Whether protected through copyright, trade secret, trademark, or patents, software technology companies depend on IP more so than perhaps any other business type in history.
It is surprising, then, just how little founders think about protecting their own IP. Sure, “product-market fit” is an all-engrossing search for truth that tolerates no distraction, but that is at best an explanation, not an excuse.
The real pros will find product-market fit while documenting and protecting IP along the way — it’s the only way to ensure you own your work, after all.
This article provides an overview to help you think about where your IP sits, how to protect it, and how to avoid certain pitfalls that plague far too many startups.
This is the second article in the Extra Crunch exclusive “Startup Law A to Z” series, following my article on corporate matters last week. I will avoid full repetition here, but briefly, the purpose of this series, alongside other Extra Crunch resources, is to provide you enough information to analyze your business circumstances and evaluate your legal risk exposure to common legal issues facing startups, such as corporate matters, IP, business transactions, compliance/regulatory, and HR. If you see legal risks in these or related areas, you can consult the Verified Expert list of best startup lawyers and reach out for help — it’s that simple.
The Legal IP checklist:
Assigning IP
- Founder pre-existing IP
- Employee Confidential Information & Intellectual Property Assignment agreements
- Independent Contractor/Consulting Services agreements
Protecting IP ownership
- Licensed IP and modifications/improvements
- Current or previous employers (see Cal. Labor Code §§ 2780-2782)
Strategic IP Portfolio
Patents
- One-year statutory bar
- Provisional patent application
- International protection
- Software patents under Alice v. CLS Bank
- Offense and defense against patent trolls
Trade Secrets
- Preserve confidentiality
- Limit and control access
Trademarks
- Check USPTO trademark database
- Secure federal trademark registration for enforcement
- Not merely descriptive
Copyright
- Original work of authorship
- Secure federal copyright registration for enforcement
- Understand ‘Fair Use’
Read on for our detailed breakdown of each of these items.
IP, legally speaking
From a high level, IP rights provide their owners the ability to legally prevent others from using certain technology or other protected assets. IP is essentially a property right that can be sold and assigned to others in the same way that vehicles, houses or any other form of tangible property can be bought and sold. Startups should think about IP along the lines of a portfolio specifically created to protect their particular business goals and strategy, in light of competitive market forces.
Keeping all that in mind, startups should develop plans to systematically and periodically review company IP, then take appropriate steps to protect it. This may include everything from implementing relatively simple information access and security protocols for trade secret protection, filing for copyright and trademark protection, or retaining experienced, dedicated patent counsel to file and prosecute patents for technologies developed by the company.
Assigning IP to your startup
For a startup to create value and attract investment, it must own the IP created by its personnel. Since ownership of IP initially attaches to the person or persons who created it, those creating IP must actually “assign” — the magic phrase in the contract is “hereby assign” — or transfer ownership of it to the company, not merely “agree to assign” it, as some poorly drafted contracts state.
Additionally, anyone who has contributed to the development of IP, even if the contribution is relatively small, is considered a “joint owner” of that IP, absent some written agreement to contrary. Therefore, it is essential that anyone who touches IP of the company — founders, employees, and independent contractors alike — actually assign their contributions to the company.
Founders and employees both will assign to the company their rights in all IP created in the course of their employment through a well-drafted “Confidential Information and Intellectual Property Assignment Agreement” (or “CIIAA” for brevity sake). This should be done as part of any employee onboarding procedure without exception. The CIIAA should include confidentiality provisions and perhaps non-solicit and/or non-compete provisions in those states which allow them (non-competes are generally unenforceable as against public policy in California, for example). More on CIIAA’s from Cooley Go.
Additionally, for founders specifically, because the CIIAA may only cover IP created in the course of employment, upon initial formation of the company, founders should also assign any pre-existing IP to the company, as well. This can often be done through each founder’s Restricted Stock Purchase Agreement, signed in connection with the founders’ initial receipt of company stock, or through separate written agreements.
For independent contractors and consultants performing services for your startup, almost without exception, whatever work product they create should be deemed a “work made for hire” and all rights therein should be assigned to the company via a well-drafted “Independent Contractor Services Agreement,” which may also include non-solicit and/or non-compete provisions (if enforceable in your state). The good news here is that high-quality templates for both the “Confidential Information and Intellectual Property Assignment Agreement” (CA specific) and the “Independent Contractor / Consulting Services Agreement” can be readily found online, from sources like Cooley Go and others. You should have a lawyer revise these documents to account for the laws of your particular state, but at least the bulk of drafting has already been done.
