White Papers

December 2005

Minimizing Intellectual Property Risk
is Key for the Technology Start-Up

By Elizabeth A. Alquist and Pamela A. Johnson

There is a certain excitement attached to launching a new business particularly for those with a technology start-up. Finding capital investors, renting office space and creating marketing materials are all a part of the process. However, as with any new venture, there are risks to be aware of such as those involving intellectual property rights which include trademark protection, copyright infringement, and trade secrets. Following are some tips to help businesses minimize intellectual property risks.

Trademark Protection
Protecting one’s trademark ranks high among the intellectual property risks that start-up companies should consider. All too often, companies choose a trademark without researching their ability to use the mark. Failure to research a potential trademark properly could result in a company having to stop using the mark after it has spent substantial money in marketing and branding its products. Companies must also determine whether the mark is generic or descriptive. If a mark is generic it may not receive trademark protection. If the trademark is descriptive it may receive trademark protection if the company can prove it has acquired a secondary meaning in the marketplace. Companies should not rely on marketing agencies, even those hired to come up with potential trademarks, to research the marks for them. Many agency contracts specifically state that they are not responsible for the legality of the trademark chosen by their clients.

Companies should first check with the United States Patent and Trademark Office (“USPTO”) to determine if a company that offers similar services owns a similar mark. While this type of research is best handled by an attorney specializing in intellectual property law, businesspeople can check the USPTO Web site ( www.uspto.gov) to determine ownership of same or similar marks. Even if a search of the USPTO database does not reveal a mark similar to the trademark desired by the start-up, a company should check with the secretary of state’s office in the states where it plans to operate. If sales will be made via the Internet, a company should conduct international research. A thorough Internet search for same or similar names can also reveal potential trademark problems.

Once a company has researched a trademark and determined it is eligible for use, the mark should be registered with the USPTO. Again, while it is best to hire appropriate counsel for this exercise, businesspeople can find registration forms on the USPTO Web site. If faced with an “office action,” a situation in which the USPTO is challenging one’s ability to register a mark, legal assistance should be sought. Failure to respond to an office action can result in loss of the ability to legally use a mark.

Copyright Infringement in Marketing Materials
Companies should also seek to protect the copyrighted material contained on their Web sites, in their brochures, and other marketing materials. Further, they must be certain that they are not infringing upon any one else’s copyright in the reproduction of these materials.

A copyright is a form of legal protection provided to the authors of “original works of authorship,” including literary, dramatic, musical, artistic, and certain other intellectual works. Owners of a copyright have the exclusive right to reproduce and distribute the work. What many do not realize is that registration of a work is not necessary to secure a copyright. A copyright is secured automatically when the work is created. A c opyright does not protect ideas, procedures, systems, or methods of operation, although it might protect the manner in which they are expressed .

A copyright usually resides with the author of the work. Therefore, if a company hires an outside consultant or vendor to create Web content or prepare marketing materials, it must be sure that the copyright for such content is properly transferred to the company. This can be achieved through a contract with the consultant or vendor, making any content a “work for hire.” In order to be secure in the protection of a company’s copyright, all employees should sign an agreement ensuring that a copyright for the works they create while employed by the company belongs to the company.

Although companies are becoming quite savvy about the type of material contained on their Web sites, all too often they reproduce articles, graphics, drawings and paintings of others thinking that if they have given attribution to the copyright holder, they have not infringed upon the writer’s or artist’s work. That’s not true. One can only disseminate copyrighted materials of others with their express written permission. So, if a company reproduces the works of others on its Web site without written permission, it is likely infringing on another’s copyright. Companies should obtain permission before providing links to other sites and make sure that the linked site does not contain materials reproduced without the permission of the artist. In fact, the United States Supreme Court recently ruled that providing a link allowing Internet users to download pirated music could itself constitute copyright infringement.

Although it is not legally necessary, it is wise to post a copyright notice on one’s Web site. The notice will make it less likely that others will copy the posted material and may allow for recovery of larger damages if the material is copied. The copyright notice should contain the word “copyright” or the copyright symbol, the date the work was published and the name of the copyright holder.

