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.

What Every Startup Needs To Know: IP Pitfalls- Failure to Identify Third-Party Rights- Part Eight

By Debby Winters

Next in this series, we will discuss the failure of the startup to recognize thrid-party rights. When we think about third-party rights in the IP, we are thinking about competitors who may have a patent for a technology within a product. Every startup should be cognizant that its company commercialization may be blocked by this type of third-party right. Accordingly, startups, at an early stage, should consider a “freedom to operate” (FTO) search or clearance to assess litigation risks. A FTO is performed to make sure that commercial products, marketing and use of the product, process or service do not infringe the IP rights of third-parties.

An FTO analysis begins by searching issued patents or pending applications and obtaining a legal opinion from a licensed patent attorney knowledgeable in that field as to whether the product, process, or service may be considered to infringe one or more patents owned by others. Patents that limit the startup’s FTO can be addressed by buying or licensing the underlying technology or patent, by cross-licensing the technology or patent, or by creatively “inventing around” the patented invention by altering the startup product or process, thus avoiding infringement.

An example of how to “invent around” would be in software development, where a startup chooses to incorporate open source software into its code. However, open source licenses also need to be carefully reviewed to ensure compliance with license terms. In some instances, the use of open source code in a startup product may transform the startup’s proprietary code into open source software resulting in public disclosure of the proprietary code. It is always best to consult a licensed patent attorney.

A startup will sometimes use third-party photographs, images, or text in marketing or product support materials. In such cases, the startup should investigate if permission is required to use the material, identify the rights needed, and contact the owner for permission or a license. Startups should make sure the copyright permission or license agreement is in writing.

Comprehensive trademark searches should be conducted early in the business planning process to make sure that the desired business, product, or service name does not conflict with a registered trademark. A startup that fails to conduct a proper trademark search risks receiving a cease and desist letter or even being sued.  This may necessity a need to rebrand after launch and incur the tangible and intangible costs associated with rebranding.

Businesses need broad awareness when hiring new employees, especially those that may have knowledge of competitor’s trade secrets. This is another way to infringe on a third-party’s IP rights.  New employee agreements should include clauses that prohibit employees from transferring or using proprietary information or materials from previous employers. The startup should also verify that the new hire is not subject to any binding non-compete agreements from former employers.

In dealing with third-party rights, startups are well-advised to consider their options at an early stage. In some cases, minor product or service changes, payment of a small licensing fee to the patent or copyright owner, and/or changing potentially problematic trademarks early on and implementing careful employee hiring practices may be sufficient to avoid future disputes and can improve a startup’s chances of attracting business partners and investors to support its business development plans.

In our next blog we will discuss the pitfalls of using poorly drafted agreements to cover IP, and the danger of not using a written agreement at all.

Failure To Establish Clear IP Ownership-What Every Startup Needs To Know Part 6

By Debby Winters

In the last blog post we looked at how founders and stakeholders can claim IP. In this post we will examine how independent contractors could try to claim IP rights.

Startups often misconceive that hiring a contractor to create work for a business automatically gives the startup ownership rights of the work.  This is not always true and to ensure that the startup does owns all IP created in all startup-funded work, the startup should have independent contractors enter into an independent contractor agreement that states this is the case. Most often the agreement will contain an assignment clause stating that the independent contractor agrees to assign all inventions and IP to the company.

Additionally, startups frequently use independent contractors to create websites, software, marketing materials and prototypes for instance. Failure to implement written independent contractor or consulting agreements with suitable IP clauses that clearly establish the startup’s ownership rights to the IP prior to commissioning the contracted work can be devastating. This is particularly important if the startup plans to sublicense the work to others, make multiple copies of the work for sale, or hire others to modify the work.

Often the startup will agree to allow use for the consultant’s portfolio or work or other limited engagements. These are items open for negotiation between the startup and the contractor.

All agreements should be in writing and signed by both parties. It should be clearly stated 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; 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 or consultants.

While the approach taken with employees of the startup are similar to these, there are some differences so we will discuss those in the next post.

Failure To Establish Clear IP Ownership-What Every Startup Needs To Know Part 5

By Debby Winters

In the last blog post we looked at how the current employer of the founders might try to lay claim to the IP rights of the startup. In this post, we will look at the founders or stakeholders of the startup.

