Intellectual Property Checklist
By: John A. Leonard
This Intellectual Property ("IP") Checklist contains a general overview of IP that companies can use for on-going operations or for use during financing or acquisition negotiations. Companies seeking financing or a merger/acquisition target can use this list to examine its IP and prepare for upcoming due diligence investigations.
This is only a general guide. Every company and transaction is different and there will be specific issues that are not addressed in this guide. Moreover, remember that those who live by the checklist, die by the checklist. IP issues continue to evolve. Therefore, this guide can only serve as an introduction to this complex issue. Finally, IP is often a subtle side issue in many agreements. For example, a joint venture between two companies may result in a trade secret or a process that may be eligible for a patent. The joint venture agreement should discuss IP ownership, who is responsible for registration, and who owns the IP upon dissolution of the relationship.
A. What is Intellectual Property?
IP is generally divided into the following four categories: Copyrights, Trademarks, Trade secrets, and Patents. Each of these categories are specific tools a company can use to protect valuable property. For example, consider the following with respect to Coca-Cola:
1. Copyright. Protects expressions of ideas (print advertisements for Coke, television and radio advertisements, including the music, words and visual aspects).
2. Trademarks. Protects names, symbols and slogans used to differentiate products and services (Coke).
3. Trade Secrets. Protects secret information (the formula for Coke).
4. Patents. Protects inventions, process, design and discovery (the Coke bottling machine).
Similarly, a software company may protect its IP as follows:
1. Copyright. Advertising materials, web site, source and object code.
2. Trademarks. The name of a particular software program or division of a company that provides consulting.
3. Trade Secrets. Source code.
4. Patents. Source code business process patent.
In the software company example, source code can be protected under various means. As a general rule, two IP tools can exist more or less automatically. A company that protects its software as trade secrets could also invoke copyright protection – since it automatically applies once the source code has been recorded in a tangible medium. A company may also want to obtain additional copyright protection for object code embedded on a computer chip, or for source code as a business method patent.
It is also important to understand that IP is a two-way street. IP is frequently licensed. For example, a software company may license certain application software in order to produce its own software. A typical web site will contain software that is licensed to the web site developer, certain software that is owned by the software developer, and content and that is owned by the client. Each of the foregoing may be subject to agreements regarding ownership, licenses and non-disclosure agreements.
B. Intellectual Property Discussion
Patents are generally considered to afford the greatest degree of IP protection. There are three classes of patents in the United States - utility patents, design patents and plant patents.
(a) Utility Patents
Utility patents are issued for products, processes, machines or compositions of matter. A utility patent protects technological innovations and advancements and is arguably the most important class of patent. Examples of inventions protected by utility patents are electric generators, methods of extracting gold, business methods (software) and pharmaceuticals. Utility patents do not protect nonfunctional works of authorship or artistry like books or paintings (protectable by copyright), or commercial symbols (protectable as trademarks), or mere ideas, concepts or methods of doing business (potentially protectable as trade secretes).
(b) Design Patents
Design patents are obtainable for ornamental designs for articles of manufacture. Design patents therefore protect the non-functional aesthetic characteristics (configuration, shape or surface ornamentation) of a product. An example of an invention protected by a design patent is the aesthetic shape of a modernistic looking chair.
(c) Plant Patents
Plant patents are obtainable for new and distinct varieties of asexually reproduced plants. This class of patents excludes others from asexually reproducing the patented plant or selling or using the plant so reproduced.
(2) Trade Secrets
Trade secret law is that area of IP protection in which a company's proprietary technology and commercially sensitive information are protected from misappropriation.
The potential reach of trade secret protection is very broad in that it includes not only a company's proprietary technology (e.g. certain customer/supplier lists, cost data, pricing structure) as well. While requirements may vary from state to state, the qualifications for trade secret protection are generally that the information asserted to be a trade secret not be publicly available nor readily ascertainable, and that the enterprise has exercised reasonable efforts to keep the information secret.
Copyright protects the particular form of expression in a work of authorship or artistry that has been recorded in a tangible medium. A copyright does not protect the underlying idea, principle or theme embodied in the recorded expression, only the form of the expression.
Unlike other IP rights, copyright protection attaches to the particular work at the moment that it is created and recorded without any further formalities. In that regard, the only criteria that must be satisfied in order to obtain copyright protection are: (1) the work must be of the type that is protectable; (2) the work must be original in that it is the author's own produce and not a copy or trivial variation of an existing work; and (3) the work must be fixed in some form of tangible medium (printed page, record, film, computer disk, video, electromagnetic media, etc.).
In spite of automatic protection, it is still desirable to register copyrighted material with the U.S. Patent and Trademark Office. Material that is registered within three months of creation are entitled to three times the damages proved in an infringement suit.
A trademark is a commercial symbol that is used by a business enterprise to identify its products and/or services, and to distinguish them from the products and services of others. Once a trademark is adopted and used, the trademark owner can prevent another's use of the same or a deceptively similar mark that would likely cause consumer confusion in connection with such goods or services.
