THE BASICS: WHAT IS PROTECTABLE AND HOW SHOULD IT BE PROTECTED?

THE INTERNET

INTERNATIONAL PROTECTION FOR INTELLECTUAL PROPERTY

LICENSING AND TECHNOLOGY TRANSFER

SOFTWARE PROTECTION

HOW TO AVOID THE PRELIMINARY PITFALLS OF PROTECTING INTELLECTUAL PROPERTY

CONCLUSION

Chapter 11   Intellectual Property

One of the most valuable and fundamental assets of a new small business is its intellectual property. Intellectual property is defined as a business's intangible assets, including patents, trademarks, copyrights, and trade secrets. The rights to such property can be used to prevent competitors from entering your market and can represent a separate source of revenue to the business. All too often, however, they are overlooked or misunderstood, and they are nearly always undervalued. To fully protect and utilize these assets, every entrepreneur, small business owner, and manager, as well as advisers such as management, financial and technical consultants, lawyers, accountants, bankers, and venture capitalists, must be aware of what these rights are and how they are protected and preserved. This awareness is becoming even more critical in a world of global competition and international markets where ideas and information are fast becoming more valuable than products and things. The adoption of two international treaties, the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariff and Trade (GATT) underwrite this concern.

THE BASICS: WHAT IS PROTECTABLE AND HOW SHOULD IT BE PROTECTED?

When a new idea is conceived or a new product or method is designed, one of the first questions that arises is: Can I protect this? Can I keep competitors from copying this? There are very practical reasons for protecting a new idea. Investors are loathe to put money into a venture that cannot establish a unique product niche. Stockholders will challenge a corporation's investment of its resources in a program that can be easily copied once it is introduced to the market. All the time, effort, and money invested in perfecting the idea, as well as advertising and promoting it, may be wasted if imitators can enter the market on your heels with a product just like yours. Moreover, the imitators can cut prices because they have not incurred the startup expenses you had to endure to bring the idea from conception to a mass-producible, reliable, and appealing product or service.

Here are some examples of things that may be protected:

• A new product
• A new method
• A process
• A new service
• A new promotional or merchandising scheme or approach
• New packaging
• A new design

Once it has been determined that a new idea, product, or method is eligible for one or more forms of protection – a patent, trade secret, trademark, or copyright – the rights should be secured as quickly as possible. Each form of protection is obtained in a different manner and provides a different set of rights. The various forms are discussed in the following sections.

For example, consider a typical modern product – a computer on a stand. The computer has a disk with software on it. The computer includes the usual circuitry, including memory, CPU, and ancillary circuits. It bears the name of the manufacturer and the brand name and is accompanied by a user's manual and a label or tag. What is protectable, and how should you protect it? The next sections provide information to help answer these questions.

Patents

There are three kinds of patents: utility, design and plant. Utility patents are the kind commonly considered when one seeks to protect an invention. They are granted for any new and useful process, machine, manufacture or composition of matter, or improvement thereof, including new uses of old devices or new combinations of well-known components. Design patents cover only the new design of an object – its ornamental appearance. Plant patents are available for inventions or discoveries in asexual reproduction of distinct and new varieties of plants. This area of patents has become much more important with the growth of biotechnology inventions in the last few years, especially regarding the protection of human-engineered life forms. Most of the following discussion focuses on utility patents, though some special considerations of design patents are also provided.

Utility Patents

Utility patents cover three classes of inventions:

• Chemical inventions include new compounds, new methods of making old or new compounds, new methods of using old or new compounds, and new combinations of old compounds. Biological materials and methods, drugs, foodstuffs, drug therapy, plastics, petroleum derivatives, synthetic materials, pesticides, fertilizers, and feeds are all protectable.
• General/mechanical inventions include everything from gears and engines to tweezers and propellers, from zippers to fur-lined keyhole appliqués to Jacque Cousteau's scuba regulator. For example, complex textile-weaving machines, space capsule locks and seals, and diaper pins are all protectable.
• Electrical inventions include everything from lasers to light switches, from the smallest circuit details to overall system architectural concepts.

Computer software is patentable in various forms:

• Application programs, such as the software that runs in a computer used to control a chemical-processing plant or a rubber-molding machine, are patentable.
• Software for running a cash management account at a brokerage house or bank is patentable.
• The microcode in a ROM that embodies the entire inventive notion of a new tachometer is patentable.
• Internal or operations programs that direct the handling of data in the computer's own operations are patentable.

Obtaining a utility patent

The basic requirement for a utility patent is that the idea be new and that it be embodied in a physical form. The physical form may be a thing or a series of steps to perform.

Patent protection is established only upon the issue of a patent on the invention. The owner of the patent has the right to exclude others from making, using, and selling, offering for sale or importing the patented invention during the term of hte patent. Historically the term of a U.S. patent was 17 years from the date of issue. No longer. Patents issuing from patent applications filed after June 8, 1995, will have a term of 20 years from the date of filing. Patents already issued before June 8, 1995, maintain their 17-year term. Those patents that issue ater June 8, 1995, based on patent applications filed beore June 8, 1995, have their choice of term: either 17 years from issue or 20 years from filing. Prior to issue there are no rights under a patent.

The effort begins when the inventor or inventors conceive the invention. They or a registered patent attorney on their behalf prepare a patent application and file it in the U.S. Patent and Trademark Office. From the date that the application is filed there is a “patent pending,” but this confers no rights or protection. Protection applies if and when the Patent and Trademark Office agrees that the invention is patentable and issue the patent.

The patent application must contain a complete and understandable explanation of the invention. It does not have to be a nuts-and-bolts instruction manual. It is enough to convey the inventive concept so that a person skilled in the art to which the invention relates can make and use the invention without undue experimentation. Further, the explanation must contain a full description of the best mode known by the inventor for carrying out the invention. For example, the inventor cannot use the second best embodiment of the invention as an illustration for the patent application disclosure and keep secret the best embodiment. That will make the resulting patent invalid.

The timing of the filing of the patent application is critical. It must be filed within one year of the first public disclosure, public use, sale, or offer for sales of the invention, or the filing will be barred and the opportunity to obtain a patent forever lost. This is known as the one-year period of grace. This may change in the near future to a system in which there is no period of grace (the application must be filed before any activity listed above), to conform with practice in most other countries.

A description of the invention in a printed publication constitutes a public disclosure. A mere announcement is not sufficient, unless it contains an explanation of the invention. It matters not that the only a few copies of the publication were made available, so long as it was an unrestricted distribution.

Market testing, exhibitions, or even use by the inventor himself is a public use sufficient to activate the one-year period. An exception is a public use for experimental purposes. The test for whether a public use was an excepted experimental use is rigorous. The inventor must show that it was the operation and function of the invention that was being tested, not the appeal or marketability of the product employing the invention. Further, some evidence of the testing should be established. For example, if samples were sent to potential customers for evaluation, it would be good to show that the customers returned filled-out evaluation forms and that the inventor considered and even made changes based on those evaluations.

A sale will bar a patent even if the invention is embedded so deeply within a larger system that it could not ever be discovered. If the device containing the invention is sold, that is enough. The idea is that an inventor should be given only one year in which to file his patent application after he has begun to commercially exploit or to attempt to commercially exploit his invention. Thus, for an invention embodied in a production machine installed in a locked, secure room, the one-year period for filing a patent application begins the first time a device produced by that machine is sold, even though the machine may never be known to or seen by anyone other than the inventor. And it is not just a sale that triggers the one-year period. An offer for sale is enough, even if the sale is never consummated.

Criteria for obtaining a utility patent

A patent application contains three basic parts:

• Drawings showing an embodiment of the invention
• A written description of the embodiment referring to the drawings
• One or more claims

Sometimes (often, in chemical cases), the drawings are omitted. The definition of the patented invention, the protected property, is not what is disclosed in the drawings and specification portion of the application; this is only the description of one specific embodiment. The coverage of the patent is defined by the third part of the application, the claims.

To qualify for a patent, the claims must be novel and unobvious. Novelty is a relatively easy standard to define: either a single earlier patent, publication, or product shows the entire invention, or the invention is novel. Obviousness is somewhat more difficult to grasp. Even though an invention may be novel, it may nevertheless be obvious and therefore unpatentable. The test for obviousness is fairly subjective: Are the differences between the invention and all prior knowledge (including patents, publications, and products) such that the invention would have been obvious to a person having ordinary skill in the art to which the invention pertains at the time the invention was made? If so, the invention is not patentable even if it is novel.