For a startup whose business is initially based on IP licensed from a third party (e.g. a university), it is important to make sure that the license allows the company to own any improvements or modifications arising out of the licensed IP, and that ownership does not flow back to the university. Otherwise, the startup will not own the IP it develops and the company’s investment will be all for not.
Related IP issues may arise when founders launch a company that is potentially competitive with a previous (or current) employer, when employees switch jobs within an industry, or when founders have spent time working on personal projects using property belonging to, or with time compensated by, their employer. In these situations, there is a risk that certain IP of the previous (or current) employer may improperly be used in the new venture, or that the previous employer will have a claim to IP created on its dime. See for example, relevant language in California Labor Code 2870.
Issues with employer-owned IP constitute a bright line with no simple solution once transgressed. Of course, the above-mentioned “Confidential Information and Intellectual Property Assignment Agreement” or “Independent Contractor Services Agreement” should include promises that no proprietary information of any third-party has or will be used, but this is a band-aid solution that won’t heal underlying wounds. The only way to truly protect yourself in this context is to make sure you aren’t vulnerable to begin with; that is, do not to use company property for personal projects and never download, email to yourself, or otherwise save IP that does not belong to you for later use.
Forms of IP
In the US at least, the law has succeeded in neatly compartmentalizing virtually everything we might consider protectable IP into four relatively discrete categories:
Patents: Awarded by the United States Patent and Trademark Office (USPTO) after a lengthy application and review process, patents provide the inventor, or the person to whom a patent has been transferred or assigned, the right to exclude others from exploiting the patented invention for a period of 20 years in the case of utility patents, and 14-15 years in the case of design patents. For a patent to issue, the invention must generally meet four requirements: (1) the subject matter must be patentable (not merely an abstract idea, but a process, method, machine, manufactured article, composition, or asexually reproducing variety of a plant); (2) must be novel; (3) must have some utility or usefulness (for utility patents); and (4) must not be obvious to a person of ordinary skill in the art.
Note also that provisional patent applications may in certain cases provide real benefits to cost-conscious startups looking to get to market quickly. This is particularly true given the statutory bar of 35 U.S.C. § 102(b), which provides that patents for an invention will be forever barred if, one year before the patent application is filed, the invention was already available in the US for public use or sale, or patented or described in a printed publication available anywhere in the world.
If international patent protection is desired, certain counties may not even afford you the benefit of this one year “grace period” from the time your patentable invention is introduced to the market or otherwise disclosed (i.e., there is an absolute novelty requirement in some countries). Thus, first filing a provisional patent application before market introduction is even more critical in these cases, as at least these countries will generally recognize the filing date of a US provisional patent application under certain international treaties.
Even with a filed patent application (provisional or regular utility), this does not necessarily mean your innovation can be freely discussed along with plans for the next generation of products or improvements. Discussion of any subject matter not within the filed patent application will be deemed a public disclosure; and although the US will provide the one year “grace period,” internationally, the right to pursue patent protection will be foreclosed. So, if necessary to discuss your innovation externally, it is best to limit any discussion to the scope of the subject matter in the filed patent application.
With respect to US patent law and software products specifically, since the United States Supreme Court essentially ruled in Alice v. CLS Bank (2014) that an abstract idea cannot be patented simply because it is implemented through a computer, software patents have been relatively more difficult to come by. That said, recent guidance issued by the USPTO (effective January 7, 2019) will likely make it more difficult to reject inventions (including software) solely on the basis of it being an abstract idea; so it’s worth noting that this may effectively swing the pendulum back toward the original “machine or transformation test” that governed before Alice v. CLS Bank was decided — so we may be entering a renewed era of software patent activity.
Given the financial costs and time commitment involved, when considering when and how to invest in developing a patent portfolio in the very early stages, consider these articles from Rajiv Patel, partner at Fenwick and West, which provide more detailed guidance in this relatively complex area of law: Patent Portfolio Development Strategy for Start-Up Companies and his related Checklist.
Trade Secrets: If a technology cannot be patented, because it fails to meet the requirements outlined above, or if the technology can be more effectively leveraged by not disclosing it, then such technology can still be protected as a trade secret under state law.
