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Provisional Patent Applications Provide Lasting Intellectual Property Protection

A provisional utility patent application, as opposed to a non-provisional utility patent application, is not reviewed by a patent examiner at the United States Patent and Trademark Office (USPTO), and therefore will not directly lead to the grant of a patent. So, why do we care?

Often entrepreneurs launch their startups with a concept or a prototype of an innovative product. Their business goal is to commercialize the invention. Before the product is ready to be introduced to consumers or an interested acquirer, it has to go through a stage of commercial viability testing or technical improvements. During this period of time, startups face the dilemma of how to protect their intellectual property (IP) assets with limited capital and human resources. The decision whether to file a costly non-provisional patent application is complicated by uncertainty about the patentability of the invention, a patent’s added value to the startup and the commercial prospect of the product. Under this scenario, a provisional patent application is a sensible alternative providing benefits that a non-provisional patent application may or may not have.

Priority Date

Currently the US adopts a first-inventor-to-file system in regard to right to patent. Without patent protection, an invention is subject to the risk of being copied or claimed by another party. Available to utility and plant patents but not design patents, a provisional patent application can be used to establish the priority date of an invention, the same as a non-provisional patent application. The priority date is the earliest filing date of a patent application and used to determine the right of priority over an invention through prior art search and obviousness examination. If a non-provisional patent application is filed within one year after the filing of a provisional patent application, the non-provisional patent application can claim the benefit of the priority of the provisional patent application filing date. Startups may use the one-year grace period to research the market potential for or make further improvements to their product. In addition, startups may file multiple provisional patent applications and claim the priority dates of all of them in a single non-provisional patent application.

One requirement for the priority date claim is that the later filed non-provisional patent application must be adequately supported by the description in the provisional patent application. Also, a provisional patent application cannot claim the benefit of the priority date of another provisional or non-provisional patent application. On the other hand, the patent term of a utility or plant patent is based on the earliest filing date of a non-provisional patent application.

Patent Pending Status

The filing of a provisional patent application will allow startups to use the status label “patent pending” to describe their product, the same as a non-provisional patent application. The “patent pending” status not only will afford IP protection to the invention, but also may carry advantages in various business undertakings such as marketing, venture capital financing, valuation of the company, and deterrence of potential competitors.

Cost

The cost of filing a provisional patent application is much lower than that of a non-provisional patent application for several reasons. First, since a provisional patent application is not examined, it will not incur USPTO fees in prior art search, patent examination and communications. The basic filing fee is low. For example, the electronic filing fee of a provisional utility patent application for a small entity, such as a business organization with fewer than 500 employees, is only $70.

Secondly, the examination process of a non-provisional patent application usually entails back-and-forth communications between the USPTO and attorneys that could drag on for a couple of years and result in significant attorney fees. In total, the process of obtaining a patent may cost up in the tens of thousands of dollars. Finally, entrepreneurs will have to spend time and energy working with attorneys throughout the patent examination process. All of this may strain the capital and human resources of an early stage startup.

Scope of Disclosure

Different from a non-provisional patent application, a provisional patent application does not have to include any claims, which makes it simpler to write and easier to avoid the problem of narrow characterization. A claim defines the scope of protection and therefore tends to limit patent right to an invention. If the claims are written in overly narrow terms, competitors may be able to design around a patent making it unenforceable. Therefore, it is generally recommended to use broadening statements and alternative languages in patent application drafting.

A recent ruling, The Regents of the University of California (“UC”) vs. The Broad Institute (“Broad”), from the Patent Trial and Appeal Board (PTAB) of the USPTO illuminates the importance of the scope of disclosure in patent applications to an inventor’s right to patent. This dispute involves a genome-editing technique called CRISPR-Cas9. The CRISPR-Cas9 system, similar to a cut and paste tool in a word processor, may be employed to modify the genome of an organism by permanently deleting dysfunctional genes or inserting beneficial ones, thus holding enormous potential for applications such as developing therapeutics for intractable human diseases or pest-resistant plants.

In this case, UC’s non-provisional patent application, which was filed earlier than Broad’s and based on four provisional applications, described the CRISPR-Cas9 system in prokaryotes−single-cell organisms without cellular nucleus, such as bacterium, while Broad’s patents demonstrated CRISPR-Cas9 in eukaryotes−multicellular organisms such as humans, animals and plants. PTAB declared that the two parties claimed distinct subject matter in their disclosures. Given CRISPR-Cas9’s potential in changing the landscape of biomedical innovation and both parties of this dispute have established startups to commercialize the technology, the PTAB ruling was widely considered a huge win for Broad.

