The ever increasing speed at which information travels over social media and the expanding volume of information available on the internet has helped and hindered small and start up enterprises. It is easier to get recognition through social media but that recognition does not always translate into revenue. Likewise, it is easier to find information but the reliability of the information can be suspect. All of this matters because long term business success is often the result of the access to funds for the next phase of research, marketing and expansion. The concern here is the strategy for financing that next phase, whether classic bank barrowing, bring on investors, a private financing source as part of an exit strategy for cashing out.
Any effort to finance, whether through traditional banks, investor or private equity funds will ultimately turn on questions of makes your business model unique and what protection do you have for that uniqueness. These questions will surface as part of the due diligence to determine market survivability and, in the event the business does not survive what secure is there for the requested financing. The answer to what makes the business unique may be easy or self-evident. What protect the uniqueness of business model may be more difficult to answer and it answer may depend to a large degree on action taken years before the question was asked. The best answer may the business entity's Intellectual Property Portfolio (IP). An IP portfolio can have a varied combination of copyrights, trademarks, trade secrets, confidential information and patents. There is no set formula for what should be in an IP portfolio or the ratio of different IP rights in a respective portfolio.
Consider the example of a business producing a food product that uses a proprietary blend of know spices to achieve a unique flavor. That particular blend of spices may be protected by confidentiality and non-compete agreements with employees and supplier and the various state and federal trade secret laws. While these agreement can be a good source of protection that is reusable, they must be carefully drafted to cover all that needs to be covered without becoming overly broad or restrictive of employee movement to become subject to be stricken as such. For the budget constrained entity, these can be a one-time investment in form agreements need not be so extensive to be budget busting for a going concern. So this is a good, relatively inexpensive start on an IP portfolio. As a word of caution, such forms should be reviewed periodically to ensure continued compliance with the current laws. Assuming these agreements are a basis for protecting the uniqueness of the product, how does one go about meeting demand and expanding the production to multiple sites?
Expansion to multiple sites is likely to mean that product procedures or recipes will need to be written in some medium that is accessible to different individuals. Although the individual employees may be covered under agreements, there is still a need to protect the information whether it is stored on paper in an electronic form. Protection for this component of the IP portfolio is available under the copyright laws. Instruction manuals are protectable by copyright and the copyright laws have provisions for filing information as a trade secret. Copyright registration is another good, relatively inexpensive component of an IP portfolio and the Library of Congress has some very helpful circulars at https://www.copyright.gov/circs/ for those who want to venture forth and file their own applications. Information stored on a computer can be copyright protected and may be easier to limit access through permissions, passwords and random time limited tokens like RSA Securid®. In addition to copyright protection, commercial information stored on a computer that has limited access to authorized personnel may have an additional enforcement mechanism in the federal computer fraud statutes.
Registered copyright have long life term and are assignable as a property right. Accordingly, properly secured and registered rights can provide a long term business asset that is fully transferable for value, separately or as part of the business entity.
A second grouping of relatively inexpensive but value IP rights is found in the trademark laws. Trademarks come in a territorial version, common law; a limited geographic area of protection, intrastate or state trademark laws; and, national protection, interstate or federal trademark laws. As might be expected, the requirements and cost associated with them vary according to the protection desired. Common law rights do not require registration and are acquired through use of the mark. State trademarks are acquired by registration based upon use within the state. Federal rights are acquired by registration based on interstate use of the mark. Thus, federal registration requires the use of the mark in commerce across state lines so as to qualify as interstate commerce. A federally register trademark has nationwide coverage and is particularly effect for expansion, whether organically or through franchising. In the case of a franchise, the trademark combines nicely with the confidential information, trade secrets, and operation manuals reference above to create the basic information transferred to a franchisee. And, the trademark provides an identifier for the business that traveling consumer can recognize and depend upon as a measure of product or service quality.
All federal trademark rights are acquired through an application and examination process that takes place in the Trademark branch of the United States Patent and Trademark Office (USPTO). The state trademark registrations process is less expensive than the federal trademark application and examination process, but both are relatively inexpensive means of acquiring a potentially very value business asset.
Although a startup or small business may not initially consider trademarks to be import, it should consider the current value of trademarks like McDonald's®, Coke®, Exxon®, or Marriott®. Each of these companies was once a startup or small business that is now recognized as a dominate entity in it market segment. These marks also demonstrate the variety of businesses that can benefit from developing a robust trademark portfolio.
Basic information regarding the federal registration process for a trademark can be found at https://www.uspto.gov/trademarks-getting-started/trademark-basics.
Another important category of IP rights is found in the patent laws which provide for certain exclusive rights in inventions. All patents are federal rights that are acquired through an application and examination process that takes place in the various patent examination groups in the USPTO. The patent examination groups are organized according to the technology or subject matter of the patent application. The examining groups are further classified according to whether the application is for a utility or design patent. Utility patents, as the name implies, cover the utility of an invention or the way it works. For example, an improvement in how a transmission works would be a utility patent. Design patents cover the appearance of an object so long as the appearance is not dictated by the object's function. For example, a perfume bottle can be the subject of a design patent because the perfume does not dictate the bottle's appearance. Design patents are often used in conjunction with trademarks as a means of identify a source of a product. Although a design patent cannot replace or duplicate a trademark, the years of use can create a long term image of a product source, such as the distinction, Coke® bottle.
Patent protection is available for almost any invention that invention that is new and useful. This standard is very broad and the usefulness of the invention is judged liberally and does not get into matters of practicality or cost. There are some limits to what can be patented. For example, patents are not available for things that are laws of nature, such as gravity, but a patent can be granted for things that use a law of nature to achieve a result different from pure gravity.
The cost associated with patents can vary greatly. Design patents are relative inexpensive and provide a more limited exclusivity. Utility patents are typically a multiple of the cost of design patents but provide a broader scope of protection. The decision on which form of protection should be pursued is also generally more involved and expensive. For either form, it is often best to have a prior art search conducted on the subject invention. This search can provide a snapshot of the prior art an examiner might apply against the proposed patent application, and it might uncover an existing patent that may potentially be infringed by the subject invention.
Patents, like the other IP rights, can be licensed or sold and are often value components of an IP portfolio.
Basic information regarding the patent application process can be found at https://www.uspto.gov/patents-getting-started/general-information-concerning-patents.
To summarize the Intellectual Property Portfolio building process, it is critical to have a plan from the outset. Start with the form of the business organization and a form non-disclosure and non-compete agreement that covers employees and suppliers. Then focus on things like manuals and recipes that can be copyrighted and any potential trademarks. Finally, look at the operations of the business and decide if there are any patentable inventions. It may not be possible to do everything, but that does not excuse doing nothing. The early choices may be dictated by the available funds, but the small things may be what are needed to have the necessary funds for bigger things in the future. Remember, McDonald's, like many other fast food establishments, sells hamburgers!
Reprinted with permission from the April 29, 2020 issue of The Legal Intelligencer ©2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
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