When representing a startup, a lawyer must identify key intellectual property (IP) issues and advise the client on an appropriate initial IP budget right from the start. Some startups will have a business plan that depends on patenting its technology, whereas others may seek to closely guard innovations as trade secrets or rely on strong trademark protection as they launch consumer-facing enterprises with a focus on branding and sales. Online businesses, social media, digital entertainment, and software enterprises may face surprisingly complex copyright issues as they grow. The lawyer must therefore tailor the IP strategy to the startup’s business plan.
The first steps in tailoring a startup’s IP strategy are to: (1) identify the most important existing IP assets; (2) identify potential (future) IP rights; and (3) implement an IP prosecution plan and budget. The startup likely will not be able to afford all the IP protection that it could pursue, so prioritization is crucial, as is consideration of whether any of the identified IP rights are already protected. Ask the client to identify the startup’s core IP and to articulate a plan to protect, grow, and potentially leverage its IP. For example, will the startup license its IP to third parties to manufacture products?
In addition, it is important to remember that the client may be unaware of the IP rights it already owns because some IP rights—notably, copyright—can come into existence automatically. Other kinds of IP rights require proactive steps to secure and protect them. For example, trademarks require use for protection, at least in the United States, and rights under patent law do not attach unless and until a patent issues after application and examination.
The four major categories of IP rights, what is protected by each of those rights, and how the protection arises are summarized as follows:
TYPE OF IP
TO WHAT IT APPLIES
HOW IT ARISES
Original creative works
Upon creation of original work
Identification of source of products or services
Use and registration
Valuable information not known to the public
With reasonable efforts to keep secret
Issued following application and examination
Although trade dress and design protection are additional categories of IP rights, this article considers only each of the four major categories of IP rights in turn, with particular focus on issues the lawyer will encounter when working with a startup.
Copyright: Securing Ownership of Software and Other Original Creative Works
Many startups rely on proprietary software and other creative works to launch their new businesses. Copyright extends to software as well as to other creative works, including literary and dramatic works, sound (music) recordings, visual arts, and technical drawings. Copyright protects such “original works of authorship . . . fixed in a tangible medium” (17 U.S.C. Section 102(a)) immediately upon their creation, but to reiterate one of the essential principals underlying copyright law, it protects the original creative expression, not the ideas being expressed. A copyright owner enjoys the exclusive right to
- reproduce (make copies of) the original work;
- make derivative works based on the original work;
- distribute the original work (in the case of music, this means sell or license copies of phonorecords);
- perform the copyrighted work publicly;
- prevent importation of works that infringe the copyrighted work; and
- assign or license any of these rights.
Outsiders often help a startup with software development, web design, or video or photography for a website or for marketing or brand-identity materials. When the startup works with third parties, however, it is not always clear that it will own all the rights it needs. The startup could be precluded from licensing its software, launching its online store, or distributing an original app.
The default rule under U.S. copyright law provides that the author or creator of a work of authorship is the owner of the copyrights in it. The exception is if the work is a “work for hire,” which is owned by the company that engaged the worker to produce the work. However, “work for hire” has a particular meaning under the Copyright Act. An original work will be a work for hire if: (1) it was created by an employee within the scope of his or her employment; or (2) if the work was specially commissioned in a written agreement and is one of the following nine categories of works: (i) contribution to a collective work; (ii) part of a motion picture or audio-visual work; (iii) translation; (iv) supplementary work; (v) compilation; (vi) instructional text; (vii) test; (viii) answer to a test; or (ix) atlas.
It may not be clear whether an original work is a work for hire and therefore owned by the startup. Is a sufficient agreement in place? Does the work fall squarely into one of the enumerated categories? If not, did an employee create the work within the course and scope of his or her employment? In addition, often it will be far from clear whether an individual will be determined to be an employee, particularly in the context of the initial startup team, where founders may be doing many things at once without clearly acting as traditional employees. In JustMed v. Byce, 600 F.3d 1118 (9th Cir. 2010), the court held that a tech startup, not one of the feuding cofounders, owned the copyright in its source code because the cofounder-developer was actually an employee, not a contractor. Therefore, the code was a work for hire. This was despite the fact the cofounder-developer claimed he was not regularly working in the company, there was no work-for-hire agreement, and he worked remotely from a different state, on his own time, with no employee benefits. The court noted that he was on salary for an extended period of time and that the startup team intended to treat him as an employee eventually, even if they did not yet implement all the formal structures of employment.
There can be unintended consequences to implementing a work-for-hire agreement. For example, California Labor Code § 3351.5(c) extends the definition of “employee” to persons who have signed work-for-hire agreements, and similar treatment results under California Unemployment Ins. Code § 621(d). A consequence of this is that a startup must pay unemployment and other payroll-related taxes in connection with fees (deemed wages) paid to such persons. To avoid these problems, startups should insist that workers assign to it the copyrights in the original works they create. Many employers will uniformly include assignment provisions in employee agreements, and many will include invention assignment provisions alongside work-for-hire clauses in a belt-and-suspenders approach to contracts with independent designers or developers to ensure that, in any event, the copyrights have been assigned to the company.