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Why Do Technology Startups Need IP Assignment Agreements?

If you are considering forming a startup, an intellectual property (IP) assignment agreement will be crucial for your company, especially if your company wants to get financing from outside investors in the future. An IP assignment agreement is a contract that transfers an individual’s rights to an intellectual property (for example, patent, trademark, copyright, etc.) to another legal entity, such as a company. You and your colleagues may want to ask: why do you need to transfer your intellectual property rights to your company?

 

What are the consequences for not having an IP assignment agreement?

If individual inventors do not assign the IP rights to the company, it will be very difficult for the company to seek investment in the future, because an investor will not fund a company that does not have the complete ownership of its intellectual property assets. Therefore, the IP assignment agreement will be a key document that the investor will look for before deciding whether she will fund the company.

Imagine two inventors jointly own a patent. An obvious concern for potential investors is whether this patent can be effectively protected against infringement. However, if the patent is involved in patent infringement litigation, both co-owners must join the lawsuit so that the suit can be filed. Either owner’s lack of interest in joining the litigation will make the patent meaningless because the patent can be easily infringed. In contrast, if a sole owner, the company, owns the patent, the company itself can bring this suit. This is easier for protecting the patent because the company does not need to get every owner’s consent to bring the suit.

Additionally, the value of the patent will be diluted if it is jointly owned by several owners. Each co-owner of the patent can independently exploit, without consent of, and without accounting to, the other co-owners. Because a license is available from more than one party, its value is inevitably diluted. Otherwise, if a potential licensee wants to get an exclusive right to the patent, it must negotiate with all owners, and the holdout problem (where one party’s withholding of support prevents a deal) is likely to occur.

 

What provisions need to be included in an IP assignment agreement?

Because the IP assignment agreement is critical to a company, the agreement should be drafted by a lawyer. Both the Assignor (e.g., the individual developer) and the Assignee (e.g., the company) must carefully review the provisions in this agreement. The most important sections of an IP assignment agreement are:

Assignment of Intellectual Property. This section describes the assignment and acceptance of the intellectual property. If the Assignor agrees to assign the intellectual property in exchange for a consideration, either in the form of cash, equity or royalty, the consideration needs to be clearly identified in the agreement.

Description of the Assigned Intellectual Property. The agreement usually includes a full description of the intellectual property or refers to an exhibit that describes the intellectual property. Notably, the to-be-assigned intellectual property sometimes includes goodwill, which is the intangible value of the intellectual property. The assignment of trademark’s goodwill is particularly important because it includes the brand’s reputation and recognizability.

Warranty. It is especially important to have the Assignor warrant that she has the capacity to assign the intellectual property. Otherwise, the assignment may not be effective.

An IP assignment agreement is crucial for showing your startup’s future investors that the company possesses valuable intellectual properties. Therefore, soon after your company is formed, remember to ask everyone who may have a right in the intellectual property, including inventors, employees, independent contractors and so on, to sign the IP assignment agreement.

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The Defend Trade Secrets Act & Startups

President Obama signed the Defend Trade Secrets Act (the “DTSA”) into law on May 11, 2016, and established the first federal cause of action for trade secret theft. The DTSA provides protection of trade secrets by enabling companies to bring suit in federal courts without needing diversity jurisdiction, as well as by providing a mechanism through which plaintiffs can retrieve stolen trade secrets. Startups often heavily employ trade secrets and other intellectual property, so they should take particular care to familiarize themselves with the provisions of the DTSA.

 

What the DTSA Does

To be clear, the DTSA does not substitute for or alter the trade secret laws already in place at the state level. It allows companies to bring trade secret suits in federal courts more easily than before, as diversity is no longer needed between the parties. This can become a bargaining chip for companies who want to resolve disputes more quickly with defendants who would prefer not to go to trial in federal court.

The DTSA also provides ex parte seizure of allegedly stolen trade secrets, where the company can retrieve the stolen property without any notice to the alleged trade secret thief. Because this is an extraordinary measure, the companies (the plaintiffs) must meet a high bar and show extraordinary circumstances for the court to grant ex parte seizure. This mechanism allows startups to quickly halt dissemination of trade secrets when an employee leaves for another company, and begins using the trade secrets she acquired from her original company at her new one. Startups are particularly susceptible to trade secret breaches, as employee turnover or poaching tends to be higher than in more established companies or industries. For instance, in Mission Capital Advisors LLC v. Romaka, the court ordered the seizure of contact lists and other electronically-stored information that was allegedly stolen by a former employee of the plaintiff company. The data-driven modern era enables employees to steal huge amounts of data with little effort, so the DTSA provides one welcome method with which to reign in trade secret theft.

