Articles

Focus on Intellectual Property: Tips and Traps for the Upstart Business Owner

Charles A. Horowitz and Gregory B. Perleberg, Attorneys at Law
Mansfield Tanick & Cohen, P.A.

Historically, small businesses have been the engine for our economy's growth. This is as true today as during previous economic cycles. Indeed, today's challenging economic climate presents opportunities for many aspiring entrepreneurs to take away business from less nimble, old-line companies, many of which are constricted by high overhead and legacy costs. Too many times, however, these dreams are crushed early on due to a lack of attention to intellectual property and related issues. This article will address five avoidable legal problems, to ensure your upstart business the best chances of becoming the next industry leader.

1. Have You Protected Your Company's Intellectual Property Rights?

A company's overall valuation is directly related to its intellectual property (IP) portfolio. In fact, for technology and e-commerce businesses, IP can represent up to 80% of a company's value. Common types of intellectual property include copyrights (e.g., original works of authorship such as advertising materials and software code), trademarks (e.g., brand names, logos and Internet domain names), patents (e.g., any new and useful process, machine, manufacture, or composition of matter) and trade secrets (competitively valuable business information).

For any early-stage businesses, it is critical to protect intellectual property from theft and infringement - both in the United States and in other countries where they do business. Companies should inventory their IP to examine what might be eligible for a patent, trademark, copyright or trade secret status. In many cases, the types of intellectual property often overlap. For example, the IP that makes up Google AdWords consists of a federal trademark registration for the brand name "ADWORDS," a patent for a method for advertising on the Internet, copyrights for software programming, trade secrets for proprietary data, and a domain name (www.google.com).

Once it is known what IP a company possesses, it can then review its options for protecting that property, and do a cost/benefit analysis to determine which IP protection measures make the most sense. A U.S. utility patent is generally granted for 20 years from the date the patent application is filed; however, periodic fees are required to maintain the enforceability of the patent. U.S. trademarks can generally last forever, as long as the trademark is used in commerce and defended against infringement. For copyrightable works (created after January 1, 1978), protections extends for 70 years after the death of the owner. For "works made for hire" (covering the usual type of work owned by a small business, such as website designs obtained through an independent contractor), the copyright lasts for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever expires first.

Key considerations for business owners include:

• Document the creation of your intellectual property. The ideal documentation is federal registration through the U.S. Patent and Trademark Office (www.uspto.gov) or the U.S. Copyright Office (www.copyright.gov). In the event of infringement, registration can be an important part of your case and may be required if you plan to sue an infringer.
• Do not overlook the importance of trademark "clearance." A trademark clearance, also known as a trademark availability assessment, allows a qualified trademark attorney to review and analyze current uses of your particular mark as well as those that may create a likelihood of confusion and risk of infringement. Should a third party discover your use of an infringing mark, they may demand that you discontinue use of the mark (replacement signage, packaging, etc., can be costly), stop using a domain name, sue you in an effort to collect damages or enjoin your business from continued operation using that trademark. While a trademark clearance reveals potential problems, it may also reveal that you are indeed the first to use a particular trademark, and therefore, may be entitled to seek federal registration.
• Take caution when including literary, music and artistic works in connection you're your advertisements and website. Unless placed in the public domain, using a third party's materials (e.g., a photo or even a few notes of a song) may constitute copyright infringement and expose your company to substantial legal liability. As a rule of thumb, prior written authorization should be obtained.
• Utilize written agreements with freelance web developers, graphic designers, writers, and the like, specifically providing that your business will own any developed materials as a "work for hire."
• If you suspect infringement, contact an attorney specializing in intellectual property law - IP law is complex and an attorney's help can be crucial.

The tips and traps summarized above underscore the complex nature of intellectual property issues. The good news is that a relatively modest "up front" investment in a legal consultation may be all that's needed to protect your start-up company from costly and potentially catastrophic infringement litigation.

