Aside from competence of management team, control of intellectual property is a major focus of investor scrutiny. The ability to identify and protect intellectual property directly reflects on investor confidence and the resulting access to capital available to a start-up. Protection of intellectual property assets is available through the law of copyright, trade secrets, patents and trademarks. While a company may have a variety of intellectual property assets with different requirements for protection, typically only one or two types of protection will be available for a particular asset of the company. The entrepreneur should consider several factors before choosing particular type of protection.
Firstly, the entrepreneur should consider the nature of the intellectual property assets. Literary, dramatic, musical and artistic works such as books, movies, computer code, engineering drawings and semiconductor topology best lend themselves to copyright protection. Company names, symbols and advertising slogans that are employed to establish corporate identity use trademark protection. Patents afford protection to inventors of new, useful and unobvious ideas with practical industrial applications such as machines, products, processes or improvements of existing technology. Finally, some protection could be obtained for trade secrets at Common Law, however this protection is volatile.
Secondly, the entrepreneur should consider how the intellectual property is going to be used. Company names, logos and authored materials are designed to be in the public domain. However, critical business information and inventions must be protected. Patents provide the strongest protection for inventions but only for a limited time and require complete disclosure of the invention. Trade secret protection at Common Law is inexpensive and available for anything of economic value anywhere in the world and may last indefinitely, however this type of protection can collapse despite the entrepreneur’s best efforts if someone learns the trade secret independently or through reverse engineering.
Finally, the entrepreneur should consider the cost required to protect the company’s intellectual property. Copyright registration is available for a nominal fee, while trademark registration is more expensive, and patent protection is quite costly. The legal cost of patent prosecution, correspondence, issuance and upkeep fees may amount to thousands of dollars.
For start-up companies, patents protect their technologies and may be attractive to potential investors. In Canada the Patent Act governs patent protection. Pursuant to the Patent Act, Canadian Patent Office grants a patent. Any “art, process, machine manufacture or composition of matter” or any new and useful “improvement” of one of these qualifiers is patentable in Canada if it is “new and useful”. Unlike in the US where the courts stated that “anything under the sun that is made by man” is patentable, the underlying idea of the Canadian patent system is to protect ideas of “practical application in industry, trade or commerce”. Canadian judges are reluctant to extend the concept of invention beyond established precedent – “it is Parliament job’s, not the courts, to extend or contract patentability”. The novelty requirement means that the invention must be new and not previously patented, described, or otherwise anticipated. Non-obviousness requires that the invention, in light of the prior art, is not obvious to a person skilled in such prior art. The usefulness element requires the invention to have specific and substantial benefits that the inventor must disclose.
To register a patent an inventor must truthfully disclose in the patent petition the substance of an invention. The Patent Act provides that even innocently made false “material allegations” invalidate the patent. Omissions made willfully for the purpose of misleading also invalidate the patent. A Canadian registered patent typically grants to an inventor a twenty-year monopoly and allows the owner to exclude others from making, using, importing, offering for sale, or selling the invention. If a third party infringes a patent, the patent holder can bring an action to a court of law and through litigation stop the infringing user from continued infringement of the patent and can also seek damages, legal fees, and costs. There is no such thing as an international patent. A patent has to be registered in each and every country the entrepreneur wants to have a protection. Patents are not renewable, and when the term expires the subject matter of the patent becomes part of the public domain and is open to public use.
Some matters are not patentable. Patenting is usually denied where adequate protection exists under other intellectual property laws. Semiconductor topographies are protected under the Integrated Circuit Topographies Act, plant varieties under the PBR Act, designs under the Industrial Design Act, trademarks under the Trademarks Act and an action in tort of “passing-off”, and artistic material under the Copyright Act. Patentability also is not available in Canada to natural phenomena, scientific principles, abstract theorems and business methods. It is worth noting that in 1998 the Federal Court of the United States held for the first time that a business method is patentable. In State Street Bank & Trust v. Signature Financial Group Inc., the court concluded that a financial program that calculated daily mutual fund contributions to investment portfolios qualified for patent protection.
Many countries refuse to grant patents to for computer programs. The Canadian Patent Office has adopted this position since 1978 and treats computer programs as algorithms – “a set of rules or processes for solving a problem in a finite number of steps”. The courts in Canada reason that “a program may do sums faster than an unaided human, but that does not make doing sums patentable even if useful data results”. This was used by the Patent Appeal Board in the Schlumberger Application to justify denial of the issuing of a patent with respect to a program-related invention. This refusal was upheld by the Federal Court of Appeal in Schulmberger Canada Ltd. v. Commissioner of Patents and leave to appeal to the Supreme Court of Canada was denied. The invention was a computer-operated process for analyzing measurements obtained from holes drilled as part of oil and gas exploration. The Patent Appeal Board, in denying the application, stated that 'claims to a computing apparatus programmed in a novel manner, where the patentable advance is in the apparatus itself, are patentable'; and 'claims to a method or process carried out with a specific novel computing apparatus devised to implement a newly discovered idea are patentable.'