The meanings of “novelty” and “unobvious” in the area of patentability can be better understood with an example. Suppose a person is struggling to screw a wood screw into hard wood, and he realizes that the problem is that he cannot supply enough twisting force with the blade of the screwdriver in the slot in the head of the screw. So he gets the bright idea of making the slot a little deeper, so that the screwdriver blade can bite a little deeper and confront more surface area of the slot, thus applying more force to turn the screw. This is a good idea, but it creates another problem. The deeper slot extends much closer to the sides of the screw head. There is less support, and fatigue lines develop, which eventually cause the screw head to crack. The inventor then gets the idea to use a new screwdriver with two shorter, crossed blades, which will give increased surface area contact with two crossed slots in the head of the screw.

But a problem still exists. Although the twin blades do not require such deep slots, there are now twice as many slots, and the screw head is seriously weakened. Now the inventor sees another path: keep the double-blade configuration, but chop off the corners, so that the slots need not extend out so close to the edge of the new screw head.

The results: he has invented the Phillips head screwdriver, for use with a Phillips head screw. Certainly the invention is “novel”: no one else had made that design before. It is also “unobvious” and thus patentable. The addition of the second blade and elimination of the corners has resulted in a wholly new screwdriver concept. The concept is patentable.

Now suppose another party, seeing the patent issued on this double-blade Phillips head, comes up with an improvement of her own. Her invention is to use three crossed blades (cutting the head of the screw into six equal areas), with their corners removed. This design is not patentable. Certainly it is novel, but is it unobvious? Not likely. Once the first inventor has originated the idea of increasing the number of blades and eliminating corners, it is obvious to simply add more blades.

Drafting the patent claims

Once it is decided that a patentable invention exists, it must be protected by properly drafted patent claims. It is the claims that the U.S. Patent and Trademark Office examiner analyzes and accepts or rejects in considering the issuance of the patent. It is the claims that determine if someone has infringed on a patent. It is the claims that define the patent property.

Claims are clearly, then, the most important part of a patent. It is no good to have claims that cover the invention yet do not protect your product or process from being copied by competitors. Does this sound contradictory? Study the following example and you will understand.

Suppose an inventor meets with a patent attorney and shows the attorney a new invention for carrying beverages on the slopes while skiing. The invention eliminates the risk of smashing glass, denting metal, or squashing a wineskin, and it also eliminates the need to carry any extra equipment: It's a hollow ski pole. The ski pole has a shaft, a chamber, and a handle. The handle has a threaded hole that communicates with the hollow shaft. Partway down the inside of the hollow shaft is a plastic liner that creates a chamber for holding liquids; this plastic liner is sealingly attached to the shaft. The chamber is closed by a threaded plug, which engages the threaded hole. The inventor wants to patent the pole, so he assists the patent attorney in writing a description of the ski pole. They write the following claim:

“A hollow ski pole for carrying liquids, comprising:

• a hollow shaft;
• a liner sealingly engaging the hollow inside of the shaft to define a chamber for containing liquid;
• a handle on the shaft;
• a threaded hole in the handle communicating with the chamber in the hollow shaft; and
• a threaded plug for engaging the threaded hole.”

The patent application is filed. The U.S. Patent and Trademark Office examines the application and issues the patent with that claim. The inventor is happy. But not for long, because a competitor comes out with a similar hollow ski pole that doesn't use a liner. The competitor simply welds a piece of metal across the inside of the shaft to make a sealed chamber. The competitor has avoided infringing the patent, because there is no liner, which was one of the specifications of the first patent claim. Another competitor replaces the threaded plug with an upscale mahogany cork. Again the patent is not infringed, because there is no threaded plug.

To infringe a patent, a competitor must infringe a claim of the patent. In order to infringe a claim of the patent, the infringing process or product must include every element of the claim.

This problem can be avoided by exploring the various ways in which the product can be built. This may require input from sales, marketing, engineering, and production people as well as the inventor. After a thorough study, a better claim might emerge as follows:

“A hollow ski pole for carrying liquids, comprising:

• a hollow shaft;
• a chamber formed in said hollow shaft for containing a liquid;
• a handle on the shaft having a hole communicating with the chamber in the hollow shaft; and
• a means for closing the hole in the handle.”

Someone could still design around this claim by leaving out the means for closing the hole; the skier could use her thumb and hope she doesn't fall. Practically speaking, however, the claim would be good enough to keep others from making a meaningful competing product without infringing. There is a limit to how broadly the claim can be worded, however. Eventually, if the claim becomes broader and broader, and does not specify the ski pole or hollow shaft, it will apply to a bottle or a pot with a cover, and the patent will not be obtainable. Careful claim drafting is critical.

Inventorship

Another important area is inventorship. In the United States a patent must be filed by the inventor(s) and no one else. The inventor is the originator of the inventive concept. A project leader is not by his supervisory position alone an inventor of an invention. Neither is a technician or engineer who may have built the first working model. The inventor may have sold or assigned the patent application to someone else – his employer, a partner in some enterprise, a company he has newly formed, or another inventor. Thus, the original inventors may not be the owners of the patent, but it must still be filed in their names.

Provisional Patent Applications

A new type of patent applications referred to as a provisional patent application is now available. A provisional application requires only a written description of the invention and drawings; unlike a conventional application no claims or oath are required. Its purpose is to allow inventors to get something on file quickly and inexpensively to estalish an early filing date that can be relied on by the full patent application, which can be filed up to one year later. Some doubt their effectiveness for either purpose. Provisional applications will be regarded as abandoned in 12 months. The full conventional patent applications must be filed within the 12 months and must refer to the provisional application in order to assume the benefits of the earlier filing date. The provisional application must be complete enough to support the disclosure of the later filed full patent application. Otherwise, the filing date is lost and there is a risk of the patentable subject matter falling into the public domain.

Design Patents

Hockey uniforms, ladies' dresses, computer housings, automobile bodies, buildings, shoes, and game boards are all protectable with design patents. But this type of patent covers only the appearance, not the idea or underlying concept. What you see is what you get. Design patents are generally less expensive than utility patents and in some cases are the only protection that is needed or obtainable.

Design patents have a life of only 14 years from the date of issue but are otherwise generally subject to the same rules as other patents. That is, the new and original ornamental design to be patented must be novel and unobvious and must be filed within one year of the first public use, publication, sale, or offer for sale.

Trade Secrets

Trade secrets cover everything that patents cover, and much more. A trade secret is knowledge, which may include business knowledge or technical knowledge, that is kept secret for the purpose of gaining an advantage in business over one's competitors. Customer lists, sources of supply of scarce material, or sources of supply with faster delivery or lower prices may be trade secrets. Certainly, secret processes, formulas, techniques, manufacturing know-how, advertising schemes, marketing programs, and business plans are all protectable.

There is no standard of invention to meet as there is with a patent. If the idea is new in this context, if it is secret with respect to this particular industry or product, then it can be protected as a trade secret. Unlike patents, trademarks, and copyrights, there is no formal procedure for obtaining trade secret protection. Protection is established by the nature of the secret and the effort to keep it secret.

A trade secret is protected eternally against disclosure by all those who have received it in confidence and all who would obtain it by theft for as long as the knowledge or information is kept secret. In contrast to patent protection, there are no statutory requirements for novelty or restrictions on the subject matter.

The disadvantage of trade secrets compared with patents is that there is no protection against discovery by fair means, such as accidental disclosure, independent inventions, and reverse engineering. Many important inventions, such as the laser and the airplane, were developed more or less simultaneously by different persons. Trade secret protection would not permit the first inventor to prevent the second and subsequent inventors from exploiting the invention as a patent would.

The distinction between patents and trade secrets is illustrated in a case in which a woman who designed a novel keyholder immediately filed a patent application. It was a simple design and could be easily copied. While the patent was still pending, she licensed it to a manufacturer for a 5% royalty, with the agreement that if the patent didn't issue in five years, the royalty would drop to 2 ½%. The patent never issued, and the royalty was dropped to 2 ½%. Over the next 14 years, on sales of $7 million, the manufacturer's edge eroded as others freely copied the design. The manufacturer repudiated the royalty contract on the ground that it required payment forever for the small jump that the manufacturer got on its competitors, whereas the patent, had it issued, would have allowed only 17 years of exclusivity. The Court held the manufacturer to its requirement to pay. The ruling allowed the inventor to receive 2 ½% royalty for as long as the manufacturer continued to sell the keyholder. Had the patent issued, royalties would have lasted only 17 years.