The DTSA also provides whistleblowers with immunity when they disclose trade secrets to government or law officials, as long as they do so in relation to furthering an investigation or a lawsuit.

 

The Notice Requirement

The DTSA requires employers to include a notice of whistleblower immunity in all of its contracts with employees, contractors, or consultants if the contracts restrict the use or disclosure of trade secrets. As noted above, this provides protections to whistleblowers who reveal trade secrets to federal, state, or local government officials when the whistleblowers are assisting in investigations or lawsuits.

All startups that possess and deal with trade secrets should include these notices in their contracts with employees, in order to comply with the DTSA. It may also be helpful for startups to provide training for their employees regarding the companies’ trade secret policies, as well as on federal and state trade secret laws.

 

The DTSA Descriptions of Trade Secrets

One potential roadblock for plaintiffs in DTSA claims is the extent with which to identify the trade secret alleged to have been stolen. The court in Mission Measurement Corp. v. Blackbaud, Inc. articulates this issue, noting that trade secret allegations, if too detailed, may constitute an “unwitting disclosure of the trade secret to the public.” In its complaint, Mission Measurement described the allegedly stolen trade secret broadly as a software program, and identified it with dates of its use and agreements or meetings made in relation to it. The Defendants argued that the allegations lacked sufficient particularity and were thereby inadequate, because the complaint failed to identify with enough specificity the trade secrets at issue in the lawsuit. The court rejected this argument, and concluded that “such allegations were adequate in instances where the information and the efforts to maintain its confidentiality are described in general terms. The court in Aggreko, LLC v. Barreto clarifies this notion, ruling that allegations of trade secret theft must still describe the trade secrets to the extent the defense “would be put on notice as to the nature of the claim.”

When bringing DTSA claims, startups should therefore be mindful to maintain the confidentiality of their trade secrets by not revealing too much in their complaint, but to also plead with enough detail so defendants cannot reasonably argue that they cannot pinpoint the specific trade secrets that were allegedly stolen.

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How to Strengthen your Chances of Registering a Trademark

When you see two golden arches that form the letter “m”, your mind probably jumps to McDonalds. That world-famous logo was successfully registered as a trademark, and has served as a way for consumers to recognize the source of the product ever since.

Registering a trademark has many advantages. Registration can discourage other companies from using a similar mark, because the registration makes it easily searchable to the public, in effect deterring them. In addition, future applications of similar marks will be refused registration, as the United States Patent and Trademark Office (USPTO) is required to cite existing registrations against new applications. In the event of trademark infringement, the registered trademark holder has the ability to sue for damages.

The application process to register a trademark can be difficult to navigate, but there are a few steps an applicant can take to make it smoother and more likely to result in a registration. If there are registration-barring problems within an application, a trademark examiner employed by the USPTO will respond to the applicant by issuing an “Office action”. Office actions detail exactly what about the application prevents it from being registrable. Often, the reason for rejection is the genericness or descriptiveness of the mark.

Trademarks are categorized by their ability to identify a source, on a scale of distinctiveness. The four classifications of distinctiveness are: 1. Arbitrary or fanciful, 2. Suggestive, 3. Descriptive, and 4. Generic (in descending order). The more distinct a trademark is, the more likely it is to be registered. Beginning from least distinctive, a generic mark is one that obviously describes whatever the product itself is. For example, if the product was a table, a generic mark for the product would also be “table”. Trademark law does not permit generic marks to be registered, and they can never be distinctive.

A step up from generic marks are descriptive marks. These require only a little bit of imagination from the general public to figure out what the product is. An example of this would be “Sweet and Salty” to describe a trail mix with sweet and salty components. Descriptive marks only meet the registrable standard of distinct if they have acquired secondary meaning. Secondary meaning refers to when consumers recognize the mark as the source indicator. Examples of descriptive marks which have acquired secondary meaning are “Windows” and “Sharp”.

Suggestive marks are inherently distinctive, and can be registered as trademarks. They require the public to make some imaginative leap between the mark and the advertised product. Examples of famous suggestive marks are “Playboy” and “Coppertone”. Finally, there are arbitrary or fanciful marks. These are inherently distinctive as well, and have the strongest chance at being registered. Arbitrary or fanciful marks give the consumer no obvious relationship between the mark and the product. “Kodak” and “Apple” are examples of arbitrary and fanciful marks that have been successfully registered.

