What Every Startup Needs To Know: IP Pitfalls- Poorly Written Or No Agreements- Part Nine

By Debby Winters

Using poorly written agreements or no agreements at all can be a disaster for the startup. Not only is the valuation of a startup based on the IP that it owns, but also on the agreements with IP clauses. Examples are not just limited to things you typically think of as IP agreements but can include employment, consulting, funding, collaboration, settlement, licensing, research, and material transfer agreements. Thus, poorly drafted or non-existent IP-related agreements can be problematic for a startup.

Because of a lack of sufficient funding, many startups attempt to save legal expenses by using template IP-related agreements from a variety of non-professional sources, including the internet. However, such agreements can fail to include clauses that adequately protect the startup’s interest and in many cases, can include clauses that jeopardize a startup’s IP. Thus, when using IP-related agreement templates, the startups should have such agreements at the very least vetted by IP professionals. Startups can also do themselves a disservice by using an attorney who is not familiar with the nuances of IP law.

Many IP-related agreements, particularly research agreements, generally include confidentiality, publication, and IP clauses. The startup should review confidentiality and publication clauses to ensure that confidential information, including trade secret information, is protected from disclosure and that the startup has the right to review manuscripts and other materials containing confidential information before publication. With respect to the IP clauses, the startup should make sure the language allows for retaining its own IP and for protecting jointly developed IP.

Furthermore, with respect to patent license agreements involving a third-party licensor, startups need to make sure that the license agreement provides all the rights needed to commercialize the licensed technology, includes future improvements to the technology, and retains the right to sublicense the technology. The agreement should also have a sufficient termination clause in the event the startup needs to opt-out of the agreement.  The agreement should also specify the relevant field of use and possibly other fields for future expansion. Importantly, the startup should review patents to ensure that the commercialized product materials, methods, and tools are properly claimed with patent life remaining. This should be drafted and reviewed by an experienced IP attorney.

In conclusion to the series of blog posts dealing with common IP pitfalls for a startup, the process of bringing a new startup business to life and in launching new products to the marketplace can be an exciting time. However, many startups are so focused on bringing a new product or service to market that they fail to take the necessary steps to protect the associated IP. Failure to put an IP plan in place can cripple valuation and expose the startup to potential third-party infringement risk. In contrast, startups can protect and exploit their IP assets to build value and revenue by developing an IP plan as part of their conception, creating an action plan to protect IP assets including protection of confidential information, securing ownership rights to the IP, conducting freedom-to-operate searches, and ensuring properly drafted IP-related agreements are in place.

If you need help with your IP or with protecting it, let me know.

Failure To Establish Clear IP Ownership-What Every Startup Needs To Know Part 7

By Debby Winters

In the last post we examined how independent contractors could try to claim IP rights. In this post we will look at IP rights as it relates to employees of the startup.

The startup eventually will have employees and it is wise to have these employees enter into work-for-hire-type agreements that explicitly confer rights in the works to the startup. That can be accomplished through an employment agreement or through separate agreements.

Additionally, startups should have employees sign confidentiality and invention assignment agreements with clauses that clearly state the obligation of the employee is to assign all developed IP to the startup. Failure to include such assignment clauses can create ownership problems for the startup, especially if the employee leaves the company to work for a competitor or cannot be subsequently located

The agreements should also state that the startup’s confidential information is only for use for the benefit of the startup; require disclosure of ideas, inventions and discoveries related to the agreement or employment; and include a statement of ownership rights over ideas, inventions and discoveries. Recordable assignment of IP rights should be required to show clear ownership of inventions and other IP developed by its contractors and employees.

It is often advisable to get help from an experienced IP attorney in the drafting of such agreements.

We have talked about establishing clear lines of ownership for the startup IP, next we will look at the failure to identify third-party rights.