The source of protection of trademarks in the United States is the common law, with those rights having been expanded by federal statutory law to provide nationwide registration protection and relief from infringing activity occurring in interstate and foreign commerce.
Not all trademarks are created equal. Trademarks are divided into the following categories:
1. Fanciful (Kodak)
2. Arbitrary (Apple Computer, Old Crow Whiskey)
3. Suggestive (Chicken of the Sea)
4. Descriptive (Roach Motel)
Fanciful and arbitrary names are afforded the most protection. These names are easier to register and defend. Suggestive and descriptive names (the types of names most favored by marketing departments) are more difficult to register and are afforded the least protection.
C. Options to Develop Intellectual Property
1. Retain internally for goods and services without licensing.
2. Retain internally for goods and services without licensing plus use of life cycle management.,
Schering-Plough and Claritin Allergy Drug. The pharmaceutical industry spends billions of dollars each year developing drugs. A drug may take years to develop, only to face stiff competition from other companies and ultimately to go into generic production. Thus there is great incentive to extend the life cycle of drugs. Companies think in terms of "choke points" that can be used to extend the length of patent protection afforded a new drug. Every stage of the drug process is analyzed in terms of aspects to patent., New uses, coating technologies, new manufacturing methods are common choke points. When the base drug patent expired, the company could fall back on another choke point. Competitors could copy the drug, but could not copy, for example, the manufacturing process. For example, Schering-Plough was earning approximately $3 billion per year on the Claritin drug. Schering-Plough discovered how the drug was processed in the body and patented a process of manufacturing that enables the body to increase the efficacy of the drug.
3. License to Non-Competitive Companies–Carrot and Stick Portfolio IP mining.
Companies with portfolios of patents seek alternatives to developing and commercializing each patent owned. Patents can be used in a field of use unrelated to the owner's use. In addition, an owner may have patents that are simply not used. In these cases the owners can use both a "carrot" and "stick" approach to licensing. Under a carrot approach, an owner identifies potential licensees who could benefit from using a patent either exclusively or within a particular field of use. Generally, carrot licenses involve excusive licenses. In "stick" licensing, an owner identifies an infringer that is using protected technology and seeks to either prevent the infringer from using the technology or to enter into a non exclusive licensing agreement or to simply sell the patent to the infringer.
4. License to competitive Companies.
Creating an industry Standard: JVC vs. Sony. When video players and recorders were introduced there were two basic standards. JVC produced the VHS standard. Sony produced the Betamax standard. Most people in the industry believed that Betamax standard was based on superior technology. Sony decided to retain the technology for its own use and did not license it to others. JVC, on the other hand, licensed VHS to others. The result was that VHS became the ubiquitous industry standard.
Eating the Competition: Pilkington Glass. Pilkington developed a superior method to produce flat glass. Instead of retaining the method for itself, it chose to license it to competitors, generating substantial royalties. It then used the royalty money to purchase many of it's licensees, thus becoming one of the world's largest flat glass producers.
5. Joint Venture.
Coopetition. GlaxoSmithKline produces an ulcer drug named Zantac. However, it was not the first in the marketplace. Realizing its situation, and taking into account its small U.S. distribution network, Glaxo licensed Roche Pharmaceuticals to sell Zantac in the U.S.
6. Spin out as subsidiary.
7. Sell as subsidiary.
8. Asset-based lending.
9. Technology Unit Investment Trusts.
Technology Unit Investment Trusts (TUITS) are similar to Real Estate Investment Trusts (REITS). TUITS are established around certain technology themes. Perhaps as many as 100 patents may be contributed by various patent owners. Investors purchase shares in a TUIT entitling the investor to a fractional share of future licensing cash flows. Owners are cashed out of their interests as investors purchase share of the TUIT. For owners, this is a good strategy for early stage, or non performing or low performing patents because cash flow can be generated from either the incremental share of licensing income or the sale of the owner's equity share in the TUIT. For investors, a TUIT is like a stock mutual fund. It is a convenient method to invest in technology on a diversified basis, thereby reducing risk.
10. IP Options.
Many possibilities exist for IP Options. An option to "call" is the right to purchase a license at a price on or before a specific time. An option to "put" is the right to sell a license at a price on or before a specific time. Consider the following:
Patent Owner is not realizing adequate income from an early stage, or non performing or low performing patent. Company desires to develop the patent, but requires additional capital. Patent Owner licenses the patent to Company for $800,000, coupled with a Put option that permits the Company to Put the patent back to the Patent Owner. The Put Option entitles the Company to require the Patent Owner to purchase from Company, the license for $400,000 on or before the expiration of 2 years. Patent Owner benefits by booking $400,000 as current income on a patent that was not otherwise generating income (and may have never been able to license but for the option). Company benefits by having the right to recover $400,000 if it determines it cannot commercialize the patent as expected. If the Put option is not exercised, the Patent Owner books an additional $400,000. For most investors, the Put option will be seen as a way to reduce risk. Potential losses can be quantified and the company terminated on or before 2 years.
This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
Copyright © 2012 Fairfield and Woods, P.C.,ALL RIGHTS RESERVED.
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