July 3, 2014 | 6-minute read (1143 words)
Not protecting your business’ IP or unwittingly infringing someone else’s can be a really costly unforced error. This week Allonn Levy of Hopkins & Carley and Glenn McCrae, EGFS’ Strategy Officer, gave a webinar on how to avoid the biggest mistakes startups make with IP. Get the download here and read below for the top 5 mistakes, advice and tips on how to address issues before they blow up, and ways to avoid being involved in costly litigation.
Mistake #1 — Failure to register IP. There are several types of protection, with varying degrees of strength.
What can’t be copyrighted? Ideas, processes, or method of operation.
Copyrights — protect “creative expression,” not ideas or concepts. Among other things, they confer the right to reproduce, distribute publicly, and publicly display: essentially providing a limited government monopoly on the ability to sell/distribute your work.
Software code counts as “creative expression. Applying for a copyright won’t require you to disclose your full code. The standard limited disclosure is the first line of code and the last 50. For especially sensitive situations, you can request even greater secrecy: but this needs to be backed up with strong justification. We also often recommend copyrighting websites because they are one of the biggest areas of theft.
Pitfalls: be careful and clear in creating copyrighted work that is owned by the company; i.e., created by an employee in the course of performing his or her job. This is known as work for hire. If you don’t clearly distinguish between employees and independent contractors, you could have problems in claiming authorship of the copyright. As I covered in my post on employment law risks, not getting that distinction right is problematic on many levels.
Any changes to a copyright must be in writing, and signed by the author. When you’re releasing software updates, figure out the value and extent of the changes in weighing whether it makes sense to change the copyright.
Registering a copyright has 2 big benefits: 1) automatic statutory penalties levied on violators, including a maximum $150,000 penalty for willful infringement. 2) the presumption of copyright validity. Together, these raise the risk factor for infringers.
In terms of litigation, a registered copyright enables you to seek remedies in the form of injunctions. It’s also the only way to collect attorney’s fees.
Simply applying for a patent doesn’t give you protection though. You need to both apply and have it approved.
Patents — considered the strongest form of IP, patents protect ideas (process, machine, manufacture, improvements). They’re also more expensive than other forms of IP protection. There are 3 types: utility (new and useful invention), design (new, original, and ornamental), and plant (distinct and new variety).
Marks must be 1) registered or 2) used enough to become identified with your business. Another way to protect a mark, that comes with limited protections, is by creating a California corporation.
Marks (including trademarks or service marks) — word, phrase, symbol, or design that differentiates your brand
Many people try to use NDAs here. But there are drawbacks with this strategy. First, people often sign confidentiality agreements without having a clear understanding of what they’re agreeing to. Creating agreements is cheap -- they can even be verbal -- but they are not particularly valuable because they’re costly to enforce due to the need to prove issues of fact. And remedies are limited to actual damages except in cases of willful violation: unlike for copyrights, where infringement results in automatic statutory damages.
Trade secrets — the lowest level of IP protection.
Mistake #2 — Not doing your homework to try to avoid disputes. Always do an IP search to make sure you’re not unintentionally violating someone’s mark, patent, or copyrighted work.
Mistake #3 — Right-click conundrum. A classic example of this, and one that generates lots of lawsuits, is copying images from other websites. Avoid this by making sure you know where every image you use comes from. Even better, take the images yourself. And set clear policies for your employees. These will go a long way in helping you avoid a willful infringement finding.
Mistake #4 — Not reading the fine print in legal agreements. Know what you’re signing and be especially careful with licences, indemnification agreements, and notice requirements.
Mistake #5 — Not knowing the key provisions of the Digital Millenium Copyright Act (DMCA). The law prohibits circulation of an access-controlled device. It was intended to protect internet service providers, but also covers a broad range of companies offering similar functions/services. It includes 2 key provisions:
Safe Harbor — grants complete immunity even if a copyrighted work is infringed
How expensive is all this protection? Actual costs vary, but as a rough estimate assume a range of about $400-$3,000 for trademarks, $400-$5,000 for copyright registrations, and $3,000-$10,000 for initial patent applications. You should also expect around $1,500-$2,500 of additional expenses per “Office action.” These are official letters/inquiries initiated by the Patent Office in relation to your patent application. The numbers really depend on your specific case, but plan on spending around $5,000-$20,000 in total to register a patent.
Notice & Takedown — provides a mechanism for shutting down an infringing webpage without a court order
Enforcement on a tight budget can be tricky. But the real value of IP protection lies in avoiding the fight to begin with (by registering your IP), not in winning litigation. That said, there are ways to limit the costs of standard litigation types, especially in patent cases. Also, don’t overlook mediation, arbitration or informal negotiation and licensing agreements as options.
Bottom line: you can avoid most of these problems by being proactive and creating an IP strategy upfront. That includes registering all of your IP. You’ll gain leverage, legitimacy, and create assets. All of which also play into investors’ valuation decisions. In developing your strategy think through the type of protection you need, when you need to have it in place, how you would respond if your IP is infringed, and incorporate cost estimates into your financial model and forecasts.
IP questions? Tell us your concerns in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.