Many companies use both approaches, filing a patent application on a trade secret. When the patent is ready to issue, the company reevaluates its position. If the competition is close, they pay the fee and let the patent issue. If not, they don't pay the fee, allowing the patent application to go abandoned, and preserve the trade secret.

Certain trade secrets have been appraised at many millions of dollars, and some are virtually priceless. For example, the formula for Coca-Cola is one the best-kept trade secrets in the world. Known as Merchandise 7X, it has been tightly guarded since it was invented 100 years ago. It is known by only two persons within the Coca-Cola Company and is kept in a security vault at the Trust Company Bank in Atlanta, Georgia, which can be opened only by a resolution from the company's board of directors. The company refuses to allow the identities of those who know the formula to be disclosed or to allow them to fly in the same airplane at the same time. The company elected to forego producing Coca-Cola in India, a potential market of 550 million people, because the Indian government requires the company to disclose the secret formula as a condition for doing business there. While some of the mystique surrounding the Coca-Cola formula may be marketing hype, it is beyond dispute that the company possesses trade secrets that are carefully safeguarded and are extremely valuable.

Secrecy is essential to establishing trade secret rights; without it there is no trade secret property. There are four primary steps for ensuring secrecy:

1. Obtain confidential disclosure agreements with all employees, agents, consultants, suppliers, and anyone else who will be exposed to the secret information. The agreement should bind them not to use or disclose the information without permission.
2. Take security precautions to keep third parties from entering the premises where the trade secrets are used. Sturdy locks, perimeter fences, guards, badges, visitor sign-in books, escorts, and designated off-limits areas are just some of the ways that a trade secret owner can exercise control over the area containing the secrets.
3. Stamp specific documents containing the trade secrets with a confidentiality legend and keep them in a secure place with limited access, such as a safe or locked drawer or cabinet.
4. Make sure all employees, consultants, and others who are concerned with, have access to, or have knowledge about the trade secrets understand that they are trade secrets, and make sure they recognize the value to the company of this information and the requirement for secrecy.

Trade secret owners rarely do all of these things, but enough must be done so that a person who misappropriates the secrets cannot reasonably excuse his conduct by saying that he didn't know or that no precautions were ever taken to indicate that something was a trade secret. This is important because, unlike patents, trade secret protection provides no “deed” to the property.

Since there is no formal protection procedure, the necessary steps for establishing a trade secret are often not taken seriously until a lawsuit is brought by the owner against one who has misappropriated them. In each specific case the owner must show that the precautions taken were adequate.

Trade secret misappropriations generally fall into one of two classes: someone who has a confidential relationship with the owner violates the duty of confidentiality, or someone under no duty of confidentiality uses improper means to discover the secret.

Trade secret theft issues frequently arise with respect to the conduct of ex-employees. Certainly, a good employee will learn a lot about the business during his employment. And some of that learning he will take with him as experience when he leaves. That cannot be prevented. The question is, did he just come smart and leave smarter, or did he take certain information that was exclusively the company's?

For example, in one case a company that had been making widgets for the government for many years did not get its annual contract renewal. When the company questioned the loss of the contract, it was explained that a competitor was supplying widgets of equal quality at a lower price. Upon investigation the company determined that the competitor was located in the same town, that the competitor's widgets were uncannily identical in every dimension, and that the competitor was owned by an ex-employee of the company who had left over a year before. Amicable approaches failed, and a lawsuit was instituted during which the company discovered that the ex-employee had copied their detailed engineering drawings to make the widgets; this eliminated all engineering and design costs and enabled the competitor to sell the widgets to the government at a much lower price. But the ex-employee had not stolen anything. It seems the man knew that every year his ex-employer reissued important engineering drawings that had become torn and tattered or that needed updating, and he threw out the old ones. The ex-employee testified that while driving by one day, he saw the old drawings sticking out of the dumpster. He drove in, took them out of the dumpster, put the ones he wanted in his car, and chucked the rest back in the dumpster. That's how he got a widget with identical dimensions. The court held him liable for misappropriation of trade secrets. He had trespassed to obtain the drawings, and he had learned of the ex-employer's practice of disposing of old drawings while an employee with a duty of confidentiality to the company. The court granted an injunction preventing the ex-employee from selling widgets for a period of months equal to the jump he got by not having to develop his own engineering drawings.

But what if the ex-employee had not trespassed to obtain the drawings from the trash? What if he had waited for the trash collector to remove them and then asked if he could pore over the trash? Or what if he had gone to the dump and picked the drawings out of the mud? When does the owner part with ownership of trade secret materials dumped in the trash?

Trade secrets are extremely valuable, often more so than patents, and can form the basis for lucrative licensing programs. Care should be taken to identify and protect them early and consistently.

Trademarks

Trademark protection is obtainable for any word, symbol, or combination thereof that is used on goods to indicate their source. Any word – even a common word such as “look”, “life”, or “apple” – can become a trademark, so long as the word is not used descriptively. “Apple” for fruit salad might not be protectable. Apple for computers certainly is.

Common forms such as geometric shapes (circles, triangles, squares), natural shapes (trees, animals, humans), combinations of shapes, or colors may be protected. Even the single color pink has been protected as a trademark for building insulation. Three-dimensional shapes such as bottle and container shapes and building features (for example, McDonald's golden arches) can also be protected.

While people generally only speak of trademarks, that term encompasses other types of marks. A trademark is specifically any word or symbol or combination of the two that is used on goods to identify its source. However, a service mark is a word or symbol or combination used in connection with the offering and provision of services. Blue Cross/Blue Shield, Prudential Insurance, and McDonald's are service marks for health insurance services, general insurance services, and restaurant services, respectively. Ownership is established by advertising the mark in conjunction with the service, as opposed to trademarks, where advertising is insufficient – the mark must be used on the goods in commerce.

There are also other types of marks. A collective mark indicates membership in a group, such as a labor union, fraternity, or trade association. A certification mark is used to indicate that a party has met some standard of quality; Quality Court motels, Underwriter's Laboratory, and Good Housekeeping's seal of approval are familiar examples.

If you use any such name or feature to identify and distinguish your products, then think trademark protection. Ownership of a trademark allows you to exclude others from using a similar mark on similar goods that would be likely to confuse consumers as to the source of the goods. This right applies for the duration of ownership of the mark.

Trademarks can be more valuable to a company than all of its patents and trade secrets combined. Consider the sudden appearance and abrupt increase in the worth of trademarks such as Cuisinart, Haagen-Dazs, and Ben & Jerry's. Consider also the increased value that a trademark name such as IBM, Kodak, or GE brings to even a brand new product.

A trademark, unlike a patent, is established without any formal governmental procedure. Ownership of a trademark is acquired simply by being the first to use the mark on the goods in commerce. And it remains the owner's property as long as the owner keeps using it. And keep using it you must, for nonuse for a period of three years constitutes abandonment.

The mark should not be descriptive of the goods on which it is used, although it may be suggestive of the goods. However, it is best to select a mark that is arbitrary and fanciful with respect to the goods. This is because every marketer, including a competitor, has the right to use a descriptive term to refer to its goods. Therefore, exclusive rights to such a mark cannot be secured.

A trademark owner should also take care to prevent the mark from becoming generic, as happened to Aspirin, Cellophane, Linoleum, and other product names. Thus, it is not proper to refer to, for example, simply a Band-Aid, Jello, or Kleenex. The correct form of description is Band-Aid adhesive bandages, Jell-O fruit-flavored gelatin dessert, or Kleenex facial tissues.

It is wise to have a search done for a proposed new mark to be sure that the mark is clear to adopt and use on the goods, that is, to verify that no one else is using the same or a similar mark on the same or similar goods. It is confusing to customers and expensive to change a mark and undertake the costs of all new printing, advertising, and promotional materials when you discover that your new mark has already been used by another.

