Intellectual property basics

By Roman Tsibulevskiy

The most valuable assets for many start-up companies often consist of intangibles, such as new business models or new computer code.  It is critical for start-ups to be able to protect their “intellectual property.” This term is used to identify a collection of distinct, but related legal doctrines about patents, copyrights, trademarks, trade secrets and rights against unfair competition.

A.  Patents

A patent is a document granted by the United States Patent and Trademark Office (USPTO) to an inventor for a right to exclude others from making, using, offering for sale, or selling the invention throughout the United States, or importing the invention into the United States.  If the invention is a process, the inventor has the right to exclude others from using, offering for sale, or selling throughout the United States, or importing into the United States, products made by that process.

Under US Patent law (35 U.S.C. §§ 101, et seq.), in order to be eligible for a patent, an invention must be “novel, useful and not of an obvious nature.” There are three types of patents:  design patents, plant patents, and utility patents.  Design patents can be obtained for the appearance of products, for new, original and ornamental designs.  Plant patents protect inventions or discoveries of new varieties of plants that can be asexually reproduced.  These patents are especially significant in biotech companies and products.  The most common are utility patents that consist of four basic categories of utility patents:  (1) processes (e.g., methods of manufacturing or doing business and computer programs); (2) machines; (3) articles of manufacture; and (4) compositions of matter.

In anticipation of working on an invention that may be patentable, it important to maintain detailed records which will prove three elements:  the date of conception, the date of reduction to practice and the diligence in between the two dates.  A clear written description should also be drafted, including drawings, if applicable, to clearly explain the invention, including use, design and how the invention is novel.  Once an invention is imagined, a patentability search should also be completed to disclose whether the invention is novel and in a “nonobvious” way.

Applications for patents are made to the USPTO, located in Alexandria, Virginia, and should be prepared and prosecuted by a patent attorney or agent.  USPTO reviews each application to determine whether the invention is patent eligible, novel, nonobvious, and useful.  In general, a United States patent application contains the following information:  (1) a written specification, (2) a drawing, if necessary to an understanding of the invention, (3) an oath or declaration by the applicant stating that he believes himself to be the original and first inventor of the invention, and (4) the prescribed filing fee.  Completed patent applications are assigned an examining group in the USPTO and are reviewed by an examiner.  The examiner must thoroughly investigate the available prior art on the subject matter of the invention, or related subject matter, to determine whether the patent is novel and nonobvious.

Once the patent is issued, the invention and any underlying secrets are fully disclosed.  The patentee then has the legal right to prevent unauthorized use or exploitation of the invention.  Utility and plant patent terms begin when the patent is issued, and ends 20 years from the date when the application for the patent was filed in the United States.[1]

A patent does not automatically allow the patentee to use or practice the invention.  If it is a patent that is an improvement over an existing invention that still has a monopoly, then one must obtain permission from the owner of the earlier patent.  This circumstance may arise when different companies hold different patents in a particular technology area, such as mobile devices.  Companies that face this situation may enter into licensing agreements to allow for the use of one another’s patents.

The regulations that implement patent statutes are found at 37 C.F.R. Chapter 1.  These regulations also provide guidance for pursuing corresponding applications within countries with which the US has entered into patent treaties.  The most commonly used treaty is the Patent Cooperation Treaty (“PCT”), which involves 123 countries.  The PCT simplifies initial filing formalities by allowing the filing of one international application, but eventually one must prosecute the invention in a specific country’s patent office to obtain a “national” patent.  There are additional patent treaties that provide for simplified prosecution of applications in multiple countries simultaneously, such as the European Community, which has a regional patent office called the European Patent Office (“EPO”).

Finally, it is very important to note that it is unlawful to file for a foreign patent without first obtaining a foreign filing license from the USPTO.  In some instances, a further review by the Defense Department, Energy Department and Department of Commerce, among other agencies, may also be required, depending upon the nature of the patent application disclosure.

The effort to prepare and prosecute a patent application involves significant resources and should not be made without considering the potential for return on this investment.  One purpose for this brief description of patents is to note the positive attributes for obtaining patents and to also note some of the negative attributes.  The most important positive attribute for pursuing a patent is the “monopoly” that is granted to the inventor.  The most obvious negative attribute is the requirement that the invention must be fully disclosed and published.  Once published, the details of the invention become available to competitors.  This can provide competitors with the opportunity to “design around” an invention and thereby practice something that is very similar while not being affected by the “monopoly” granted to the inventor.  The publication of the patent also provides the opportunity for competitors to practice the invention without paying any royalty or license fee, an activity called infringement.

