Innovation economists believe that what primarily drives economic growth in today’s knowledge-based economy is not capital accumulation, but innovative capacity. So we hear about graduate business programs in entrepreneurship; investment in “innovation.”
In this setting, should an entrepreneur bother with intellectual property issues as she moves forward with her new venture? After all, it is about the dream, right? And we have all heard the old adage — entrepreneurs don’t steal other entrepreneurs’ ideas because they are too obsessed with their own. So the entrepreneur should feel safe, at least among other entrepreneurs, sharing her ideas openly and seeking input from colleagues, right?
Right, of course. If your client is Cinderella, and she believes that Prince Charming will one day come knocking on the door and fit two glass slippers perfectly on her feet, while he gives her $1 million in seed capital to fund her start-up. In other words, wrong.
Nothing highlights this like a hypothetical, so let’s walk through some of these issues together. Please note that any similarity to actual events or people is purely a coincidence.
Sarah Smart is a graduate business student at Startup University (SU), a special business school focused on “making the entrepreneur’s dreams come true.” At SU’s Center for Startup Transformation (CST), Smart is enrolled in a course in entrepreneurship. It uses the latest research regarding customer discovery and provides the students with a new approach to business conception: out with the business plan, in with a customer-focused business.
The students in the class are broken up into teams, each of which will focus on a new business idea. The coaches and instructors for the class tell the students something important: Don’t go out and try to convince customers they have a problem; identify a problem that exists and solve it.
This sparked an idea in Sarah’s mind. She remembered that her mother always complained about the way her midsection looked in a tight dress, and that her mother was worried about underwear lines showing under clothes. Sarah, who had an undergraduate degree in engineering, remembered learning about a fabric called Steelfab, with steel particles that compressed anything it covered. Sarah thought perhaps she and her colleagues could develop a business using the special fabric to manufacture and sell a newfangled type of girdle, if you will. She decided to call the product “Undiearmour.” Sarah said she thought that if the product worked — i.e., smoothed panty lines and slimmed down women so they would feel more comfortable wearing tight dresses — they might be able to sell them for $75 or more.
One of the instructors for the class, Carl Martin, was trained as an intellectual property lawyer. He inquired about the origin of the product at issue. Assuming the “product,” for this initial question, was a girdle made with steel-infused fabric for the purpose of slimming a person’s body, the first question Carl asked Sarah was where she conceived of the idea.
Sarah said that while she was an engineering student at the University of East Florida, she worked at an underwear manufacturer in Miami named Underwhere. There, Sarah said, she first saw the steel-infused thread in use in some bras for full-figured women and discussed it with the company’s VP of research and development. Sarah remembered, eventually, that she had signed an agreement with Underwhere requiring her to maintain the confidentiality of all projects on which she worked. The agreement also said that, to the extent that Sarah developed any product or applied for any patent derived from anything on which she worked at the company, the rights in the product or patent belonged to the company.
Carl also asked about the involvement of Sarah’s colleagues in her business school class team — Janice and Josephine. Sarah said they were really great partners. Josephine was the one who came up with the idea to use Steelfab for girdles, after Sarah told Janice and Josephine about the fabric. And Janice came up with the original name “Undiearmour” for the product. Sarah said both of her partners had trust funds, so neither one cared if they had any rights to the Undiearmour product or any revenues derived therefrom.
Sarah also remembered that while she was working for Underwhere, she was a research assistant for Carla Minnow, an engineering professor at the University of East Florida.
Sarah told Carl that his questions were a waste of her time (as she had always heard lawyers were), and she needed to get her materials together for her 30-second “elevator pitch” at “Startup Junket,” a weekend trip around Biscayne Bay with 500 other entrepreneurs and 10 angel investors. Sarah said she had been told by her parents to focus solely on the people with money, and not let pesky lawyers, most of whom are just looking to bill her company to death, get in the way of progress.
“Clean IP”: Assignments, Works for Hire and Joint Works
Carl tries to not to be offended, remembering that Sarah is a student and still has much to learn about the “real world” and just how helpful a good lawyer can be. Carl does ask to see Sarah after class, though, to go over a few things with her, and she begrudgingly agrees.