Since Schlumberger, the Patent Office has been more liberal in its interpretation of the limitation in the Patents Act and has allowed the issuance of patents for certain software. Patents are now granted by the Canadian Patent Office for inventions implemented by computer programs. The position taken has continued to be that to be patentable, an invention must do more than merely perform a calculation, and be more than an algorithm embodied in software. The apparatus or circuitry for implementing the invention must also be claimed. In practice, however, the hardware requirements of software inventions are claimed in such general terms that their significance is limited to a recognition that a physical embodiment of the invention is required. The result has been that patents have issued for inventions that are principally algorithms. For example, patents have been granted to the inventions that proposed logic for processing elevator calls, and calculations and comparisons of voice patterns for use in speech recognition. It appears that patent protection could be afforded to novel software in Canada. Since 1981 United States allow apparatus claims for a general computer as modified by a new computer program.
In addition to protecting the business's ideas or their expression, an entrepreneur should protect the business's identity and marketing strategy. While trade secrets, copyrights, and patents focus on the methods, products, or services of the business, trademarks protect a business's distinctively recognized symbols such as logos, marks, slogans or designs that are used to identify and distinguish its goods and services. Only use of a trademark or its surrogates – public recognition or an intention to use – creates rights, and then not in respect of a creator of a trademark but in respect of a person or entity behind the use of trademark and its public recognition.
Trademarks and tradenames are protected at Common Law trough an action in tort of “passing off” and under the Trademarks Act. The federal government requires registration in order to gain protection for trademarks. Only indicia that qualify as a trademark are considered for registration. To register a trademark: (1) the subject matter must be trademark eligible; (2) the trademark must be distinctive; and (3) the trademark must not be likely to cause confusion with a previously used or registered mark. Descriptive, misdescriptive, generic words, names of people and marks or symbols used by other companies or institutions will most likely be rejected.
The eligible subject matter is very broad, and according to the Trademarks Act there are the following categories of trademarks: (1) classic trademarks; (2) service marks; (3) proposed trademarks (either classic or service marks); (4) distinguishing guises; and (5) certification marks. To be protected by the Trademarks Act, a mark must be distinctive enough to identify clearly the origin of goods or services. Moreover, a trademark will lose its eligibility for protection if prospective purchasers come to perceive a trade symbol primarily as a generic designation for the category, type, or class of goods or services with which it is used. For example, aspirin used to be a trademark, but as it became more and more descriptive of the product and less distinctive, it lost is ability to be a trademark.
Canadian trademark registration gives the trademark owner the exclusive right to use the trademark throughout Canada in association with the goods and services defined in the trademark registration for a period of 15 years from the date of registration. Registration of a trademark can subsequently be renewed for further multiple periods of 15 years. The registration also gives the trademark owner the right to sue others who may be infringing the registration by using a similar trademark to that of the registered trademark.
The benefits of registering under the Trademarks Act include (1) being able to prevent others from using the marks in a manner that would likely lead to confusion in the market place; (2) obtaining a statutory presumption of ownership of the trademark; and (3) putting others on constructive notice of ownership. If others use a trademark without permission or use a substantially similar mark that will likely cause confusion, an entrepreneur controlling a particular mark can bring an action to end the infringing use of the trademark. Also, entrepreneurs may seek damages and lawyer' fees in exceptional cases. Finally, the entrepreneur can have the infringing objects destroyed. By contrast, the rights that are afforded at Common Law under an action in tort of “passing off”, are limited to the territorial area in which the trademark has been used, or where the trademark owner can establish a reputation based on that trademark. The rights will be similarly limited in scope in association with the goods and/or services with which the trademark has been used.
Because of the importance of a presence on the web, a start-up should search to determine that the domain name it chooses is not already registered as a trademark. Choosing a domain name that is registered as a trademark almost certainly is an infringement, and as such would subject the entrepreneur to anti-cybersquatting laws. A start-up should also periodically conduct web searches to be sure that its trademarks are not infringed. A common misappropriation of trademarks occurs when a competitor uses a start-up's registered name as a metatag. By doing so, the competitor steers web surfers to its site rather than the start-up's website.