Registering a Mark

Although there is no need to register a mark, there are benefits associated with registration that make it worthwhile. Registration may be made in individual states, or a federal registration may be obtained. A state registration applies only in the particular state that granted the registration and requires only use of the mark in that state. A federal registration applies to all 50 states, but to qualify, the mark must be used in interstate or foreign commerce. A distinct advantage of federal registration is that even if a mark is used across only one state line, that is, if goods bearing the mark are in commerce only between one state and another state or country, that is enough to establish federal protection in all 50 states. Thus, if you are using your mark in Massachusetts, New Hampshire, and Rhode Island, for example, but do not register it federally, you may later be blocked from using your mark in all other states if a later user of the same mark, without knowledge of your use of the mark, federally registers it. That later user would then have the rights to the mark in all other 47 states even though its actual use may have been only in Oregon and California!

While your common law rights to a trademark or service mark last as long as you properly use the mark, registration must be periodically renewed. Federal registrations extend for 20 years (10 years for registrations filed after November 16, 1989); terms for states vary, but 10 years is typical.

Over the history of trademark law in the United States, registration in the U.S. Patent and Trademark Office followed the common law. That is, to establish ownership of a trademark one had to use the mark on the goods in commerce, and to register the mark in the U.S. Patent and Trademark Office one had to establish that the mark was indeed in use.

That has changed somewhat. Now an application can be filed to register a mark that is not yet in use but is intended to be used. After the U.S. Patent and Trademark Office examines the application and determines that the mark is registerable, the applicant is required to show actual use within six months. The six-month period can be extended if good cause is shown. Nevertheless, before registration, even before actual use, the mere filing of the application establishes greater rights over others who actually used it earlier but did not file an application for registration.

Ownership of a Mark

Care must be taken with trademark properties. A trademark cannot simply be sold by itself or transferred like a desk or car, or a patent or copyright. A trademark must be sold together with the business or goodwill associated with the mark, or the mark will be abandoned. Further, if a mark is licensed for use with a product or service, provision must be made for quality control of that product or service. That is, the trademark owner must require the licensee to maintain specific quality levels for products or services with which the mark is used, under penalty of loss of license. And the owner must actually exercise that control through periodic inspection, testing, or other monitoring that will ensure that the licensee's product quality is up to the prescribed level.

Ownership of a mark is most important in a business. When Cuisinart started selling its food processors, it promoted them vigorously under the trademark Cuisinart. A good part of the business's success was due to the fact that the machines were sturdily made by a product, quality-conscious French company, Robot Coupe, who had been making the machines for many years before they became popular among U.S. consumers under the mark Cuisinart. When price competition reared its head, Cuisinart found cheaper sources. Robot Coupe owned no patents and had no other protection. When Cuisinart began selling brand X under the name Cuisinart, a wild fight ensued through the courts and across the pages of major newspapers in the United States, but to no avail. The whole market had been created under the name Cuisinart, and Cuisinart had the right to apply its name to any machine made anywhere by anyone it chose. Robot Coupe, whose machine had helped create the demand for food processors, was left holding its chopper.

European Trademark

A “European” trademark registration is now available, known as a Community Trade Mark or CTM, wherein a single registration will cover the entire European Union: with the benefit of a single filing plenary protection is provided. However, there are certain drawbacks. For example, a single user in any country of the Union could block registration everywhere and cost considerations make a CTM filing uneconomical generally unless trademarks are sought in at least three countries.

Copyright

Copyrights cover all manner of writings, and the term writings is very broadly interpreted. It includes books, advertisements, brochures, spec sheets, catalogs, manuals, parts lists, promotional materials, packaging and decorative graphics, fabric designs, photographs, pictures, film and video presentations, audio recordings, architectural designs, and even software and databases. Software and databases are protected not only in written form but also as stored in electronic memory.

A utilitarian object such as a hypodermic needle, a hammer, or a lamp base cannot be the subject of a copyright. Yet stained glass windows, software, piggy banks, and a sculpture useful as a lamp qualify for copyright protection.

It is said that a copyright does not protect a mere idea; it protects the form of the expression of the idea. But this is broadly interpreted. For example, one can infringe a book without copying every word; the theme is protected even though upon successive generalizations the theme will devolve to one of seven non-protectable basic plots. This is apparent in the software area, where using the teachings of a book to write a program has resulted in copyright infringement of the book by the computer program. In another case a program was infringed by another program even though the second program was written in an entirely different language and for an entirely different computer. The form of the expression protected was not merely the actual writing, the coding, but the underlying concept or algorithm – the flow chart. Copyright is a very strong and readily achievable source of protection.

A copyright has a term extending for the life of the author plus 50 years. Legislation is under consideration to extend that 50-year term to 70 years in conformity with certain other countries. For corporate “authors” or works made for hire, the period is 75 years from first publication or 100 years from creation, whichever is shorter. During the life of the copyright the owner had the exclusive rights to reproduce, perform and display the work.

Establishing Copyright

Historically, under law a copyright was established by publishing the work – a book, painting, music, software, instruction manual – with copyright notice, typically “Copyright” “Copr.,” or © followed by the year of first publication and the name of the owner. The notice may appear on the back of the title page of a book, on the face of a manuscript or advertisement, or on the base of a sculpture. It had to be visible and legible, but it could be placed so as not to interfere with the aesthetics of the work. If more than a few copies of the published work appeared without the notice, the copyright was forfeited forever. Works that were unpublished did not need notice. They were protected by virtue of their retention in secrecy. Publication with notice was all that was required; registration with the Copyright Office was not always immediately necessary.

Under the laws enacted in 1976, publication without notice can be rectified if the notice is omitted from only a small number of copies, registration of the work with the Copyright Office is effective within five years, and an effort is made to add the notice to those copies published without it. Notice must be on the work in all its forms. For example, for software the notice should appear on the screen, in the coding, on the disk, and on the ROM, wherever the software is resident or performing. In one case an infringer got away with reading out copyrighted software from a ROM because there was no notice on the ROM, although there was notice elsewhere.

Presently, under an amendment to the current law effective March 1989, no notice is required at all. In order to become a member of an international copyright treaty known as the Bern Convention, the United States had to abolish all formalities required to establish copyright in a work. Now the simple fact that a work was created, whether published or not, is enough to establish the copyright. It is not clear that this removal of the need for notice is retroactive. Thus, new works after March 1989 need not have notice, but those that were required to bear notice before the amendment should, in the exercise of prudence, continue to bear the notice.

Although notice is no longer compulsory, it is a valuable and worthwhile practice since it enables the pursuit of innocent infringers. That is, an infringer who did not have actual notice that the work copied was copyrighted is nevertheless liable if the work bore copyright notice.

Registering a Copyright

Registration also is non-compulsory, but it, too, bestows valuable additional rights. If the copyright owner has registered the copyright, statutory damages of up to $500,000 can be recovered without proof of actual damages. This can be a real advantage in copyright cases where actual damage can be difficult and expensive to prove.

Registration requires filling out the proper form and mailing it to the Copyright Office with the proper fee and a deposit of two copies of the work for published works, or only one copy if the work is unpublished. Accommodations are made for filing valuable or difficult deposit copies: Deposit for three-dimensional works can be effected using photographs, and deposits for large computer programs can be effected using only the first and last 25 pages. Further, if the program contains trade secrets, there is a provision for obscuring those areas from the deposit.

Summing Up

Now consider the question posed at the beginning of this chapter: What parts of a computer on a stand are protectable, and how can they be protected? The computer memory, circuits, and CPU, as well as its architecture, could be protected by patents or trade secrets. The software could be protected by patent, too. The software could also be protected by copyright and trade secret. (Software protection is discussed in detail later in this chapter.) The user's manual could also be protected by copyright and trade secret. The company name and the brand name could be trademarks. The housing of the computer as well as the stand could be protected by design patents. The contents or form of the label may be protected by trademark or copyright.

THE INTERNET

Internet activity is placing new pressures on intellectual property practice. Uploading and downloading of copyrighted material on the Internet is copyright infringement. Copyright infringement has also been found in some cases against bulletin board operators and administrators who have received and stored such material.

Webnet addresses are taking on some of the characteristics of trademarks but not enough to make that sort of protection clearly available when there is a similarity between two addresses that is likely to cause confusion. Further, there have been some instances where a party has incorporated a well-known name or mark of another in his own net address. No clear legal theories have evolved yet.