2. Is Your Intellectual Property Yours?

Owners of upstart businesses often come from companies in the same industry, field or profession. Before investing significant capital in a new venture, it is important to review contracts and agreements you may have signed in that prior employment, which could spell trouble in getting your product or service to market. To protect their investments, business owners routinely require that their technical, research and development, creative and other staff sign agreements assigning to the company the legal right to any invention, design, trade marks/dress or other intellectual property created during the course of their employment. These agreements generally contain no time limits or sunset clauses, and are enforceable in court regardless of whether the actual invention or design was ever used or produced by the employer. Inventions and designs produced outside of working hours, using the employee's own tools and equipment, generally fall outside the scope of these agreements. In Minnesota, the inventor's statute, Minn. Stat 181.78, specifically provides that an employer cannot require an employee to assign or offer to assign his invention if no employer equipment or investment is used and the employee is working in his/her own time.

Assignment clauses give rise to frequent litigation. In Applera Corp.-Applied Biosystems Group v. Illumina, Inc, for instance, an employee of developed and patented a new DNA sequencing technique. Although he worked on his own time in a personal notebook, the employee often brought that notebook to the company and discussed his progress with scientists there. Furthermore, the employee used his work phone and fax numbers on his correspondences with the Patent and Trademark Office, and requested the signatures of two company employees to witness his notebook.

The employee then left the and to join a new, competitive venture, assigning it his patent rights. The company sued for ownership of the now former employee's patent, arguing that his employment with the company contributed to the idea for it and, based on his actions, and that he must have used the company's time and resources. Ruling in the employee's favor, the court found that he made the invention at home on his own time. Of significance to the court, although the employee used company resources, he did so not in the invention of his sequencing technique, but only to pursue his interests after its creation.

3. Have You Breached Your Fiduciary Duty as an Employee?

Under Minnesota law, all employees are subject to a fiduciary duty of loyalty to employers, which among other things prohibits them from soliciting existing customers of the employer for a competing business or, as is more typically the case, a competing business that the employee is in the process of setting up. This rule applies to employees in industries providing just about any good or service, from barbers to brewers to brokers to bankers. (But not barristers - Minnesota forbids imposition of noncompetes on lawyers). While still employed, it is best to avoid telling a customer that you are planning to start a competing business. Under no circumstances, however, should you solicit the customer on behalf of your as-yet-unformed company. Notwithstanding this prohibition, the law permits you to do just about any other preparatory act, even while still employed with your existing employer, including: (1) printing business cards and marketing materials; (2) obtaining an Internet domain name; (3) hiring a programmer to create a website; (4) filing articles of incorporation; and (5) obtaining a certificate of assumed name.

Guided frequently by feelings of betrayal as much as business judgment, companies frequently sue departing employees for fiduciary breaches. This was the case in the recent Minnesota appellate court decision of Workers' Compensation Recovery, Inc. v. Marvin. There, the employee's job duties included acting as the company's primary contact with Benedictine Health Systems, the company's most important client. As WCR's fortunes diminished, the employee began to contemplate resigning and starting her own business. Near the end of her employment with the company, she set up a meeting with several BHS executives to discuss that company's renewal for future services with WCR. At the meeting, the employee felt obligated to inform BHS that she would be resigning from WCR. She maintained that, although the BHS executives asked her to contact them after she resigned, no terms or contracts were discussed and no business was solicited.

A few months later, BHS canceled its contract with WCR and indicated that it wanted to continue to work with Marvin. Soon afterward, WCR sued Marvin. The court held that the employee had in fact breached her duty of loyalty, and granted a temporary restraining order prohibiting her from dealing with BHS for six months.

4. Are You Subject to a Noncompetition Agreement?

Noncompetition agreements have become commonplace with Minnesota, in some industries being nearly ubiquitous. Although officially "disfavored" under the law, Minnesota courts routinely uphold and enforce noncompetes that are proper in form and scope, and that meet the other requirements for enforceability. In addition to employees, more and more independent contractors are now being required to sign noncompetes as well, which are generally enforceable to the same extent. Before starting a business that risks violating a noncompete, it is advisable to seek legal counsel to determine its enforceability and potentially negotiate an exception to allow you to develop your business without fear of a lawsuit which, depending on the relief sought, could result in your being liable for damages and/or your business being forcibly shut down through a court-ordered injunction. In addition, many long-term employees do not even know or remember if they signed a non-compete. So as not to "tip off" a former employer that you plan on competing, you may discretely obtain a copy by requesting your personnel file, which under Minnesota law must be provided upon written request to a departing employee. Copies of noncompetes nearly always are maintained in an employee's personnel file.