As in the U.S., there are a number of significant advantages to using trade secret law to protect intellectual property in Canada. Copyright protects only the expression of a work and not the underlying ideas and logic. Because trade secrets have no statutorily defined time limits, they can protect information indefinitely. Moreover, trade secret protection can be achieved inexpensively. However, to be effective, a trade secret protection regime must involve both internal provisions to ensure the confidentiality of the trade secret, including appropriate measures to limit access to the information, and external measures to limit the manner and extent of distribution. In summary, the entrepreneur must generally keep the information secret.
For many startups, customer lists, pricing information and marketing strategies may be subjects for trade secret protection. Trade secret law in Canada is granted at Common Law. Unlike the United States, there is no trade secret legislation. Under the Common Law, trade secret protection may be invoked against parties to a confidentiality agreement or against third parties by use of the tort of breach of confidence. This tort is founded on the equitable principle enunciated by Lord Denning of the British Court of Appeal in the case of Seager v. Copydex 'that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it o the prejudice of him who gave it without obtaining his consent'. To be successful in an action for breach of confidence an entrepreneur has to establish several things: (1) he must show that the information itself has the 'necessary quality of confidence about it', (2) he must show that the information has been provided to the person against whom the action is brought in circumstances that create or imply an obligation of confidence and (3) he must show that there has been unauthorized use of the information to his detriment.
Companies potentially can protect anything of economic value as a trade secret anywhere in the world, but Common Law protection is unreliable. Even the entrepreneurs who properly guard their proprietary and confidential information can lose their trade secrets. Someone may develop the same product or information independently or through reverse engineering. Resigning employees can use the trade secret information that became part of their general skills and knowledge. Finally, non-compete restrictions through the employment contract may not be enforced if they unreasonably restrict an employee’s mobility.
Copyright protection in Canada is afforded under the Copyright Act. Copyright protection is granting to authors of original literary, dramatic, musical and artistic work for a limited period of time. Quality and legality of work are not relevant for copyright protection. Copyright prevents unauthorized copying only, and only protects expressions fixed in a tangible medium. Ideas alone cannot be copyrighted, but an author's unique expression of an idea is copyrightable. The creator of the original work owns the copyright and may transfer his or her right by sale or a gift. An employee who creates a copyrightable work during and within the scope of employment loses his right in favor of the employer. On the other hand, a person who creates a work under written agreement to commission a work is deemed to be the owner of the copyright.
Like the United States, Canada is a party to the Universal Copyright Convention. Thus, each country is committed to giving the same protection to the others copyrighted works as it gives to the works of its own nationals. Unlike the United States, Canada is also a party to the Berne Copyright Convention. As a member of the Berne Union, Canada is committed to a copyright regime that provides automatic protection without formalities for copyrightable works. There is no requirement in Canada to register a copyrightable work or to deposit such a work with any regulatory authority. In Canada registration of copyrightable works is permitted on a voluntary basis and does provide advantages in terms of establishing proof of ownership, especially in the case of assignments of copyright.
Copyright grants the author exclusive rights to the material for the author's life plus 50 years. A copyright holder receives the exclusive right to reproduce, prepare derivative works, distribute, perform, or display the work. These rights are subject to the “good cause or excuse” and the "fair dealing" doctrines. The good cause suggests that a person may deal with otherwise copyrighted material in a matter of public interest. In contrast, the fair dealing doctrine permits use of copyrighted work for the purposes of private study, research, criticism, review or newspaper summary.
Software start-ups may obtain protection of computer code under the Copyright Act. Computer programs, both in source code and object code and whether on paper, magnetic medium or semiconductor chip, will enjoy protection for the period of the life of the author plus 50 years. Copying computer code is copyright infringement. Even non-literal copying of a program’s structure, such as flow of algorithms and organization modules, is an infringement. However, the features of a program, ideas, methods and principles are not protected and can be copied. Therefore, copyright of a program user interface and its screen layout could not be obtained. Copying semiconductor topology is also copyright infringement and semiconductor start-ups may obtain protection under Integrated Circuit Topography Act, which gives ten years of protection from the earlier of the date when the application for protection was filed or when the topography was first commercially used.
The Copyright Act extends moral rights to computer programs (i.e. the right of an author to claim authorship and to prevent any distortion or alteration of the work or its association with products that would prejudice his reputation). Canada has decided not to follow the lead of countries like the United Kingdom where moral rights are denied to authors of computer programs. Finally, the Copyright Act provides for penalties for infringement. Every person who knowingly makes for sale or hire any infringing copy of a work in which copyright subsists, or who offers such copies for sale or hire, or who imports such copies into Canada, will be guilty of an offence and liable on summary conviction to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six (6) months or to both, or on conviction on indictment to a fine not exceeding $1,000,000 or imprisonment for a term not exceeding five (5) years or to both.