INTERNATIONAL PROTECTION FOR INTELLECTUAL PROPERTY

Obtaining protection for patents, trademarks, and copyrights in the United States alone is no longer sufficient in the modern arena of international competition and global markets. International protection often needs to be extensive and can be quite expensive, but there are ways to reduce and postpone the expense in some cases. Protection must be considered in countries where you intend to market the new product or where competitors may be poised to manufacture your product.

A patent in one country does not protect the invention in any other country: A novel product or method must be protected by a separate patent in each country. In addition, each country has different restrictions that must be met, or no patent protection can be obtained. The first and most important restriction is the time within which you must file an application to obtain a patent in a country or else forever lose your right to do so.

Patent Filing Deadlines

Not all countries are the same with respect to filing deadlines. For example, as previously noted, in the United States an inventor may file an application to obtain a patent on an invention up to one year after the invention has become public through a publication explaining the invention, a public use of the invention, or the sale or offer for sale of the invention. This one-year period is known as the period of grace.

There is not period of grace in many other countries, such as Great Britain, West Germany, Sweden, France, Italy, Switzerland, Belgium, Austria, the Netherlands, Australia, and Japan. And each country has a slightly different view of what constitutes making an invention public. In Japan, for example, public use of an invention before the filing of an application bars a patent only if the public use occurred within Japan, but in France any public knowledge of the invention anywhere bars the patent.

Thus, whereas the United States allows a business one full year to test market its new product, most other countries require that the patent application be filed before any public disclosure, that is, before the owner can even begin to determine whether the new product will be even a modest success. And meeting this requirement is not inexpensive, especially when the U.S. dollar is down against the currencies of other major countries.

How to Extend Patent Filing Deadlines

However, there are ways around having to file immediately, as provided for by the treaty known as the Paris Convention. If you file in the United States and then file in any country that is a party to the convention within one year of the date on which you filed in the United States, the U.S. filing date applies as the filing date for that country. In this way, by filing one application for the invention in the United States, you can preserve your initial U.S. filing date for up to one year. This means that you can file an application in the United States, and then immediately make the invention public by advertising, published articles, and sales. If within one year the product appears to be a success, you can then file in selected foreign countries, even though the prior public use of the invention would ordinarily bar your filing in those countries.

There are other options by which you can postpone the cost of foreign filings while preserving your right to file. Another, more recent treaty known as the Patent Cooperation Treaty (PCT) permits a delay of up to 20 or even 30 months before the costs of filing in individual countries are incurred. The PCT option is available if you file and request PCT treatment within one year of your U.S. filing date.

Thus, by filing a PCT application in a specially designated PCT office within one year of your U.S. filing, and by designating certain countries, you can preserve your right to file in those countries without further expense for 20 or 30 months after the U.S. filing date. That will provide an additional 8 or 18 months for test marketing the product. This does introduce the extra cost of the PCT application filing, but if you are considering filing in, say, six or more countries, the extra PCT filing may be well worth the cost for two reasons:

• It delays the outflow of cash that you may not presently have or may require for other urgent needs.
• If the product proves insufficiently successful, you can decide not to file in any of the countries designated under the PCT and save the cost of all six national application filings.

Another cost-saving feature of international patent practice is the European Patent Convention (EPC), which is compatible with the Paris Convention and the PTC and which enables you to file a single European patent and designate any one or more of 17 European countries in which you wish the patent to issue.

There are a number of international treaties that affect trademark rights and copyrights as well.

LICENSING AND TECHNOLOGY TRANSFER

A license is simply a special form of contract or agreement. Each party promises to do or pay something in return for the other party doing or paying something. Contracts that deal with the transfer of technology, or more broadly, intellectual property – patents, trade secrets, know-how, copyrights, and trademarks – are generally referred to as licenses. The licensed property can be anything from the right to use Mickey Mouse on a T-shirt or to make copies of the movie Star Wars, to the right to operate under the McDonald's name, to use a patented method of making a microchip, or to reproduce, use, or sell a piece of software. Software licenses are just one of the many types of licenses. The basic considerations are the same as for any other license, but specific clauses and language are tailored to the software environment.

Common Concerns and Clauses

The term license is typically used to refer to a number of different types of contracts involving intellectual property, including primarily an assignment, an exclusive license, and a nonexclusive license. And this broad reference will be used in this section.

An assignment is an outright sale of the property. Title passes from the owner, the assignor, to the buyer, the assignee. An assignment can take a number of forms:

• It can cover an entire patent, including all the rights under the patent.
• It can apply to an undivided fractional portion of all the patent rights (such as 30% undivided interest).
• It can include all the rights embraced by a patent limited to any geographical part of the United States.

A license is more like a rental or lease. The owner of the property, the licensor, retains ownership; the buyer, the licensee, receives the right to operate under the property right, be it a patent, trade secret, know-how, copyright, or trademark. An exclusive license give the licensee the sole and exclusive right to operate under the property to the exclusion of everyone else, even the licensor. A nonexclusive license, in contrast, permits the licensee to operate under the licensed property but without any guarantee of exclusivity. The licensor can try to find more licensees and license them, there may be others who are already licensed, and the licensor can also operate under the property.

By definition, an assignment is exclusive since the assignee acquires full right and title to the property. Many licensees prefer an assignment or exclusive license because they want a clear playing field with no competitors in order to maximize their revenue from the property and justify the license cost.

Within either of these forms – exclusive license or nonexclusive license – may be included a right to sublicense, which is the right of the licensee to license others. This removes part of the licensor's control over the property and extends the licensee's liability to the conduct and payment of all sublicensees. A sublicense is an important and valuable right that is not automatically conveyed with the primary license right; it must be expressly granted. The term transferable in a license means that the license can be transferred as a whole along with the part of the licensee's business to which the license pertains; it does not confer the right to sublicense.

Licensors often prefer a nonexclusive license because it spreads their royalty income over a number of diverse licensees, increasing the chances of a successful return. In addition, if the property is freely available to all credible businesses, no one is left out or disadvantaged. All have an equal chance to compete, and the chances are reduced of a lawsuit from a rejected potential licensee.

Defining the Property Being Licensed

Great care must be exercised to clearly define the property being licensed. For example, consider the following questions:

• Is it more than one patent, just one patent, or only a part of one patent?
• It is just the trademark, or the entire corporate image – names, advertising, and promotional scheme and graphics?
• If it concerns copyright, does it cover just the right to copy a book or other printed material in the same print form, or does it include nay of the following rights?
  • Translation into another language
  • Adaptation for stage, screen or video
  • Creation of derivative works
  • Merchandising its characters and events on T-shirts and toys?
• If it involves know-how or trade secrets, where are they defined?

Licensees must be sure that they are getting what they want and need. And a licensor must make clear the limits of the grant. In a software license if the grant is only to use the software, not to modify it or merge it with other software, that must be expressly stated.

Limitations on Licenses

A license may have numerous, different limitations, including time, the unit quantity, and the dollar value of products or services sold. The license can also be limited geographically. Field-of-use limitations are quite common, too. This limitation restricts the licensee to exploit the licensed property only in a designated field or market.

Assigning Value to a License

Perhaps the most universal concern in negotiating a license is, how do you assign a dollar value to intellectual property? First, determine what it cost to acquire that property, to build that property. For example, all of the following are hard costs that go into creating a property:

• The research and development cost involved in coming up with a new invention
• The design cost of coming up with a new trademark or copyrighted work
• The costs of commercializing the invention
• The cost of advertising and promoting the trademark or copyrighted work, which can run into millions of dollars a year
• Incidental costs, such as legal costs, engineering costs, and accounting costs

Second, determine how this intellectual property affects the profitability of the product or the business. Can you charge more because the product has a famous name or because of the new features the invention has bestowed on the product? Can your costs be cut because of the new technology of the invention? If so, determine dollar values for those figures.

You might also determine how much the intellectual property increases gross revenues by opening new markets or by acquiring a greater percentage of established markets. All of these figures can be converted into dollar amounts for valuation.