However, assignment provisions must be drafted with attention to other limitations. For example, California Labor Code § 2870 imposes nonwaivable restrictions on all-inclusive employee invention assignment provisions. Even when exclusive rights under copyright are assigned to a company, those rights can be terminated (albeit after a fairly lengthy period of time). These “termination rights” under the Copyright Act survive the original creator of the work and can cause the copyrights to revert to heirs.
Trademark: Protecting the Startup’s Brand Identity
Many startups have devoted resources to the creation of brand marketing materials by the time they first meet with a lawyer. The lawyer must consider whether the startup can secure and expand its rights in those materials efficiently, and sometimes the startup may be unaware of substantial impediments to securing all rights in and to those materials as it grows.
Advising the startup on trademark basics is useful. A trademark or service mark identifies the source of a product or service and distinguishes it from the source of competing products or services. Trademarks are typically made up of a particular word, phrase, symbol, slogan, or design or a combination of one or more of those elements, but a trademark can also be made of other kinds of nonlinguistic elements, including colors or even scents or sounds. In the United States, registration depends on use, and registration provides presumptive evidence of exclusive ownership and right to use a mark. Still, prior users of a mark can establish continuing rights to use a mark in the territory in which it was used prior to the other party’s registration.
Trademark rights exist at common law but are afforded greater protection through registration at the state level or, for the greatest degree of protection, at the federal level with the U.S. Patent and Trademark Office. Federal registration provides access to the federal courts for infringement disputes, with the possibility of recovering attorney fees, statutory penalties, and increased damages.
It may be necessary to advise the startup on the unlikelihood of the ability to register a mark that has already been selected. Under U.S. trademark rules, registration is not allowed for marks that are (among other things):
- likely to cause confusion, mistake, or deception in relation to an existing registered mark
- “merely descriptive” of the goods
- “deceptively misdescriptive” of the goods
- “primarily geographically descriptive” of the goods (with some exceptions)
- “geographically deceptively misdescriptive” of the goods
- “primarily merely a surname”
- “comprises any matter that, as a whole, is functional”
- “immoral, deceptive, or scandalous matter”
- “disparage or falsely suggest a connection with persons living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute.”
A word or a logo can be considered a trademark or a service mark only if it is distinctive. A distinctive mark is one that is capable of distinguishing the goods or services upon which it is used from the goods or services of others. A nondistinctive device is one that merely describes or names a characteristic or quality of the goods or services. The distinctiveness of a mark can generally be categorized into one of five categories that fall along the following spectrum of distinctiveness:
FANCIFUL – ARBITRARY – SUGGESTIVE – DESCRIPTIVE – GENERIC
The “strength” of a mark is determined in part by where it falls on this spectrum. Marks that are fanciful, arbitrary, or suggestive can function as trademarks. Generic marks cannot. Fanciful marks are considered stronger than suggestive marks and are therefore granted greater protection by the courts. Marks that are descriptive can be registered as trademarks or service marks only if they have obtained “acquired distinctiveness” or “secondary meaning,” the application for which requires a substantially higher degree of evidence than for a fanciful or suggestive mark. Many new businesses will not appreciate that descriptive marks, which may be immediately indicative of the services or goods offered, are much harder to register than those that are fanciful or unique. The more the proposed mark leans toward the fanciful or arbitrary end of the spectrum, such as marks that consist of unique, made-up terms or phrases rather than ordinary words that clearly explain the product or service sold, the more likely the mark is registrable.
The startup should carefully consider the budget for its trademark protection and corporate identity strategies. It may need to abandon marks that are clearly likely to be found descriptive because the cost to obtain registration will escalate. The attorney should caution the startup that initial trademark budgets do not contemplate oppositions or cancellation petitions, which can dramatically increase trademark prosecution fees. Consider the following scenarios, which could raise trademark concerns right from the beginning:
- A new line of products/services: Is the name available? Is it too similar to a competitor’s product name?
- Expansion of the startup into new markets: Does the foreign equivalent of the startup’s mark cause problems in that country? Is the mark unavailable for use in that foreign jurisdiction?
- Working with distributors or licensees: How should the startup allow strategic partners to use its marks? What controls are needed to govern third-party use?
- Cyber squatting: Is someone else using the startup’s trademark in a domain? Do they have legitimate reasons for use or can the startup stop their domain use? This might be done either through domain dispute arbitration or an action under the Anti-Cybersquatting Protection Act, a federal statute designed to provide a remedy against domain registration without legitimate business purposes.
Trade Secret: Advising on the Appropriate Protection and Implementing Protection Strategies
Trade-secret protection can be a crucial mode of protection for some of a startup’s important assets where not otherwise protected by copyright or patent law. For many startups, trade-secret protection can be a significant alternative for patent protection for nontechnical information that is not otherwise patentable, or for information that maintains value so long as the competition cannot access it. If certain material is recognized as a trade secret, the startup will have a legal remedy in the event it is misappropriated and used without the startup’s consent.