USPTO does not provide any policing mechanism resulting from infringement.  Instead, the US Patent laws assume that the owners of the patent will police the use of their invention themselves by filing a suit of infringement.  The difficulty is in detecting infringement.  While an infringement of an “article of manufacture” or “composition of matter” may be easier to detect, it can be very difficult to detect whether a patented “process” is being infringed.  When considering whether to proceed with a patent application as the best means for protecting intellectual property, it is important that issues such as the novelty of the invention, potential for commercial use and market for the invention be considered.  It may be decided, after due consideration, that the best means for protecting intellectual property is to retain the invention as a trade secret.

B.  Trade Secrets

Trade secrets are generally defined and protected by state laws.  A “trade secret” is any formula, pattern, device or compilation of information used in one’s business, which provides an opportunity to obtain an advantage over competitors.  A trade secret by definition includes items of intellectual property beyond the more narrow definition required to obtain a patent.  There is no need for a trade secret to be novel, useful and nonobvious.

Most states have passed a statute for governing ownership rights in trade secrets titled the Uniform Trade Secrets Act (“UTSA”).  This statute defines a “trade secret” as follows:

“Trade secret” means information, including, but not limited to, technical or non-technical data, a formula, pattern, compilation, program device, method, technique, drawing or process, financial data, or list of actual or potential customers that:  (i) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

If the company has a trade secret that is also patentable, the company must make the decision whether to treat it as a trade secret or to obtain a patent.  Unlike patents, trade secret protection would not enable the first inventor to preclude the second or any subsequent inventor from exploiting the invention.  The primary advantage of a trade secret is that it is not published, and thus, not available to a competitor to infringe upon illegally.  However, the disadvantage of a trade secret is that no protection exists against the discovery or use by fair means, such as through reverse engineering or independent invention.

Trade secrets should be protected by implementing procedures to ensure the confidentiality of such information.  Information remains a trade secret for as long as the confidentiality of the information is maintained.  Disclosure of the information in a manner that does not ensure its confidential treatment can remove the trade secret status of such information.  All information and physical items maintained as trade secrets must be clearly marked and labeled by the company.

A trade secret may be thought of as “know-how,” which would include business or technical knowledge that is kept secret to gain an advantage over competitors.  Some examples of trade secrets are secret processes, formulas, techniques, unique business plans, special customer lists and sources of scarce materials.  Unlike other forms of intellectual property, there are no standards to meet for it to be defined as a trade secret as long as the trade secret provides some value and remains a secret.  Trade secrets last only as long as the information is kept secret.  As long as the knowledge or information is kept confidential, a trade secret may be protected against disclosure by all who have received such secrets in confidence and all who would have obtained the secrets by theft.

If trade secrets are obtained by a third party improperly or in circumstances where they should have known it was confidential, owners of the trade secrets can protect their ownership interest by filing an infringement suit.  To prevail in a trade secret infringement suit, a trade secret owner must show that (1) the information alleged to be confidential provides a competitive advantage and (2) the information really is maintained in secrecy.  In addition, the trade secret owner must show that the information was either improperly acquired by the defendant (if the defendant is accused of making a commercial use of the secret) or improperly disclosed by the defendant (if the defendant is accused of leaking the information).

Some states have made theft of trade secrets a crime punishable by a fine and/or a jail sentence.  Furthermore, the US has made certain types of trade secret thefts federal crimes.  The Economic Espionage Act of 1996 (ELEA) (18 O.K. §§ 1831 to 1839) provides punishment for theft both within the US and for thefts from US companies outside the US.

C.  Trademarks and Service Marks

A trademark is a name used to identify and distinguish a product from other products.  A service mark functions similarly, only it is used to identify and distinguish a service rather than a product.

Trademarks and service marks can be federally registered with the USPTO.  Federal trademark laws, commonly referred to as the “Lanham Act,” define trademarks as:  “any word, name, symbol or device or any combination thereof (1) used by a person or (2) which a person has a bona fide intention to use in commerce and applies to register on the principal register established by [the statute], to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.”[2] The registration provides the owner with sole rights to use such marks in the registered market.

When an applicant files for a trademark or service mark, the applicant selects one or more international classifications most relevant to their intended market for the trademark.  This classification list is used worldwide and an applicant can also file for trademark protection in other countries with which the US has trademark protection treaties.  In order to be awarded a trademark, the owner must show proof of use in each of the classifications for which he has filed.  As a result of the trademark law principles of “likelihood of confusion,” which are partially reflected in the classification system, there can be more than one trademark owner for a specific name, each owning rights for a different market segment.  (For instance, two different trademark owners can simultaneously own the same mark “Ferrari,” where one mark represents a restaurant business and a second mark identifies a well-known luxury car manufacturer.) A trademark or service mark registration may be renewed every 10 years as long as the registrant is still using the mark.