Royalty Rates

A “typical” royalty rate for a nonexclusive license to a patent, trade secret, or know-how is universally stated to be 5%, but that rule is breached as often as it is honored. Nonexclusive license royalty rates in patent licenses can be 10%, 20%, 25%, or even higher. And exclusive license royalty rates tend to be higher because the licensee receives total exclusivity and the licensor is at risk if the licensee does not perform. Exclusive licensors generally demand initial payments for the same reason. In determining a reasonable royalty as a damage award in an infringement suit, courts have considered the following factors:

• The remaining life of the patent
• The advantages and unique characteristics of the patented device over other, prior devices
• Evidence of substantial customer preference for products made under the patent
• Lack of acceptable noninfrining substitutes
• The extent of the infringer's use of the patent
• The alleged profit the infringer made that is credited to the patent

Negotiating License Agreements

In any commercial agreement in which the consideration promised by one party to the other is a percentage of profits or receipts or is a royalty on goods sold, there is nearly always an implied promise of diligent, careful performance and good faith. But licensors generally seek some way to ensure that the licensee will use its best efforts to exploit the property and maximize the licensor's income. One approach is simply to add a clause in which the licensee promises to use its “best efforts.” Another approach is to compel certain achievements by the licensee. The license may require a minimum investment in promotion and development of the property, which may be expressed in dollars, human labor hours, or even specific stated goals of performance or sales. Or the simpler approach of a minimum royalty can be employed: The licensee pays a certain minimum dollar amount in running royalties annually, whether or not the licensee's sales actually support those royalties – not a pleasant condition for the licensee but one that provides a lot of peace of mind for the licensor.

Perhaps the best insurance of performance is a competent, enthusiastic licensee. A little preliminary investigation of the licensee (in terms of net worth, credit rating, experience, reputation, manufacturing/sales capability, and prior successes/failures) can assuage a lot of fears and eliminate risky licensees. A reverter clause, which evicts the licensee and returns control to the licensor in the event of unmet goals, is the ultimate protection. Often the licensor's greatest concern is that the licensee might now or later sell one or more competing products, leading to a plain conflict of interest. A non-competition clause can prevent this, but antitrust dangers are raised by such clauses, and licensees do not like this constraint on their freedom. Other approaches are safer, such as specified minimum performance levels.

Confidential disclosure clauses are necessary in nearly all license agreements, especially those involving trade secrets, know-how, and patent applications. Such clauses are necessary to protect not only the property that is the subject of the license, but also all of the technical, business, financial, marketing, and other information the parties will learn about each other during the license term, and even during negotiations before the license is executed.

Foreign Licenses

The aforementioned clauses and concerns pertain generally to all licenses, domestic U.S. as well as foreign. In addition, there are other clauses more peculiarly suited to foreign agreements.

Geographic divisions are important because of the somewhat different treatment of intellectual property in each country. The manufacture and use of the product related to the patent, trade secret, or know-how may be limited to the United States, but sales may be permitted worldwide. Payment must be defined as to the currency to be used as well as to who will pay any taxes or transfer charges. The parties must provide for government approval of the transfer of royalties and repatriation of capital.

A license agreement is a special form of contract in which each party promises to do something in exchange for promises by the other party. It is based on a business understanding between the parties and common sense applied to the attainment of business goals. But it is more complex than a normal contract because of the uniqueness of its subject matter, intellectual property – patents, trademarks, copyrights, trade secrets, and know-how. These properties require special action for their creation and maintenance. And great care is necessary in licensing such properties to maximize their returns and prevent their loss.

SOFTWARE PROTECTION

Protection for computer software has been the subject of debate for many years. At one time there was strong opposition to the awarding of patents for inventions embodied in or involving software. That is no longer the case; Now software is commonly patented. Copyright protection had been considered only for the coding, but that too has changed: Now it is clear that copyright protection covers not only the coding (the literal aspects of a computer program), but also aspects such as the sequence and flow, organization and structure, user interface, and menus. Trade secret protection was formerly available, but only if you kept the software secret, which made it awkward to embrace copyrights. Now the Copyright Office has a procedure whereby software copyrights can be registered yet trade secrets contained in the software can be specifically preserved.

Patents for Software

Broad patent protection is available for software. The scope of patent protection extends beyond the coding or routines, beyond the structure and organization, beyond the user interface and menus of the program, to the broad underlying concept of algorithm. All manner of software is protectable by patent regardless of how it is perceived – as controlling industrial equipment or processes, as effecting data process, or as operating the computer itself.

For example, software implementation of steps normally performed mentally may be patentable subject matter. Thus, while a method of doing business is not patentable subject matter, the software to effect a business activity may be. In one case the software implementation of a system that automatically transferred a customer's funds among a brokerage security account, several money funds, and a Visa/checking account automatically upon the occurrence of present conditions, was held to be patentable subject matter. Also, a software method of translating from one language to another (Russian to English) was found to be protectable.

Many patents have been issued on data processing software; following are some examples:

• A system for registering attendees at trade shows and conventions
• A securities brokerage cash management system
• An automated securities trading system
• An insurance investment program for funding a future liability
• Software for managing an auto loan
• Software for optimization of industrial resource allocation
• Software for automatically determining and isolating differences between text files (word processing)
• Software for returning to a specified point in a document (word processing)
• Software for determining premiums for insurance against specific weather conditions.

Software that operates the computer itself is patentable, too. For example, patents have issued on:

• Software for converting a source program to an object program
• Programs that translate from one programming language to another
• A cursor control for a pull-down menu bar
• Software that displays images in windows on the video display
• A computer display with window capability

The software may be composed of old routines as long as they are assembled in a different way and produce a different result, for it is well established in patent law that a combination of old parts is patentable if the resulting whole is new. Indeed, most inventions are a new assembly of well-known parts or steps.

Design patents too have been used to protect software. Design patents have been issued for visual features produced on the screen by the computer software, such as various display icons; one example is an icon for a telephone display.

Software Copyrights

Copyright protection for software, though not as broad as patent protection, is nevertheless quite broad. As stated earlier, a copyright protects not just against the copying of the coding but also against the copying of the organization and structure – its “look and feel.” If a subsequent developer creates software that “looks and feels” like earlier copyrighted software, there is infringement, whether or not the coding is similar. But courts do differ on the breadth of copyright protection.

All forms of programs are protectable by copyright – flow charts, source programs, assembly programs, object programs. And it makes no difference whether the program is an operating system or an applications program. No distinction is made concerning the copyrightability of programs that directly interact with the computer user and those that, unseen, manage the computer system internally. Protection is also afforded microcode or micro-programs that are buried in a microprocessor, and even programs embedded in a silicon chip.

Databases too are protected by copyright. The input of a copyrighted database results in the making of a copy, so there is copyright infringement. It makes no difference if the data copied from indices and graphs or maps is rearranged not as another book or visual aid but as an electronically stored database: It is infringement. And this is so even if new and different maps, graphs, and text are produced from a database by the computer.

Even more subtle copyright problems have occurred regarding databases. The purveyor of a computer program that permits users to access and analyze the copyrighted database of another was found liable for copyright infringement because in order to analyze the data, the program had to first copy portions of the database.

Software Trade Secret Protection

Software may also be protected through a trade secret approach, separately or in conjunction with patent and copyright protection. Normally, all information disclosed in a published copyrighted work is in the public domain. However, the U.S. Copyright Office fully recognizes the compatibility of copyright and trade secret protection, and its rules provide special filing procedures to protect trade secrets in copyrighted software.

HOW TO AVOID THE PRELIMINARY PITFALLS OF PROTECTING INTELLECTUAL PROPERTY

Frequently, when a person thinks of protecting a new idea or product, the thoughts turn to patents, trade secrets, and copyrights. But the game can be won or lost long before one has the opportunity to establish one of those forms of protection. That is why the fundamental forms of protection – confidential disclosure agreements, employment contracts, and consultant contracts – are so important. Whether or not an idea or product is protectable by an exclusive statutory right such as a patent or copyright, there still is a need at an early stage, before such protection can be obtained, to keep the basic information confidential in order to prevent public use or disclosure, which can result in the loss of rights and inspire others to seek statutory rights before you.

Confidential disclosure agreements, employment agreements, and consultant agreements have some things in common. They define the obligations of the parties during the critical early stages of development of a new concept, product, or process. They are usually overlooked until it's too late, after the relationship is well under way and a problem has arisen. For proper protection of the business, there must be agreements with employees, consultants, and in some cases, suppliers and customers to keep secret all important information of the business and to assign to the business all rights to that information.

It is commonly thought that only technical information can be protected. This is not so. All of the following can be protectable information:

• Ideas for new products or product lines
• A new advertising or marketing program
• A new trademark idea
• The identity of a critical supplier
• A refinancing plan

And all of these can be even more valuable than the technical matters when it comes to establishing an edge over the competition and gaining a greater market share.

