Other Legal Issues for the Entrepreneur Chapter 6 Protecting the Idea and Other Legal Issues for the Entrepreneur McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Intellectual Property? It includes patents, trademarks, copyrights, and trade secrets. These represents important assets to the entrepreneur. Intellectual property should be understood even before engaging the services of an attorney.

How to Select a Lawyer An entrepreneur needs to be aware of any regulations that may affect a venture. A lawyer may work on a retainer basis or may be hired for a one-time fee. A good working relationship with a lawyer: Eases some of the risk in starting a new business. Gives the entrepreneur necessary confidence. Entrepreneur can offer the lawyer stock in exchange for services.

Patents Patent - Grants holder protection from others making, using, or selling similar idea; issued by the Patent and Trademark Office (PTO). Utility patent – Protection of new, useful, and unobvious processes, machines, compositions of matter, and articles of manufacture; term of 20 years. Design patent – Covers new, original, ornamental, and unobvious designs for articles of manufacture; term of 14 years. Plant patent - Given for new varieties of plants.

Patents (cont.) International Patents The Patent Cooperation Treaty (PCT) was established to facilitate patent filings in multiple countries in one office. It is administered by the World Intellectual Property Organization (WIPO) in Geneva, Switzerland; has over 100 participants. It provides a preliminary search that assesses whether the filing firm will face infringements in any country. Differences may exists in the patent laws of each of these countries.

Patents (cont.) The Provisional Application It is the initial application to the PTO providing evidence of first to market. Replaces the disclosure document that was previously accepted by the PTO. Gives the rights to the patent based on the concept of first to file. The actual filing of the patent in its final form must occur no later than 12 months after the provisional disclosure document if filed.

Patents (cont.) The Patent Application Introduction – Consists of the background and advantages of the invention, the problems that it overcomes, and how the invention differs from existing offerings. Description of invention – Includes a detailed description of the invention and of the drawings that accompany it. Claims - Specify what the entrepreneur is trying to patent. The application should contain a declaration signed by the inventor(s).

Patents (cont.) Patent Infringement Many businesses, inventions, or innovations are results of improvements on, or modifications of, existing products. Copying and improving on a product may be perfectly legal and a good business strategy. If patent infringement is unavoidable, the entrepreneur may try to license the product from the patent holder. It is advisable to hire a patent attorney to ensure there is no possibility of infringement.

Table 6.1 - Checklist for Minimizing Patent Risks

Business Method Patents The growth of Internet use and software development has given rise to business method patents. Firms use these patents to assault competitors and subsequently provide income from royalties or licensing fees. Concerns have evolved regarding these patents. Not all start-ups will have a product or concept that is patentable.

Trademarks A distinguishing word, name, or symbol used to identify a product. It can last indefinitely. It can be filed solely on the intent to use the trademark in interstate or foreign commerce; also with the intent to use in the future. Categories: Coined marks. Arbitrary marks. Suggestive marks. Descriptive marks.

Trademarks (cont.) Registering the Trademark Filing must meet four requirements: Completion of the written form. A drawing of the mark. Five specimens showing actual use of the mark. The fee. Initial determination of suitability takes 3 months. Objections must be raise within six months, or application is considered abandoned. The entrepreneur has the right to appeal in case of refusal.

Trademarks (cont.) Once accepted, trademark is published in the Trademark Official Gazette to allow any party 30 days to oppose or request an extension to oppose. Registration is issued if no opposition is filed. Procedure takes about 13 months from initial filing.

Table 6.2 - Benefits of a Registered Trademark

Copyrights Right given to prevent others from printing, copying, or publishing any original works of authorship. Issues surrounding access to material on the Internet have led to major legal battles for the entertainment industry. Copyrights are registered with the Library of Congress. Term of the copyright is the life of the author plus 70 years.

Trade Secrets Provides protection against others revealing or disclosing information that could be damaging to business. Trade secrets have a life as long as the idea or process remains a secret. It is not covered by any federal law but is recognized under a governing body of common laws in each state. Employees may be asked to sign a confidential information agreement. Entrepreneur needs to take proper precautions. Legal action is possible only after the secret has been revealed.

Licensing A contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Types of licensing: Patent license agreements - Specify how the licensee would have access to the patent. Trademark license agreements - Involve a franchising agreement. Copyright license agreements - Involve rights to use or copy books, software, music, photographs, plays, etc.

Licensing (cont.) Factors to be considered: Customers’ recognition of licensed property. Whether licensed property complements existing products or services. Entrepreneur’s experience with the licensed property. Long-term outlook for the licensed property. Kind of protection provided by the agreement. Commitments in terms of payment of royalties, sales quotas, and so on. Renewal options.

Product Safety and Liability It is the responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act. The Act created a commission with the responsibility of prescribing safety standards. The development of stricter regulations regarding labeling and advertising is also part of the commission’s responsibility. Large fines as well as product recalls are the typical outcomes of any action enforced by the commission.

Insurance It provides a means of managing risk in the new business. Some insurances are required by law and cannot be avoided while others are may be necessary to protect the financial net worth of the venture. Skyrocketing medical costs can have a significant impact on insurance premiums. Entrepreneurs also have to consider health care coverage.

Table 6.4 - Types of Insurance and Possible Coverage

Sarbanes-Oxley Act Congress passed the Act in 2002. Under this law: Provides a mechanism for greater control over the financial activities of public companies. Under this law: CEOs need to vouch for financial statements through a series of internal control mechanisms and reports. Directors must meet background, length of service, and responsibilities requirements regarding internal auditing and control.

Sarbanes-Oxley Act (cont.) Attempts to influence or impede the internal auditing process is a criminal act. Law covers bank fraud, securities fraud, and fraud by wire, radio, or TV. There has been some concern as to the interpretation of this law and subsequent directors’ liability. There are conflicts with the provisions of the new law and the laws of foreign countries.

Sarbanes-Oxley Act (cont.) Though private companies are not included, they are subject to control if they: Consult with a public company. Influence that public company in any wrongdoing established by the Sarbanes-Oxley Act. Entrepreneurs can set up a board of advisors instead of an extended board of directors.

Contracts A legally binding agreement between two parties. Often business deals are concluded with a handshake. The rule is to not to rely on a handshake if a deal cannot be completed within one year. Courts insist on a written contract for all transactions over $500.

Table 6.5 - Contract Conditions and Results of a Breach of Contract

Contracts (cont.) Four essential items in an agreement to provide the best legal protection: Understand the terms and conditions in the contract. Cross out anything that you do not agree to. Do not sign if there are blank spaces (these can be crossed out). Make a copy for your files after signing.