IP Provisions in Consulting Contracts- Part 3

By Debby Winters

Consulting contracts can be for work performed by an outside service provider or consultant, like market research, product design, product development, software implementation, employee benefit plan administration, and the list can go on. The consultant can begin to negotiate the consulting contract once the project proposal is accepted. Many times these contracts, as prepared by in-house counsel, are one-sided with intellectual property provisions that can be a disaster for the consultant with regards to future work. Believe me, I’ve been that in-house counsel drafting these contracts. The goal of in-house counsel is to protect your company but looking at these contracts from the consultant’s viewpoint, the contract can limit their ability to bid for and perform future work. In my last two blogs on this subject,  we looked at ownership of the work product and confidentiality provisions. This time, let’s look at the non-compete or exclusivity provisions in consulting contracts and suggests some possible approaches for workarounds.

NonCompetition/Exclusivity

Another less direct method by which customers attempt to secure rights in intellectual property developed by consultants is through a provision on exclusivity.  If your consultant client’s new customer is Fortune 500-sized or one of the leading companies in its industry, you will often see a provision in the services contract that prohibits your client from performing similar consulting work for the customer’s competitors in the industry. Sometimes specific competitors are named, but more common are the prohibitions against working in the customer’s industry are just broadly defined.  This situation is usually both ironic (the consultant was often successful in the RFP process because it has other current and prior clients in the new customer’s industry) and problematic (the consultant was hoping to leverage the new project into winning work from other companies in the industry).

Putting aside the possible antitrust implications of these provisions, the obvious ideal result is to convince the customer to drop its exclusivity demands.  If that is not possible, given the competitive importance of the project to the customer or the consultant’s desire not to fight the issue and risk losing the work, some possible fallback strategies are to limit the exclusivity to (1) a relatively short time period (e.g., six months after project completion) and/or (2) a very specifically defined set of services and/or (3) a very specifically defined market niche.

Next time we will look at non solicitation clauses and how the contractor can limit having these in the contract.

IP Provisions in Consulting Contracts- Part 2

By Debby Winters

Consulting contracts can be for work performed by an outside service provider or consultant, like market research, product design, product development, software implementation, employee benefit plan administration, and the list can go on. The consultant can begin to negotiate the consulting contract once the project proposal is accepted. Many times these contracts, as prepared by in-house counsel, are one-sided with intellectual property provisions that can be a disaster for the consultant with regards to future work. Believe me, I’ve been that in-house counsel drafting these contracts. The goal of in-house counsel is to protect your company but looking at these contracts from the consultants viewpoint, the contract can limit their ability to bid for and perform future work. In my last blog we looked at ownership of the work product. This time, let’s look at the confidentiality provisions in consulting contracts and suggests some possible approaches for workarounds.

Confidentiality

Standard confidentiality clauses in consulting contracts can act as a way to prevent the consultant from using the intellectual property embodied in the project’s work product. Beware of standard confidentiality clauses providing that all project work product are “confidential information” that cannot be disclosed to third parties. These could prevent the consultant from re-using and adapting elements of the project for future clients.

The safest strategy is to strictly limit the “confidential information” concept to (1) proprietary documents and materials provided by the customer to the consultant (subject to the usual exceptions for public domain information and materials independently developed by the consultant) and (2) those specific elements of the project work product that the parties have agreed (in the IP ownership provisions) are to be owned and used exclusively by the customer.

Next time we’ll look at non-compete provisions in consulting agreements.

UBER- Independent Contractor or Employees?

By Debby Winters

Uber has been a hot topic lately. Usually they are in the news for making cab companies mad but the recent California Labor Commission ruling that an Uber driver is an employee, not an independent contractor, has put the company’s entire business model into turmoil.  Uber Technologies Inc. v. Berwick. The case was filed in the Superior Court of California, as an appeal from the Commission decision.  The ruling awarded the plaintiff payment for business expenses, e.g. tolls, mileage.  These are things that employees, not independent contractors, can be reimbursed for in many companies. This ruling may eventually mean that Uber may have to give these “employees” health insurance and other benefits afforded to employees. This could radically disrupt the manner in which Uber does business. Something for other companies that operate as Uber does to consider is that, based on this ruling other companies could have their independent contractors ruled as an employee.  Let’s consider a few recommendations that could help you to distinguish independent contractors with your company from company employees.