Employment contracts, consultant contracts, and confidential disclosure agreements all should be in writing and signed before the relationship begins, before any work is done, before any critical information is exposed, and before any money changes hands. A business must not be in such a rush to get on with the project that it ends up without full ownership of the very thing it paid for. And the employees, consultants, or other parties must not be so anxious to get the work that they fail to understand clearly at the outset what they are giving up in undertaking this relationship.

Preparing Employment Contracts

Employment contracts must be fair to both parties and should be signed by all employees, at least those who may be exposed to confidential company matters or may contribute ideas or inventions to the business. They should also be short and readable.

Employment contracts, like all agreements, must have considerations flowing both ways. If I agree to paint your house for $1,000, my consideration to you is the painting of your house. Your consideration to me is the $1,000. In an employment contract, the consideration from the employee includes all promises to keep secrets and assign ideas and inventions; the consideration from the business is to employ the employee. Thus, it is best to present these contracts to the prospective employee well before she begins work.

After the job has begun, the consideration will be the employee's “continued” employment, and that sounds a bit threatening. Although “continued” employment is certainly proper consideration, in construing these contracts courts can easily see that the employer usually has the superior bargaining position, and so they generally like to know that when the contract was offered for signature, the employee had a fair opportunity to decline without suffering severe hardship. It is not a good idea to present the employment contract in a packet of pension, hospitalization, and other forms to be signed the day the employee shows up to begin work after having moved the entire family across the country in order to take the job.

Transfer of Employee Rights to Company Innovations

One of the most important clauses in an employment contract is the agreement by the employee to transfer to the company the entire right, title, and interest in and to all ideas, innovations, and creations. These include designs, developments, inventions, improvements, trade secrets, discoveries, writings, and other works, including software, databases, and other computer-related products and processes. The transfer is required whether or not these items are patentable or copyrightable. They should be assigned to the company if they were made, conceived, or first reduced to practice by the employee. This obligation should hold whether the employee was working alone or with others and whether or not the work was done during normal working hours or on the company premises. So long as the work is within the scope of the company's business, research, or investigation or it resulted from or is suggested by any of the work performed for the company, its ownership is required to be assigned to the company.

This clause should not seek to compel transfer of ownership for everything an employee does, even if it has no relation to the company's business. For example, an engineer employed to design phased array radar for an electronics company may invent a new horseshoe or write a book on the history of steeplechase racing. An attempt to compel assignment of ownership of such works under an employment agreement could be seen as overreaching and unenforceable. The same may be true of a clause that seeks to vest in the employer ownership of inventions, innovations, or other works made for a period of time after employment ends or before employment begins.

Ancillary to this transfer or assignment clause is the agreement of the employee to promptly disclose the inventions, innovations, and works to the company or to any person designated by the company, and to assist in obtaining protection for the company, including patents and copyrights in all countries designated by the company. The employee at this point also agrees to execute:

• Patent applications and copyright applications
• Assignments of issued patents and copyright registrations
• Any other documents necessary to perfect the various properties and vest their ownership clearly in the company

If these activities are called for after the employee has left the company, she is still obligated to perform but must be paid for time and expenses.

How Employee Moonlighting Might Compromise Confidentiality

Another important concern is moonlighting. While a company that sells CAD/CAM workstations doesn't care if its programmers drive fish delivery trucks on their own time, there are extremely sensitive situations that the company as well as the employee must take care to avoid. In one case a CAD/CAM company discovered huge telephone charges for various lengthy periods from 3:00 p.m. to 8:00 p.m. on most days of the week, including Saturdays and Sundays. The company challenged the telephone bill and found that the calls were indeed made from the company's own phones to a major computer manufacturer many miles away. The computer manufacturer claimed ignorance. But after a lengthy investigation it was discovered that an employee of the company had been hired on a consulting basis by a middle manager at the manufacturer to develop a software system. The employee had been doing his consulting for the computer manufacturer over the telephone lines from his computer terminal while sitting at his desk in his company office. The employee was not shortchanging the company as far as hours were concerned; he was working long hours to make up for his moonlighting, and the software he was developing was not in the company's CAD/CAM area. But the revelation was chilling. The mere awareness that an information line existed between this giant computer manufacturer and the company, and what might have transpired over that line, haunted the company's officers and managers for some time afterward.

To prevent this, the employee should agree in the employment contract that during employment by the company there will be no engagement in any employment or activity in which the company is now or may later become involved, nor will there be moonlighting on the company's time or using the company's equipment or facilities.

Non-Competition Clauses

A closely related notion is a non-competition provision whereby the employee agrees not to compete during his employment by the company and for some period after leaving the company's employ. This is a more sensitive area. It may be perfectly understandable that a company does not want its key salesperson, an officer, a manager, or the head of marketing or engineering to move to a new job with a competitor and have the inside track on his ex-employer's best customers, new product plans, manufacturing techniques, or new marketing program. But the courts do not like to prevent a person from earning a livelihood. Courts do not compel a lifelong radar engineer, for example, to turn down a job with a competitor in the same field and instead take a job designing cellular phones. A person who has spent a life-time marketing and selling drapes and curtains cannot be made to sell floor coverings or used cars.

However, the higher up and more important a person is in the operation of the company, the greater is the probability that that person will be prevented from competing if the employment agreement provides for it. Officers, directors, founders, majority stockholders, and other key personnel have had such provisions enforced against them, but even then the scope of the exclusion must be fair and reasonable in terms of both time and distance. A few months, a year, or even two years could be acceptable, depending on how fast the technology and market is moving. Worldwide exclusion might be acceptable for a salesperson who sells transport planes. In the restaurant business, a few miles might be all that is necessary. A contract that seeks to extend the exclusion beyond what's fair will not be enforced.

One way to ensure that an ex-employee does not compete is to allow the company to employ the person on a consultant basis over some designated period of time. In this way the employee's involvement in critical information areas can gradually be phased out, so that by the time the employee is free to go to a competitor there is no longer a threat to the company, and at the same time the employee has been fairly compensated.

Bear in mind, however, that even if ex-employees are free to compete, they are not free to take with them (in their memories or in recorded form) any trade secrets or any information confidential or proprietary to the company or to use it or disclose it in any way. To reinforce this the employment contract should provide that the employee will not, during employment by the company or at any time thereafter, disclose to others or use for her own benefit or for the benefit of others any trade secrets or any confidential or proprietary information pertaining to any businesses of the company – technical, commercial, financial, sales, marketing, or otherwise. The restriction could also protect such information pertaining to the business of any of the company's clients, customers, consultants, licensees, affiliates, and the like.

Along with this the employment contract should provide that all documents, records, models, electronic storage devices, prototypes, and other tangible items representing or embodying company property or information are the sole and exclusive property of the company and must be surrendered to the company no later than the termination of employment, or at any earlier time upon request of the company. This is an important provision for both the employer and employee to understand. In some states the law imposes serious criminal sanctions and fines for the removal of tangible trade secret property
.

Preventing Employee Raiding

Another potential area of conflict is employee raiding, the hiring away of employees by an ex-employee who is now employed by a competitor or who has founded a competing business. This is a particularly sensitive situation when the ex-employee holds a position of high trust and confidence and was looked up to by the employees she is now attempting to hire. And it is particularly damaging when the employees being seduced are critical to operations either because of their expertise or their sheer numbers. In all circumstances such an outflow of employees is threatening because of the potential loss to a competitor of trade secrets and know-how. This can be addressed by a clause prohibiting an employee, during her employment period and for some period thereafter, from hiring away fellow employees for another enterprise.

Employee Ownership of Copyright

One of the most hazardous areas of ownership involves the title to copyrights. If a copyrighted work is created or authored by an employee, the company automatically owns the copyright. But the employee must be a bona fide employee. That is, there must be all the trappings of regular employment. If a dispute arises over ownership between the company and the author, the courts will seek to determine whether the author was really an employee. Was this person provided a full work week, benefits, withholdings, unemployment insurance, worker's compensation, and an office or workspace? If the author was anything less than a full employee, the copyright for the work belongs to the person. It does not below to the company!