First, Carl explains that investors will not generally put money into a company where the IP is not secure. By “secure,” Carl means where ownership is not clear and title not owned by or licensed to the company.
In this case, Carl has a number of concerns. Sarah said that she learned about the Steelfab fabric when working for an employer. Typically, companies have policies regarding ownership of intellectual property. If there are no policies in place, often employees are asked to sign agreements that can include confidentiality, nonsolicitation, noncompete or assignment provisions. Sarah admitted to signing one of these documents, in fact.
It is not as if all is lost without policies and agreements, however. To the extent a work is a creative work that is copyrightable subject matter under Title 17, Chapter 102 of the U.S. Copyright Act, it is governed by statute. This provision of federal law states that copyright protection subsists in original works of authorship “fixed in any tangible medium of expression,” now known or later developed, from which they can be perceived, reproduced or otherwise communicated, either directly or with the aid of a machine or device. Works of authorship include: literary works; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works;motion pictures and other audiovisual works; sound recordings; and architectural works. If the item at issue falls within this description, and it is created by an employee (as that term is defined under the applicable law) within the course and scope of her employment, it is a “work made for hire,” and the copyright in the work belongs to the employer. Federal courts are littered with cases in which there is an argument regarding a potential work made for hire. Looking at this from the standpoint of an investor, the murkier the picture, the less likely an investor is to feel comfortable with the company. The investor wants equity and to roll the dice for a potential positive exit, not a lawsuit.
This has implications for Sarah and her team also, Carl says, because anything conceived, to the extent there is collaboration, could also be considered a “joint work” in which all three partners would possibly have rights, giving rise to unclear title without a full assignment of all three women to their new company, prior to the receipt of outside investment.
Believing in an “Open Source” Theory of Trademarks
Sarah thought the name “Undiearmour” was perfect for this product. After all, it sounds like “Underarmour,” a famous and popular brand, which means that customers might believe there is a relationship between the new business and the existing company. Sarah thought this would be a great way to get new customers fast.
Carl explains that this is a great way to get sued.
A trademark is a word, symbol or phrase, used to identify a particular manufacturer or seller’s products and distinguish them from the products of another. Under some circumstances, trademark protection can extend beyond words, symbols and phrases to include other aspects of a product, such as its color or its packaging. For example, the unique shape of a Coca-Cola bottle has been determined to be “trade dress,” a distinctive product feature indicating source or origin of the product.
If a party owns the rights to a particular trademark, that party can sue subsequent parties for trademark infringement. The standard is “likelihood of confusion.” The use of a trademark in connection with the sale of a good constitutes infringement if it is likely to cause consumer confusion as to the source of those goods or as to the sponsorship or approval of such goods. In deciding whether consumers are likely to be confused, the courts will typically look to a number of factors, including: (1) the strength of the mark; (2) the proximity of the goods; (3) the similarity of the marks; (4) evidence of actual confusion; (5) the similarity of marketing channels used; (6) the degree of caution exercised by the typical purchaser; and (7) the defendant’s intent.
The use of an identical mark on the same product would constitute infringement. Using a similar mark on the same product may also give rise to a claim of infringement, if the marks are close enough in sound, appearance, or meaning so as to cause confusion.
Undiearmour would likely be considered an infringement by Underarmour. Carl tells Sarah the team had better come up with an alternate name before they receive a cease-and-desist letter from Underarmour.
A start-up, by definition, is just “starting up.” Typically, start-ups have a limited — or nonexistent — legal budget. At the same time, if critical IP issues are not addressed at an early stage, there might be nothing left in which to invest.
So how do we circumvent this problem?
Carl says there is an answer. If the start-up has a product at its core, address IP issues immediately. That means, consult with a patent lawyer for an hour as soon as possible. Perhaps a provisional patent application could help protect the IP until there is money to do more. Better to be safe than sorry.
We are living in a time when innovation is considered by many to be the key to economic development and long-term stability. As lawyers, we sometimes wait for our clients to tell us what they need, and do not take a proactive approach to legal representation. We may need to do this differently sometimes, especially with a start-up. Remind the start-up at the outset that without healthy IP, there may ultimately be no investor. This is a surefire way to make sure that all is not lost before the company ever gets off the ground. •