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Intellectual Property Issues Technology Startup

Introduction

When starting up a technology company, there are so many details to consider that intellectual property questions are often overlooked. The consequences of this oversight can be considerable - greatly increased expenditures or, even worse, unrecoverable loss of valuable rights that could have been secured by taking simple, relatively inexpensive actions at an earlier date. It is therefore important for a startup, at an early stage, to identify the key issues and milestones in the life of its intellectual property and recognize the measures that should be taken to protect its valuable intellectual property rights in a cost-effective manner. In technology companies, intellectual property issues tend to cluster around three basic areas - utility patents, trademarks, and copyrights. While each of these areas is governed by its own statutes and rules, in real life the challenge of securing these rights often cuts across two or even all three of the categories.

Patent Rights

A technology company often begins its life with the single objective of exploiting an invention. Even for startups with a broader business plan, a critical first step is to identify any subject matter that may qualify for patent protection. The range of eligible subject matter may be broader than is commonly thought, as technology companies, in particular, push the envelope in their patent applications. For example, Priceline.com has obtained patent protection for its “reverse auction” business method and Amazon.com for its “one click order” business method. Identifying appropriate subject matter, as well as the point at which it becomes eligible for protection, should therefore be determined in consultation with an experienced patent lawyer. Once the protectable subject matter has been identified and a decision to seek patent protection has been made, it is often best to file a provisional patent application. The costs of preparing and filing the application are relatively low and depend on the degree of complexity of the invention and the extent to which the inventors are able to provide a full written description of exactly how to make and use the invention. A provisional patent application is generally considered to be the most cost-effective means of securing the earliest priority right to the invention, which is important for several reasons.

First and most important, an early provisional application minimizes the amount of “prior art” that may be used to prevent a patent from being issued. Put another way, the longer that a company waits to file a provisional patent application, the greater will be the developments in the field that will affect the consideration of the patent application. In addition, an early priority right can become critical when filing for a patent in Canada and foreign countries, because most countries other than the United States are governed by the first-to-file rule. Under this principle, if two or more applications are filed for the same invention, the patent is awarded to the application having the earliest priority right. In contrast, U.S. patent law is governed by the first-to-invent rule, under which the patent is awarded to the party that can demonstrate that it was the first to invent the patentable subject matter, even if that party's patent application has a later file date than that of a competing party.

Even in the United States, an early priority date is important when more than one applicant applies for the same patentable invention. In this situation, the patent application with the earliest priority date is accorded important procedural rights that place its inventor in a much stronger position to be declared the first to invent and thus eventually to earn the U.S. patent. It is usually best to file a provisional patent application as soon as the inventor knows how to make and use the invention. At the very least, the patent application should be filed prior to any offer for sale, public disclosure, public use, or sale of the invention. Failure to file a patent application prior to any of these events may reduce the available patent rights in certain countries and even prevent a valid patent from issuing. This dire result is a consequence of a patent rule known as absolute novelty, which is operative in many countries. In order to obtain patent protection in absolute-novelty countries, a patent application must be on file prior to any disqualifying public disclosure, public use, or sale of the invention. The nuances and specific definitions of these rights-losing-events vary from country to country, and a patent lawyer should be consulted regarding potential loss of rights in any specific country and under any particular set of circumstances.

A failure to file an application on a timely basis prior to making the invention public will prevent the company from obtaining valid patent rights in most countries outside the United States. Relatively few countries – but including the United States, Canada, and Mexico – provide a one-year grace period within which the potential commercial success of the invention may be tested prior to making an investment in patent protection. In these countries, an offer for sale, public disclosure, public use and/or sale of the invention typically triggers the one-year period. If by the end of that year an application for a patent has not been filed, the rights to obtain a valid patent are lost. Thus, for a technology startup to maximize its ability to obtain valid patent rights in global markets, it is important to prepare and file a patent application as soon as possible, but not later than making the invention public. In that way, not only are patent rights preserved within the United States but also within the vast majority of foreign nations.

The second critical component of a patent rights strategy is to provide a full and complete written description of how to make and use the invention for which the patent is sought. Startups (and mature companies rushing to bring a product to market) too often leave the patenting process to the last minute or consider it only as an afterthought. Then, faced with a deadline under which valuable patent rights will be lost if an application is not filed, a barely adequate, or in some cases an inadequate description of the invention is prepared and filed. The consequence of having a legally adequate but less than complete written description of the invention is that the maximum scope of patent protection available from the application will not truly match the scope of the invention, and will thus be less than could have been obtained. For example, a legally adequate application might omit a certain claim, which would then give competitors a head start in developing a competing product.

In the worst case, a less-than-complete application might not even be legally adequate. For example, it might omit some critical feature of the invention or a discussion of the “best mode” of practicing the invention at that time. If the U.S. Patent and Trademark Office discovers such inadequacy during its consideration of the application, it may refuse to grant a patent. Even if the Patent Office does not discover the inadequacies and issues a patent, the patent is not secure. If the patent later becomes the subject of litigation, it is likely that the inadequacies will then be exposed, the likely result of which is that a federal court will invalidate the patent. The additional cost of providing a full and enabling disclosure, compared to an inadequate or barely adequate disclosure, would typically be in the hundreds of dollars or, at most, a few thousand dollars. On the other hand, if the patent application is rejected, the cost of challenging a patent examiner's decision would be measured at several thousand to potentially tens of thousands of dollars. If the patent is ultimately invalidated in litigation because of a failure to provide an enabling disclosure of the invention and/or to detail the best mode of carrying out the invention, the cost would run at least many tens of thousands to hundreds of thousands of dollars, considering the cost of obtaining the patent, paying the maintenance fees, and defending the validity of the patent in litigation. In some cases, the cost of losing the patent on an invention could be measured in the millions of dollars.