Under certain circumstances, a mark becomes “incontestable” upon the filing of an appropriate declaration by not later than the end of the sixth year following registration.  Once afforded “incontestable” status, a mark may only be subsequently challenged under certain limited, specific conditions spelled out by statute.

D.  Copyrights

Copyrights historically related to protection for “writings” (see US Constitution, Article 1, and Section 8).  However the changing nature of technology has led to an expanded meaning for the term “writing” that now includes architectural design, software, masks for integrated circuits, the graphic arts, motion pictures and sound recordings.  The applicable law is the US Copyright Act (17 O.K. §§101-810).  This law preempts any inconsistent state law so copyrights are generally governed by the federal law.  Currently the Copyright Act is administered by the Copyright Office of the Library of Congress.

A copyright allows the author the exclusive right to reproduce; prepare derivative works; distribute whether by sale, lease, or rent; and perform, display, or digitally transmit their expressions of original thought or works of authorship.  Works of authorship include literary works, musical works, dramatic works, pantomime and choreographic works, pictorial, graphic and sculptural works, sound recordings, motion pictures and other audiovisual works, architectural works and computer programs.

There are certain prerequisites for works to be copyrightable.  First, the work must be original.  This does not mean that the work must be novel or unique, but simply that the work must originate with the author.  Also, the work must be fixed in some tangible medium of expression (e.g., printed, recorded or sculpted) that allows it to be communicated for more than a transitory period.

The purpose of copyright protection is to reward an author with exclusive rights in exchange for benefiting the public with disclosure of the work.  Presently, copyrights are protected for the life of the author plus 70 years.  In addition, copyrights may be registered in the Library of Congress, and by doing so the owner has the right to sue infringing users for damages.  If the work belongs to an employer of the author or has been commissioned under a “work made for hire” contract agreement, the copyright lasts 95 years from the date of first publication or 120 years from creation — whichever is earlier.  After the expiration of this period, the copyright is almost always not renewable and the work falls into the public domain.

The government can own and hold copyrights transferred to it by assignment, bequest, or otherwise.  For example, software developed under a government contract may be copyrighted and transferred or licensed to the government by an assignment.  In such case, the author copyrights the material and then assigns all ownership rights or grant licenses to the government.

Copyright protection is automatic once a work is put in a tangible medium of expression (e.g., written down or stored on magnetic or optical media).  Currently, copyright law protects publicly distributed works without the familiar “©” notice (see the Berne Convention), but including a notice of copyright on the work will provide the copyright owner with the advantage of invalidating any claim of “innocent infringement,” allowing the owner to force an unlicensed user to cease and desist their use.  The author of the copyrighted work can also seek damages for infringement, but only if there was both a notice of copyright on the work (or the infringer was put on notice of the copyright and continued to infringe) and the author had filed or registered their copyrighted works by depositing a copy of the work in the Library of Congress.  In some instances, it may be possible to deposit a copy of the work with trade secret portions obscured to prevent a loss of trade secret rights, while allowing for the registration of the copyright rights.

E.  Intellectual Property Licenses

A license is essentially any arrangement under which an owner of a right provides a third party authority to use such right, whether fully or partially.  Licenses that pertain to intellectual property provide a means to use and to protect the underlying intellectual property.  A license gives the licensee the right to use the intellectual property and it also serves to protect the licensor’s ownership since, by entering into a license, the licensee is agreeing that the licensor owns the licensed intellectual property, even if later it turns out to be incorrect.  The meat of an intellectual property license is in the grant of rights clause.  For example:

“Licensor hereby grants to Licensee, its subsidiaries, divisions and affiliates a non-exclusive, worldwide license to use, reproduce for archival purposes, and display the Software in object code format.  Such license shall include the right of Licensee to sublicense to Licensee’s contractors if necessary.”

There are numerous issues that pertain to licenses, including, for example, the ownership of derivative inventions (i.e., those created as a result of sharing the intellectual property licensed), the territory for use, the markets in which use can be practiced, rights to sublicense or to disclose to third parties, license fees, royalties, etc.  Government rights and various laws may also impact a company’s ability to enter into certain types of licenses.  As such, licenses are typically unique to the business purpose for which the intellectual property is being shared.  Consequently, it is not practical to provide a standard form for licenses.

Negotiating rights clauses can be contentious, especially in complex deals where new intellectual property is to be created.  A well-drafted clause can maximize a company’s return on its intellectual capital; a poorly drafted one is an invitation to litigation.  Any need to prepare or enter into a license agreement should be advised by an attorney at an early stage in any business negotiations in an effort to avoid terms that are impossible to ultimately offer and/or accept.

[1] 35.U.S.C. § 154(a)(2).
[2] 15 U.S.C. § § 1051-1128