Trade secrets must be valuable and remain a secret in order to be protected. This means your startup must take concrete steps to preserve the confidentiality of its trade secrets by limiting and controlling access to such information with formal policies and procedures; otherwise, you will lose trade secret protection. The canonical trade secret example is the recipe for Coca Cola. It is not a patentable invention, but it remains a very well-protected trade secret in that no one quite knows what the recipe contains, aside perhaps from the sugar. To determine whether to protect your technology as a trade secret or to file for patent protection, consider the matrix in the article: To Patent or Keep Secret? That Is the Question, by Chinh H. Pham, a partner at Greenberg Traurig.
Trademarks: Given the explosion of new startups in recent years, your company will need to brand itself distinctively to attract customers or users. Distinctive markings used to identify a particular product or service and to distinguish it from others — including words, phrases, logos, images, or other designs — can be protected through trademark. Trademark protections attach as soon as a mark is used, even without a formal federal registration with the USPTO; however, the owner of a federally registered trademark will enjoy larger geographic protection and can more readily sue for trademark infringement. So it is worth putting in some effort up front to ensure your desired business will not result in trademark disputes down the road — this is easy enough to do using the USPTO’s trademark database, for example, but ultimately it could be a state-by-state question.
In order to obtain federal trademark registration, the mark must not be “merely descriptive” — that is, it should not simply describe the characteristics, features, purpose, or use of goods or services. For example, “Google” and “Nike” are strong trademarks, while “Sweet Cream” for an ice cream brand would be relatively weak. Trademarks which are to some extent descriptive are also weak because under the Trademark Fair Use doctrine described by Jaburg Wilk (and actually distinct from the much more well-known copyright “Fair Use” doctrine) a competitor may in certain circumstances still use another’s registered trademark if it accurately describe their own products and services.
Note also that you can and should place the “™” symbol next to anything you want to trademark (even without a formal registration), but the “®” symbol is reserved for those who actually have a registered trademark with the USPTO.
Copyright: In theory, copyright protection attaches as soon as any “original work of authorship” is fixed in a tangible medium of expression (meaning you can apply the copyright symbol to any work so created), but in practice, you’ll find that registration with the U.S. Copyright Office is essentially a prerequisite to enforcement. “Original work of authorship” refers to something created independently by a person and possessing some minimal degree of creativity. And for non-patentable software code that is not a trade secret, copyright protection is probably the best form of IP protection available.
The reasons to pursue copyright registration are at least three fold: (1) in order to file a lawsuit for copyright infringement in federal court, you must first file an application for registration of the copyright, even if the infringement has already taken place; (2) the registration will itself help to establish that your copyright is valid (i.e., you are the author of the original work) shifting the burden to the other party to prove otherwise; and (3) undertaking a lawsuit is incredibly expensive in itself and actual monetary damages are difficult to prove; however, if your copyrighted work was registered before the infringement began or within three months after it was published, you may be entitled to recover, in addition to actual monetary damages, your attorneys’ fees and court costs, and certain “statutory damages” (which can total as much as $100,000 per infringement) without having to prove any actual damages.
More information on the basics of copyright law available from the United State Copyright Office here and this article from Mitchell Zimmerman, Of Counsel at Fenwick and West.
Conclusion
The creation, protection and enforcement of intellectual property rights collectively represent a complex and shifting area of law. In patent and trade secret law specifically, litigation frequently arises, both between technology giants (Apple vs. Samsung, Waymo vs. Uber, etc.), but also, from “patent trolls” who acquire patents for the singular purpose of suing operating companies, as further described by IP Watchdog. Thus, it is extremely important to think about your IP portfolio early on, from both offensive and defensive positions. The information in this article, as well as the included links, barely scratch the surface of IP law, but should provide enough directional guidance to get you started.
Daniel T. McKenzie, Esq., manages the Law Office of Daniel McKenzie, specializing in the representation of startups and startup founders. Prior to establishing his law office, Daniel McKenzie co-founded and served as lead in-house counsel for Reelio, Inc., backed by eVentures, and acquired in 2018 by Fullscreen (a subsidiary of Otter Media and AT&T).
Thank you to Chinh Pham, a partner at Greenberg Traurig for providing comments on this article.
DISCLAIMER: This post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. TechCrunch, the author and any acknowledged parties, including their respective law firms, expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.