Trademark Rights

Acquisition of trademark rights is less risky and less costly if an organized, intelligent approach is made at or near the beginning of the lifetime of a new product, rather than waiting until the product's launch date or even beyond. Once a decision is made to market an invention, the company should begin to select candidates for marks that will be used to identify the product or service in interstate commerce. At this stage, two considerations are paramount: (1) Whether the company can adopt and use the mark in interstate commerce free from the legitimate assertion of rights by another. (2) Whether the company can obtain a trademark registration (and in some instances corresponding foreign trademark registrations) for the mark. As an initial step, a relatively inexpensive computer database search should made from records available at the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office. The objective of this search is to eliminate bad candidates and thereby save costs that might otherwise be spent on the clearance of marks that are not likely to win approval. Once this initial clearance search is complete, it is wise to conduct a full search beyond the Trademark Office database including common law databases, and Internet domain names.

In situations in which the product is destined for global distribution, it is also worthwhile to commission searches in foreign countries. Although the initial selection of candidate marks will often involve the cost of hiring consultants and test marketing, brainstorming can be done informally among company employees, friends, and family. An initial search limited to the Trademark Office database can be conducted for a few hundred dollars. Once a candidate mark has passed through this screening process, the typical cost (per mark) of obtaining a full search, including a full analysis and opinion letter, typically ranges from about $1,000 to $1,500. Once a mark has been cleared, the actual preparation and filing of an application for registration typically costs about $750 to $1,000. With these proactive measures, the startup can have a relatively high degree of confidence that once the product is launched, there will be no successful challenge to the use of its chosen mark. However, if a mark is adopted by the company without obtaining clearance (what is sometimes called freedom to operate), it runs the risk that its product launch will be thwarted by a cease and desist letter and a costly lawsuit for trademark infringement, which might even include a request for a preliminary injunction against the use of the mark.

The company's management might then be faced with the critical decision of whether to stop the product launch altogether and choose an alternate mark. The company would also face the lost-opportunity costs that accompany a management's preoccupation with a crisis rather than with the marketing of the new product. And, depending on the size of the launch, thousands or tens of thousands of dollars in launching costs, such as product packaging and related promotional materials, may be wasted. Finally, the psychological blow may place the very life of a startup company at risk. The financial calculus alone makes the wisdom of developing an appropriate trademark strategy clear. The selection, adoption, and registration of trademarks typically cost a very few thousand dollars; the failure to take these proper steps can exact a financial and psychological toll that can be staggering for a young company.

Copyright Rights

Copyright registration is a relatively inexpensive form of legal protection available to a technology startup company. On the other hand, the financial consequences of not obtaining appropriate copyright protections are typically not as high as the costs that accompany the failure to obtain patent and trademark protection. Companies often use copyright as a complementary form of protection for promotional materials, manuals, and, most important, computer software. Copyrightable subject matter is referred to as a “work of authorship,” and registration may be obtained once the work of authorship has been reduced to a tangible medium, such as a printed page, computer file, and the like. The cost of registration at the Canadian Intellectual Property Office and the U.S. Copyright Office varies, but typically runs only several hundred dollars, including the government filing fee and the associated costs of preparing and filing the application.

Two major benefits accrue from the early filing of an application for registration of copyright if an infringement is discovered and spawns litigation. In a lawsuit brought on a registered copyright, the copyright owner has the ability to obtain (1) statutory damages, without the need to comply with costly discovery requests or offer evidence to prove the damage amounts, and (2) an award of lawyer's fees and costs. On the other hand, failure to register the copyright in a timely manner may result, as a practical matter, in not being able to enforce the copyright against infringements. For technology companies, an important element in copyright registration is to ensure that the documentation reflects the company's ownership of the copyrights, rather than the individual who created those works. This is especially true when the employment relationship between the company and the individual who created the work is unclear. Except for “work made for hire,” ownership of the copyright as a matter of law belongs, in the first instance, to the human beings who authored the work rather than to the company who may have paid those humans for creating it. Whereas the cost of obtaining documentation that clearly identifies the company's ownership of the work is typically trivial if completed in conjunction with or prior to the authoring of the work, these costs can become devastatingly high if the work becomes valuable and the company cannot establish through proper documentation that it owns the copyright to the work.

As always, if a dispute can only be resolved through litigation, the costs to obtain or prove ownership may reach into the hundreds of thousands of dollars, with typical presumptions working in favour of the human author as opposed to the company. This increases the risk that the company ultimately will not be determined to be the owner of the copyright. Intellectual property issues often arise in the life of a startup company in the context of company patents, trademarks, and copyrights. Employees and consultants who participate in product development can claim an ownership or co-ownership right to the company's intellectual property unless a written agreement clearly provides that the ownership of the intellectual property right is held by the company. An employee's claim of right to a company's intellectual property can be devastating in situations in which a company product or trade name becomes a valuable asset. Typically, employee claims of ownership can be prevented by an employee agreement assigning all intellectual property rights to the employer. Because such agreements involve the surrender of prospective employee rights, they need to be drafted in compliance with applicable state labour laws. When dealing with consultants or other independent contractors, the company should have a written agreement providing that the company retains ownership of all intellectual property.