Software Licensing
The importance of software licensing is often overlooked and misunderstood by companies. Oftentimes, employees believe that they can download necessary programs from the Internet, bring a copy from home or borrow a copy from a co-worker’s computer and use that software from their desks. This activity may constitute a copyright infringement by the employee for which the penalties can be severe. In fact, statutory damages for each instance (or each piece of software copied) of non-willful infringement is $30,000 under the Copyright Act, and $150,000 for each act of infringement found to be willful.

Companies would be well-served by putting mechanisms in place to avoid the pitfalls of licensing non-compliance. A written policy should be distributed to all employees informing them not to download any software onto their computers without authorization. In addition to having each employee sign such a policy at the time of hire, the policy should be sent periodically as a reminder to employees. Record keeping is often overlooked when purchasing computer equipment. Copies of software licenses and invoices for all software should be kept in one location. In the event of a software audit or an accusation of infringement, having all documentation easily accessible will save the company valuable time and resources. Finally, the company should purchase audit programs to monitor the software on its machines and appoint someone in the company who does not have budget control over software purchases to make annual or periodic checks of the audits to ensure licensing compliance.

In the area of software licensing, organization and diligence are critical to avoiding expensive problems down the road. Setting up controls is a worthwhile investment.

Trade Secrets and Proprietary Information
Companies are sometimes surprised to learn that what they consider to be their most important asset—their equivalent to the Coca Cola formula—does not qualify as a “trade secret” because it was not protected from disclosure. If proprietary information is not handled in an appropriate manner, the courts will not protect it. Simple measures can be taken to demonstrate, when necessary, that a company properly guarded its trade secrets. Take the example of a group of specifications the company considers to be proprietary information that is not readily accessible elsewhere. Ask a variety of questions including: Who has access to the documents? Are they stamped “Confidential”? Are they protected on the computer system with a password accessible only by employees with a need to access them? Are non-disclosure agreements in place with any vendors or consultants who need access to them? Are the documents kept in a secure location?

Claims alleging trade secret violations typically arise when an employee leaves a company and goes to work for a competitor. For this reason, it is important to have signed confidentiality agreements with employees. Depending upon the level of the employee and his or her job duties, the company may want to consider a reasonable post-employment restrictive covenant, including a non-compete clause or non-solicitation of customers, vendors, or employees. Any employee involved in company innovations should sign an agreement to assign to the company all intellectual property developed by him or her while employed by the company. Failure to draft a confidentiality or non-compete agreement correctly can render it invalid. That’s why legal counsel should review these agreements.

Insurance and Legal Considerations
Considering the price of litigation these days, technology start-ups might want to seek protection for intellectual property risks by purchasing insurance. While most commercial general liability policies do not cover liability for intellectual property risks, a knowledgeable agent or broker can help entrepreneurs find the coverage they need for their particular industry. Many insurance companies offer specialized policies for technology companies including Internet liability and media liability coverage. These policies frequently offer varying levels of protection for trademark and copyright infringement.

Starting a business is an exciting prospect but one that should be entered into with as much information as possible. That means researching all the risks including those involving a company’s intellectual property. Take the time to contact an insurance agent or broker and legal counsel to discuss intellectual property risks and the measures that can be implemented to avoid a potential catastrophe in the future.

Elizabeth A. Alquist is a Partner at Day, Berry & Howard LLP in Hartford, Conn. She is a trial lawyer in the Intellectual Property and Technology department. She can be reached at eaalquist@dbh.com.

Pamela A. Johnson is an attorney with St. Paul Travelers in Saint Paul, Minn. She works in the Technology Intellectual Property Claim unit. She can be reached at pajohnso@stpaultravelers.com.

The content of this article is only for the informational use of the reader. Information contained herein is not intended as, nor does it constitute, legal or professional advice, nor is it an endorsement of any source cited or information provided. In no event will St. Paul Travelers or any of its affiliates be liable in contract or in tort to anyone who has access to this publication for the accuracy or completeness of the information relied upon in the preparation of this article or for the completeness of any recommendations from cited sources. Additionally, information contained herein does not constitute and shall not be construed to reflect the adoption of any coverage position by St. Paul Travelers or any of its affiliates in connection with any of the topics or considerations set forth herein. Readers should consult source articles for more detail.