboring the point, once businesses understand what they own and the real world implications of that, they can start figuring out what they need to do to protect those rights and stop other people from taking advantage of them,” said Goldberg.
Intellectual property concerns arise throughout the life of a company. During formation, the initial contribution will probably be intellectual property of some kind, whether a copyright contribution or branding contribution, which goes into determining individual equity in the company. Intellectual property concerns at startup can be as simple as what to name the company.
The first steps can be simple, too. “Depending on the type of intellectual property we’re talking about, the first thing is just to do a simple Google search,” said Lee. Before choosing a trademark, a Google search can turn up other instances of the same name. “If you want to call your business Euphoria Day Spa, you want to Google it to see if that name already exists somewhere and then you want to go to USPTO and see if anyone has already registered the name.”
Starting up a new company without checking to be certain there’s no infringement on any other company’s trademark, copyright or patent can lead to litigation. “The last thing we want to do as a startup business is be out there for six months and get a letter advising you you’re infringing a trademark, copyright or patent,” said Rounds. He recommends startups obtain a freedom to operate opinion, which researches companies’ claims to IP. “Every company has a different budget, but you save yourself a lot of money in the long run if you do your due diligence up front.”
As opposed to registering their own trademark at the federal level, a cheaper alternative for business owners is registering with the Nevada Secretary of State’s office which provides protection for local companies.
“But at some point when the bucks start coming in and the business starts to grow, you do want to revisit that and see if you can increase the level of protection for yourself from common law to statutory,” said Lee. “If you register, there are certain statutes triggered that give you more protection and also remedies if someone infringes.”
Infringement isn’t always intentional. A certain amount of similarity within industries is inevitable. IP law allows business owners to use the English language to fairly describe what they’re doing. For example, dental offices are apt to have dental, dentistry or dental office in common. “Dental office” itself is generic, and not subject to protection, said Rounds. “But if the company chooses the trademark ‘Awesome Teeth’, they should perform a search for other businesses with that name,” he said.
The search can be regional, state by state or national. “Most of the businesses we work with do business on a national scale, so they’re interested in determining whether or not they can use the mark throughout the United States and therefore should consider a federal trademark. At state level, if they’re just doing business in Nevada, they need only be concerned with what businesses in Nevada are using in terms of names or trademark,” said Rounds.
There’s an advantage to creative brands, said Goldberg. Zappos had to spend money to educate consumers that it’s a shoe store, but once that’s done, the store isn’t confused with any other. On the other hand, a business called Las Vegas Shoe Emporium would have to continue to spend money to differentiate itself from other stores with “shoe” in the name. “People may not think of it when they’re picking their [business] names, but it can end up being extremely important to the bottom line as the business progresses,” said Goldberg.
What about copycat products on the shelves of grocery stores, using the same colors and packaging as the national brands to sell store brands? At casual glance, the products look the same. Trademark law in this case is designed to protect consumers from confusion. The law usually sides with free enterprise with a competing product that looks similar but can be distinguished.
It’s a fine line between having the competition presenting a store brand that’s identifiable and one that’s capitalizing on the financial investments and brand loyalty another business has worked hard to create. Copycats take advantage of a market created by the brand owner’s financial investments.
There are ways to win those fights, said Goldberg, like picking a really distinctive brand, filing the trademark applications and enforcing the protections on the product. “If you let it go, your rights are diluted, and eventually get to the point where the rights are so weak you can’t do anything about it.”
This is not just because a business can’t enforce its rights at that point, but also because if it gets sued, it’s harder for the attorneys to prove the business owns the intellectual property and owned it first. Registration with USPTO or Library of Congress creates a record of when a business began using its intellectual property.
Nevada was chosen as one of a handful of states for a patent pilot program aimed at changing procedural law, making patent litigation a little more streamlined so cases are more expeditious and efficient for both parties involved as well as for the court. The program provides “more procedure to assist the court and parties involved so, rather than spending years litigating these cases, they can get to the heart of the case load quicker,” said Feder.
“My advice is to view intellectual property as a business resource,” said Curran. “Some of these protections can be fairly expensive. If you’re going to spend that money, spend with the end game in mind. If I am going to seek patent protection on my invention, is there a market for that invention? Am I going to be selling that product, and how am I going to be generating revenue from the product or the business lines I’m involved in? How do my IP protections increase the value? If you can’t see how your trademark is going to increase the value of your business beyond simply having it, you want to think twice before you start spending a lot of money in protecting assets that may not generate revenue for you in the future,” he concluded.