In many instances, multiple stakeholders contribute IP to the startup. As a general rule, IP rights belong to the individual who conceived of an invention or created the work first, absent any agreement to the contrary. Well-crafted written agreements between stakeholders and the startup can ensure all rights are assigned to the startup. For IP created before pre-incorporation, IP transfer via a written agreement, in exchange of company shares or for money, is recommended. If co-founders are involved in the formation of the startup, a founder agreement may be important in ensuring that the startup owns the IP. Such an agreement can prevent issues with respect to a departing co-founder later claiming IP ownership.

In our next blog post we will look at how independent contractors could try to claim IP rights.

 

Failure To Establish Clear IP Ownership-What Every Startup Needs To Know Part 4

By Debby Winters

Failure to establish IP ownership rights can be a deal breaker in many business transactions. Due diligence analysis generally seeks to verify not only the startup’s ownership rights to each piece of IP but also to determine if there are any restrictions on its use. Typically IP ownership issues can be averted if addressed early, sometimes even before the incorporation of the startup.

Here are a few of the places where ownership should be established:

  1. Current Employment for the Founders
  2. Employees of the Startup
  3. Independent Contractors
  4. Startup Founders

In this blog, we will discuss the first topic and take up the other topics in subsequent blog posts.

Founders of many startups continue to work for their current employer while they establish the new company. The employer may have required that the Founder/employee sign a confidentiality or invention assignment agreement in which the employee agreed to assign all new ideas and inventions related to the employer’s business to the employer. This is particularly problematic if the startup product or service is closely related to the employer’s business as the employer may try to claim rights to the startup’s IP.

Thus, it is important that founders carefully review their current employment agreements and fully understand employment obligations, including IP assignment clauses and non-compete language. Employees should also consider discussing personal projects/inventions with their employer upfront to avoid ownership issues later down the road. Generally, employer resources or company time should not be used to develop projects for the startup company without the pre-approval of an employer and without the employer’s agreement not to claim ownership rights.

In the next blog, we will look at establishing ownership of IP with employees of the startup.

Not Establishing Confidentiality Protections- Startups

By Debby Winters

Before publicly disclosing its intellectual property (IP), a startup should balance the risks with the rewards of allowing the confidential and sensitive IP information to get out into the public domain.  Startups often misstep and disclose patentable subject matter at investor meetings, pitch events, or on company websites prior to filing a patent application. Unfortunately, public disclosure of an invention prior to filing a patent application can limit or even destroy patent rights. Such public disclosure can also destroy a company’s trade secrets.

Third-party conversations with those not under legal obligation to maintain confidentiality, such as a public pitch or presentation, a trade show, or publication are common examples of what can be considered a public disclosure to the patent office. If such disclosure is necessary, the startup should file a provisional patent application prior to the disclosure or at the very least have the third parties sign a written Non-Disclosure Agreement (NDA).

One caveat to that rule is that venture capitalists generally avoid signing NDAs because they deal with many startups and believe confidentiality obligations limit their contact and investment opportunities.  Furthermore, while speaking at trade shows or making a pitch, securing an NDA may not be feasible. In such instances, to avoid disclosing confidential information, the revealed information should be limited to generalities.

In the next part of this series we will look at the IP plan.

What Every Startup Needs To Know: IP Pitfalls- Part One

By Debby Winters

On their path to success startup companies often face significant risk and liability with respect to Intellectual Property (IP). The failure to adequately address IP issues can potentially lead to the permanent loss of these rights and could possibly create a litigation risk. Insufficient or nonexistent IP protection can also hamper business transactions, including seed funding and status as a desirable acquisition target.

In a series of blogs, we will look at some of the common IP pitfalls startups face and possible steps that startups can take to avoid those pitfalls and protect their valuable IP assets while at the same time reducing the risk of litigation.

Let’s start out by defining what an IP asset is.

The term “intellectual property” can be thought of as creations of the mind that are given legal rights commonly associated with real or personal property. These rights can and do have real economic value. These property rights are generally a result of either federal and/or state laws and include the commonly understood rights belonging to patents, trademarks, copyrights and trade secrets.

All businesses have some form of IP that provides a competitive advantage and helps generate profits. Many companies mistakenly believe that patent protection is the only form of IP protection and ignore the value of non-patent IP. However, startups should identify both patent and non-patent related IP assets when evaluating their IP portfolio.

Startups, no matter whether small or large, should develop an IP plan. This IP plan should identify both existing and future IP assets. In the next of this series, we will talk more about the IP plan; what it should include and how to put it together. Stay tuned!