In order to take advantage of the available remedies, a startup must ensure its assets are recognized as trade secrets. Most states have adopted the Uniform Trade Secrets Act, under which a trade secret is any information that is secret; has commercial value derived from the fact that it is secret; and is the subject of reasonable efforts to be kept secret. In other words, a startup can only keep the information protected, or obtain relief for misappropriation, if the information maintained value because it was kept secret, and if reasonable steps were taken to keep it secret.
Trade-secret information commonly includes customer lists, marketing information, technical information such as formulas, recipes, and algorithms, and unreleased software, but the startup’s contracts may be insufficient to protect all these items as trade secrets. License, distribution, and reseller agreements should include confidentiality, nonuse, and nondisclosure provisions to preserve trade-secret status. Employee agreements should include confidentiality and nondisclosure provisions to ensure that trade secrets are protected against employee disclosure, deliberate or otherwise.
When reviewing whether a company took appropriate steps to protect its trade secrets, courts will consider safeguards and restrictions on access to prevent disclosure. These “external controls” may include sign-in procedures for visitors; nondisclosure agreements with suppliers, customers, vendors, and business partners/joint venturers; and company policies precluding posting customer lists or detailed product descriptions online. In addition, the measures the company took internally to protect trade secrets are also important. These may include nondisclosure and confidentiality provisions in employment agreements; employee training and onboarding; reiterating trade-secret policies and procedures; employee termination procedures; marking confidential documents with a legend such as “Trade Secret—Document Contains Confidential and Proprietary Information—Strictly Limit Circulation”; imposing strict limits on internal distribution; using password controls for server access; requirements for pass cards, badges, keys, and locked cabinets; and policies for monitoring telecommuting arrangements and use of mobile devices.
Using nondisclosure agreements can be significant. In MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th Cir. 1993), the court found that an employer took reasonable steps to maintain the secrecy of its customer information when it required its employees to sign confidentiality agreements respecting the confidentiality of the customer database and promising to maintain that confidentiality. However, labeling information as a “trade secret” or “confidential” is not enough. In Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (1997), the court explained that labeling information “trade secret” or “confidential information” does not conclusively establish that the information satisfies the definition of a trade secret, although it is an important factor in establishing the value placed on the information and that the information could not be readily derived from publicly available sources.
Patent: Evaluating the Costs, Risks, and Rewards of Pursuing Protection
Although trade secrets must remain secret in order to preserve their protected status, patented inventions can be disclosed to the public; however, premature disclosure of new innovations can create an absolute bar to seeking patent protection.
Patent protection in the United States has undergone enormous shifts in the wake of the America Invents Act, which was passed in 2011 and changed the way patent applications are processed, reviewed, and issued if filed after March 16, 2013. The major changes include the transition from a first-to-invent patent system, meaning that inventions shown to have occurred earlier would be given priority, to a first-to-file patent system, which brings the U.S. patent system into conformity with the majority system around the world. There were also material changes made to the way assignees of patent rights may file for and obtain patents, and there were several material changes made to the patent examination process and to the way third-party proceedings are handled in the United States.
The basic requirements for issuance of patents remain the same: a patentable invention must be useful and novel and must be “nonobvious” to someone of ordinary skill in the art. In contrast to trade secrets, patents give their holders a “negative” right—a right to preclude others from making, using, selling, offering for sale, and importing the claimed invention. The United States recognizes three basic types of patents: utility, design, and plant. Many startups seek utility patents, which are allowed a term of 20 years from filing.
One of the first jobs of the startup’s lawyer is to ensure that steps have been taken to prevent unintentional disclosure of the startup’s inventions so the startup can determine whether to seek patent protection. Consider existing, pending, and potential future patent rights. Look for documents that may evidence preapplication disclosures, and help the startup determine whether significant innovations and new technologies could be the subject of patent protection. Consider whether a patent specialist must be retained to undertake a thorough review and analysis of patentability, although there can be some important strategic reasons why the startup might choose not to undertake a complete “prior art” search (which can identify existing technology that could serve as a basis upon which a patent might not issue or might be contested).
Once the startup has determined that certain technology may be patentable, a budget must be worked out for the patent application, with a reserve for patent office review. The startup must understand that the budget for pursuing patent applications can consume substantially more than the entire amount that may have been reserved for copyright, trademark, and trade-secret protection put together.
In summary, the lawyer working with a startup must understand the basic structure of the four major categories of intellectual property protection. The lawyer must guide the startup through sometimes conflicting considerations when determining which of the four IP protection regimes is the best for the particular combination of proprietary content, branding and marketing material and design, confidential processes and secret materials, and/or proprietary inventions that are at the center of the startup’s business. In addition, the lawyer must help the startup implement an appropriate budget to get it through the initial phases of securing protection, emphasizing the particular form of IP protection best suited to the startup, until more money can be raised to help secure and protect its core IP and its new IP assets as the startup grows.