Businesses that engage someone as an independent contractor should, first and foremost, have an independent contractor agreement with that individual or that individual’s business. This agreement should specify the contracted services and what the contracted rate is for those services. If you can, the duration of the agreement should be specified. It could be something as simple as stating that once a project is over the arrangement ends. Most employees, if they have a written agreement with the company do not have an end date since the arrangement isn’t viewed with an ending date but rather to continue as long as the employee is doing the job hired to do. In addition, if applicable, the agreement should specify that the company is not providing insurance to cover the services. The agreement should also specify that no taxes will be withheld and no additional benefits will be provided. The independent contractor agreement should specify how payment will be made and that the business will issue the independent contractor a Form 1099 at the end of the year.

Once you have the agreement in place, consider who will decide how the work will be performed. To be an independent contractor, the company should not dictate how, or potentially eve when, the services are performed. Courts have frequently denied a business’ claims that an individual was an independent contractor when there is evidence that the business is controlling the means and methods for how the individual performs the work. Indeed, permitting contractors to determine when they perform the services, how they perform the services, and who they may hire to assist them in performing the services, is another important factor in achieving a determination that the individual is an independent contractor. Independent contractors should also use their own tools or materials and perform the services at their own location or office, if possible. The company should never mandate exactly when an individual must show up for the job or when to leave. The company should not require the independent contractor to follow all of its employment rules or guidelines. If there are safety guidelines that are required by law to follow, then that doesn’t fall under company guidelines, but if the company has rules that are not mandated by law, these may be considered company rules or guidelines. The company should never dole out, to an independent contract, discipline of a type that would be similar to what would be given to an employee who failed to comply with those rules or guidelines.

If the company has employees that perform tasks, then an independent contractor should not be engaged to do similar work.  The agreement should identify that the contractors are responsible for their own expenses, including but not limited to mileage, tolls, phone and Internet, particularly if the business reimburses those expenses to its employees. If litigation occurs, businesses should obtain the tax returns for these individuals to determine whether or not they deducted these business expenses on their tax returns.

Companies should pay for the work performed and avoid paying their engaged contractors a static, weekly payment, for the performance of their services. The more that it looks like a salary and that the individual is receiving all of his or her pay from one source, the more it looks like the individual is an employee. Companies should strive to pay just for the job performed, which would ideally be accompanied by an invoice submitted by the contractor for the services performed. Similarly, companies should not disallow work for other companies but should support the individual’s pursuit of other contracts with other businesses, as that further supports the fact that the individual is truly independent.

Above all other considerations, consistency in demonstrating that engaged independent contractors are treated differently from hired employees and that they are, in fact, independent in the manner and method in which they perform services will go a long way to defeating potential allegations of misclassification of workers.

If the Uber ruling stands, many companies will need to reassess their classifications and determine how to best protect their interest. Only time will tell if the ruling will stand.

Five Nuggets of Wisdom For Business Owners

By Debby Winters

Every day I meet with clients with problems both large and small. They come to me seeking advice, counsel, and hopefully nuggets of wisdom that I have gained over the years working with start-up businesses. I would hope that my clients are being proactive by wanting contracts drawn up prior to work being done, advice prior to entering into a situation, and insight into the right ways to do business. However, that is usually not the case. Usually they are coming to me because they are confronted with a situation that has gone bad.

Here are five nuggets of wisdom that I wish business owners knew to ensure spending less time worrying about legal issues allowing them to focus on running their business.

  1. A Bad Contract May Be Worse than No Contract

I’ve repeatedly had clients come in with contracts that are inappropriate for the situation. For example, the contract may be for a license to a website rather than ownership of it Other contracts may contain insurance clauses with limits that are too expensive to find, if not impossible. Inappropriate contracts may end up costing more in court costs because you are litigating issues that you don’t have to or because terms that really should be in them are missing.