This means that if the company hires a part-time employee, a consultant, a friend, or a moonlighter, that person may end up owning the copyright for the work. Thus, when the non-employee completes the software system that will revolutionize the industry and bring income cascading to the enterprise, the employee, not the company, will own the copyright. The company will own the embodiment of the system that the employee developed for the company, but the employee will own the right to reproduce, copy, and sell the system over and over again. It has happened. A company that spent hundreds of thousands of dollars to develop a software system owned the finished product but not the copyright in the product. The non-employee owned the copyright and had the right to reproduce the product without limit and sell it to those who most desire it – typically the company's competitors and customers.

This is a chilling scenario but one that is easy to avoid with a little forethought. The solution is easy: Simply get it in writing. Before any work starts, payment changes hands, or plans are revealed, have the proposed author sign a written agreement specifying that, whether or not the author is subsequently held to be an employee or a non-employee, all right, title, and interest in any copyrightable material is assigned to the company. The lack of such a clear understanding in writing can wreck great dreams, ruin friendships and partnerships, and hamstring businesses to the point of insolvency while the parties fight over who owns the bunny rabbit, the book, the software, the poster, or the videotape on how to be a successful entrepreneur.

Moral Rights of Authors or Artists

Another area that must be considered is the moral rights of authors in their works. Under a law effective June 1, 1991, in the United States, moral rights of artists in their visual works are protected. Moral rights were variously defined as the rights of attribution and integrity, or the rights of paternity and integrity. What this means is that an artist has a right to insist that his name be associated with the work, or to refuse to have his name associated with the work if it is mutilated in the artist's opinion, and also to insist that the work not be mutilated; that is, the integrity of the work must be maintained. The moral rights doctrine has been invoked, for example, in an attempt to prevent the removal of a wall containing a painted mural.

The law in the United States that established the moral rights doctrine provides that the artist's moral rights may not be transferred, but may be waived by the artist in a written statement that specifically identifies the work and the uses to which the waiver applies.

Therefore, in every agreement dealing with copyrights, it is prudent to include a clause in which the artist in writing specifically refers to the work or works and waives the moral rights for all uses of all the works. It probably would also be wise to refer to Section 106(a) of the Copyright Act, which embodies the moral rights doctrine.

Rights of Prior Employees

There is another issue to consider under employment contracts. When a new employee is to be hired, obtain a copy of the employment contract with the last employer or the last few employers to determine whether this employee is free to work for this company now, in the capacity the employee seeks. Prior employers have rights, too, that can conflict, rightly or wrongly, with the employee's new employment.

Consultant Contracts

Consultant contracts should contain provision similar to those in an employment contract, along with some additional provisions. A consultant agreement should clearly define the task for which the consultant is hired – for example, to research a new area; to analyze or solve a problem; design or redesign a product; set up a production line; or assist in marketing, sales, management, technical, or financial matters. This is important to show:

• Why the consultant was hired
• What the consultant is expected to do
• What the consultant may be exposed to in the way of company trade secrets and confidential and proprietary information
• What the consultant is expected to assign to the company in the way of innovations, inventions, patents, and copyrights

A company hiring a consultant wants to own the result of whatever the consultant was hired to do, just as in the case of an employee. But a consultant's stock in trade is the expertise and ability to solve problems swiftly and elegantly in a specific subject area. Sharp lines must be drawn as to what the consultant will and will not assign to give both parties peace of mind.

Consulting relationships by their nature can expose each of the parties to a great deal of the other party's trade secrets and confidential and proprietary information. The company can protect itself with clear identification of the pertinent information and by employing the usual safeguards for trade secrets. It also must limit disclosure to the consultant to what is necessary to do the job, and also limit the consultant's freedom to use the information in work for others and to disseminate the information. Consultants must protect themselves in the same way to prevent the company from misappropriating the consultant's special knowledge, problem-solving approaches, and analytical techniques.

An often overlooked area is the ownership of notes, memos, and failed avenues of investigation. False starts and failures can be as important as the solution, especially to competitors. Related to this is the question of the ownership of the raw data. Raw data may be extremely valuable in their own right but also may be used to easily reconstruct the end result of the consultant's work, such as a market survey.

Confidential Disclosure Agreements

Whenever an idea, information, an invention, or any knowledge of peculiar value is to be revealed, a confidential disclosure agreement should be signed by the receiving party to protect the disclosing party. The disclosure may be necessary for any of the following reasons:

• To interest a manufacturer in taking a license to make and sell a new product
• To hire a consultant to advise in a certain area
• To permit a supplier to give an accurate bid
• To allow a customer to determine whether or not it wants a product or wants a product modified
• To interest investors to invest in the business

Disclosure agreements are important not only to protect the knowledge or information itself, but also to preserve valuable related rights such as domestic and foreign patent rights. These agreements should be short and to the point.

Basically, the receiver of the disclosure should agree to keep confidential all information disclosed. Information is defined as all trade secrets and all proprietary and confidential information, whether tangible or intangible, oral or written, and of whatever nature (for example, technical, sales, marketing, advertising, promotional, merchandising, financial, or commercial).

The receiver should agree to receive all such information in confidence and not to use or disclose the information without the express written consent of the discloser. It should be made clear that no obligation is incurred by the receiver for any information that it can show was in the public domain, that the receiver already knew, or that was told to the receiver by another party.

The receiver should be limited to disclosing the information to only those of its employees who need to know in order to carry out the purposes of the agreement and who have obligations of secrecy and confidentiality to the receiver. Further, the receiver should agree that all of its employees to whom any information is communicated are obligated under written employment agreements to keep the information secret. The receiver should also represent that it will exercise the same standard of care in safeguarding this information as it does for its own, and in no event less than a reasonable standard of care. This latter phrase is necessary because some businesses have no standard of care or a very sloppy attitude toward even their own important information.

Provision should be made for the return of all tangible embodiments of the confidentially disclosed information, including drawings, blueprints, designs, parameters of design, monographs, specifications, flow charts, sketches, descriptions, and data. A provision could also be included preventing the receiving party from entering a competing business or introducing a competing product or service in the area of the disclosed information. Often a time limit is requested by the receiver, after which the receiver is free to disclose or use the information. Such a time period could extend from a few months to a number of years, depending on the life cycle of the information, tendency to copy, competitive lead time, and other factors present in a particular industry. Strong, clear language should be used to establish that no license or any other right, express or implied, to the information is given by the agreement.

While such confidential disclosure agreements between the discloser and receiver are the ideal, they are not always obtainable. The receiver may argue that no such agreement is necessary, saying in effect, “Trust me.” Or the receiver may flatly refuse on the grounds that it is against its policy. Some large corporations turn the tables and demand that their own standard non-confidential disclosure agreement be signed before the disclosure of any information.

Under a non-confidential disclosure agreement, often referred to as idea submission agreements, the discloser gives up all rights to the information except as covered by a U.S. patent or copyright. Outside of those protections the receiver is free to use, disclose, or do whatever it wishes with the information. This is not due simply to arrogance or orneriness. A large corporation has many departments and divisions where research and development of new ideas are occurring unknown to other areas of the corporation. In addition, in a number of cases courts have held corporations liable for misappropriation of ideas and information when no written agreement existed, and even where a non-confidential disclosure agreement purported to free the receiver from any restriction against dissemination and use of the idea.

If no agreement can be reached or if the non-confidential disclosure agreement counteroffer occurs, the discloser must decide whether to keep the idea under the mattress or take a chance on the honesty of the receiver; however, in such a case it is wise to reduce the initial disclosure to a minimum to cut the losses should a careless or unscrupulous receiver make public or misappropriate the idea.

A middle ground that courts have recognized is an implied confidential relationship evidenced by the actions of the parties. In one case a letter soliciting a receiver's interest in a particular field and indicating that the matter was confidential, resulted in a face-to-face meeting between the discloser and receiver, where the full idea was revealed. Later, when the receiver came out with a product using the idea, the discloser sued and won. The letter set up a confidential relationship which the receiver did not reject, but rather accepted by meeting with the discloser and accepting the idea without any comment or exclusion. The letter was not signed by the receiver, but it bound the company nevertheless under the totality of the circumstances.

CONCLUSION

These basic forms of protection – employment contracts, consultant contracts, and confidential disclosure agreements – need not be complex or lengthy, but they are essential at the earliest stages of idea generation to protect and preserve for the business some of its most valuable and critical property.

This Passage was Posted with the Exclusive Permission of Wiley & Sons Publishers and It May NOT Be Reproduced, Edited, Transmitted or Reprinted in ANY Fashion without the Written Permission of Wiley & Sons Publishers.