The 2008 case of Sealock v. Petersen, involving two doctors of optometry, is instructive. Dr. Sealock was employed by Dr. Petersen, but after a time bought him out and employed Dr. Petersen as an independent contractor. There was a falling out, and Dr. Petersen started a new practice. To get the business started, he advertised in a few local newspapers.

Dr. Sealock claimed that, in doing so, Dr. Petersen violated the noncompete clause of his employment contract-the advertisements were meant to directly target Dr. Sealock's existing customers. In fact, 35 customers did leave Dr. Sealock to rejoin Dr. Petersen. Dr. Petersen argued that, when he advertised, he did not "compete" against Dr. Sealock. The court disagreed, though. It found the noncompete agreement fully enforceable and issued a temporary restraining order against Dr. Petersen.

5. Does Your Business Use a Prior Employer's Trade Secrets?

All employees in Minnesota are restricted under the law from divulging their employer's trade secrets or using them to the employer's disadvantage. This obligation arises under the common law, and exists whether or not you as an employee have signed a formal trade secrets agreement as part of your employment. Most states, including Minnesota, have adopted the Uniform Trade Secrets Act (UTSA), which defines a trade secret as "information that derives independent economic value, actual or potential, from not being generally well known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and which is the subject of efforts that are reasonable under the circumstances to maintain its secrecy". Examples of "information" under the UTSA are formulas, drawings, patterns, compilations, programs, devices, methods, techniques, or processes. Generally, to be considered a trade secret, the information must be kept in a locked or secured location. Think of the "secret recipe" for Coke locked away in a vault. Trade secrets may include not only designs and formulas but customer lists and pricing information. However, the law recognizes that the identity of a customer known to an employee through work in sales or marketing, and skills or knowledge obtained on the job, may fall outside the protection of trade secrets law because it is impossible for an employee to erase from his or her brain such information. To avoid legal difficulties, it is important for departing employees to avoid removing or emailing to themselves any customer lists, technical documents, training manuals or computer programs/software belonging to the company. Even employees who do not remove documents or programs, however, may be prohibited from employment with a competitor under the "inevitable disclosure doctrine." This limited, court-made rule protects a company from harm from a competitor where there is no way the departing employee can avoid disclosing a known trade secret. Obviously, its application depends on the nature of the job taken with the competitor. A software engineer at Microsoft normally would not be prohibited from (say) taking a position in Apple's marketing department.

Again, case law in this area is instructive. In a 2009 Minnesota case, Energy and Moisture Control Co., LLC v. Erickson, EMC learned that a Best Buy distribution center in California was looking for a contractor to design and install a lighting system. It intended to capitalize on this knowledge by sending two employees on a trip to look into the matter. Shortly after the employees returned to Minnesota, they both resigned abruptly. EMC later learned that the two employees immediately set up their own business and submitted a bid for the contract, which they won. A jury had little trouble finding for EMC, awarding damages for the misappropriation, and the court of appeals affirmed that decision.

6. MT&C is Available to Assist Your Business

Following the tips and avoiding the traps described in this article will help you to avoid costly and time consuming litigation. The particular steps necessary to protect your business, however, may depend on a myriad of factors, including the nature of your product/service, applicable governmental regulations, and the existing competitive environment. Regardless of whether your business is on the drawing board, just getting started or mature but seeking to expand, MT&C is available to help you navigate the complex world of intellectual property law. Our experienced intellectual property and employment lawyers can help you protect your intellectual property rights, avoid infringing on the rights of others, and defend you in the event you or your business is sued over intellectual property issues.

Charles A. Horowitz is a partner with Mansfield Tanick & Cohen, practicing in the areas of employment, shareholder, insurance and class action litigation. He can be reached via email at chorowitz@mansfieldtanick.com

Gregory B. Perleberg is a partner with Mansfield Tanick & Cohen, practicing in the areas of trademark, copyright, technology, e-commerce and entertainment law. He can be reached via email at [Removed].