When you are signing a contract, you need to make sure that the contract is appropriate for the situation. If you don’t understand that terms and conditions of the contract, you need to make sure you are educated on them before you sign it.

Often times template contracts have been used rather than consulting an attorney. I wish clients would realize that spending the money now to get good advice will be cheaper in the long run.

  1. Read Contracts and Documents Before You Sign Them

I am always surprised at how many people sign contracts without reading them, much less understanding them. You need to read every contract that you sign for your business. Whether it is to lease a copier for a year, to have a website developed, or simply to prepare your tax return, you want to read and understand it. You also want to make note of any term that you may need to remember.

Does that copier lease have a deadline you must terminate by so that it doesn’t automatically renew for another year? If so, you want to make a calendar reminder to ensure that if you want to cancel, you still can. Does the services agreement for that website have payment terms in it that must be complied with in order for the service to avoid being put on hold?

Regarding understanding contracts, if you don’t understand the contract, don’t sign it until you do. You may be getting into a triple net lease that costs two times more than you expected each month, simply because you don’t understand how a triple net lease works. Ignorance is no excuse after you have entered into a contract for not complying with its terms.

  1. If It Sounds Too Good To Be True, It Probably Is

If you have someone ask to invest in your business and the terms are absolutely fabulous, unless it is your mother, it is probably too good to be true. Getting a website remade for $5,000.00 when the next closest bids were in the $10,000.00-$15,000.00 range? I would consider betting money that your $5,000.00 website isn’t going to be what you expected, especially if you thought it would be the same as the other bids. In rare cases, you may be able to get a deal.

Nevertheless, most deals usually come with fine print. A student may charge you a lower rate to design your logo because he needs something for a portfolio. However, it may take much longer than if you hired a professional or may not get done at all. You should always carefully evaluate what you are paying and what you are realistically going to get.

  1. Know Your Finances

After a few years in business, you may not manage the finances for your company on a daily basis like you did when you first started. However, you need to make sure you keep up to date on what they are, at least monthly. Unfortunately, embezzlement does happen. If you don’t know what is coming in and going out of your company, you can’t know if someone is doing something nefarious with your money.

Although hopefully your tax professionals are competent; things do get overlooked and small changes can make a big impact on your bottom line. If you hire an employee in a new state, you may be required to start collecting sales tax from online sales to people in that state. If your CPA wasn’t told that you hired this new person, you may face penalties and fines by the new state for non-collection. Raising prices by several cents on your top products may generate thousands more a year. Knowing your finances makes you a more successful business owner.

  1. Advice Is Only As Good As What You Pay for It

Lastly, your advice (and contracts) is typically only as good as what you pay for. I have had countless times when potential clients come in with contracts that they have downloaded online, both for free and for nominal fees from paid sites, or that they have pieced together from contracts that they had from former employees or competing businesses. In some cases, they are lucky that there are only a few terms that aren’t in their favor. In most cases, the results can cost tens of thousands of dollars.

“Borrow” your terms of use from another website? Did you check the jurisdiction and venue clause in it before you posted it? If not, you may end up sued in the home state of the website that you took the terms of use from. Nothing is as disheartening as learning that you are being sued in a high priced city like New York City when you are from Wyoming; all because the terms of use on your website states that is where you agree to be sued. Alternatively, it could be somewhere closer to home and you and your business partner want to split ways due to the fight. If so, you could find out that the operating agreement you downloaded failed to address what happens when there is a dispute between owners.

When using former employers’ contracts or your competitor’s contract, you may have issues beyond having a bad contract. Unless the company had the contract professionally written, you may be using a contract that isn’t going to protect you. Worse, if you have a confidentiality agreement or other type of intellectual property agreement with your former employer, by using its contract as your own, even with modifications, you may be in violation of your agreement with the company.

Overall, I tell my clients that getting professional advice, whether from an attorney for legal issues, a CPA for accounting issues, or even a marketing person for branding guidance, to begin with, may appear costly. However, it can save you hundreds, if not thousands, of dollars in the long run.