In accordance with these categories, an applicant has a greater chance of being successfully registered if the mark is strong, requiring more imagination from consumers to determine what the product is.

Another way to minimize road blocks in the trademark registration process is to start using the mark in commerce as soon as possible. If the mark is already in use, then the application process becomes a bit easier. If the applicant must apply under an “intent to use” rather than a “use in commerce”, they must wait to be officially registered before they can submit a Statement of Use. In addition to that, it is helpful for an applicant to have a specimen of their trademark ready for the application.

A specimen of a trademark shows the USPTO how your trademark has been used in commerce. For standard trademarks in connection with goods, a specimen cannot merely be a drawing or mark-up of the trademark. It must be a real-life sample of how it is used on the goods in commerce. Office actions that are refusals issued on grounds of the lack of a proper specimen, an applicant may overcome responding by submitting a specimen, changing the basis of the application to “intent to use” rather than “use in commerce”, submitting a verification of the specimen, submitting evidence that the specimen was used with the goods, or submitting an unaltered, legible copy of the originally submitted specimen. Of course, submitting a proper specimen at the outset is the best way to avoid this extra hurdle.

Finally, the simplest way to ensure a clean application process is to submit a thorough and accurate application. Applicants may want to first print out a PDF version of the application and make sure they have all the fields accurately filled out and answered before trying to register their mark on the UPSTO website just to be sure to catch any oversights before the examining attorney does. Some fields to pay attention to are the correct classification of the goods or services, the submission of a specimen, or the adding of any disclaimers for the mark.

These three steps: choosing a strong mark, having a valid specimen available, and carefully answering the questions on a trademark application, are all simple ways to reduce the number of Office actions the USPTO must issue before the trademark can be properly registered. With these techniques, applicants can be well on their way to registering a trademark to officially protect their brand.

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The Basics of Patent Licensing

Part I: Is there an IP licensing opportunity?

Are you an inventor or an entrepreneur?

From KickStarter and Shark Tank to Tesla and Facebook, people are excited about innovation. Sure, Elon Musk and Mark Zuckerberg achieved incredible success, but their stories are one in a million. The truth is almost all startups fail. This article presents intellectual property licensing as an alternative to the startup route.

If you enjoy discovering customers, creating markets, and developing teams, then you may be an entrepreneur. A successful path may be to create a company and work on an exit strategy. On the other hand, if you enjoy discovering problems, creating inventions, and developing products then you may be an inventor. A successful path may be to create an intellectual property portfolio and work on a licensing strategy.

 

What can you do with intellectual property?

Intellectual property (IP) generally refers to creations of human intellect and creativity that governments reward by granting property-like rights to their creators. The basic types of IP are patents, copyrights, trademarks, and trade secrets. Patents protect new and useful inventions; copyrights protect original works of authorship; trademarks protect the goodwill of a business or brand; and trade secrets protect confidential valuable business information. For simplicity, this article focuses on licensing of product patents.

Assign a patent

An assignment is the transfer of IP rights from one owner to another, for example from an inventor to a company. This must be done in writing, and is often accomplished by language like “For good and valuable consideration I hereby assign all right, title, and interest in my Invention X to Company Y.” Assignments commonly occur when the assignor (e.g., inventor) prefers an immediate payment over a potentially larger but less certain payment in the future. Assignments are also common when the assignee (e.g., company) prefers to have control or ownership of the IP for strategic, accounting, finance, or tax purposes.

License a patent

Instead of “outright selling” IP rights as an assignment, an inventor may “lease” them as a license. IP Licenses are usually in writing due to their complexity, but they can be oral. The prototypical license establishes a running royalty to be paid by the licensor (e.g., company) to the licensee (e.g., inventor). Both parties may benefit from a license: the licensor can expect robust royalties if the invention achieves market success, and the licensee can expect not to pay royalties if the invention fails in the market.

Dedicate a patent to the public

An inventor can simply give away his IP or abandon it altogether. This is not generally a viable monetization strategy, but it may be a way to earn credibility as a prolific inventor or to absorb goodwill of a company who will put an invention on store shelves.

 

How are the relevant industries and markets configured?

Some inventions have a very specific market and an obvious distribution channel, for a non-stick frying pan. But some inventions span multiple markets, for example a low-friction coating. Understanding the markets are how they are configured can be a good starting point for licensing.

Non-exclusive license

A non-exclusive license gives a licensee the right to exploit the IP, but the licensor may grant additional licenses to others concurrently. This can be advantageous for a licensor when his IP improves a product made by several companies having roughly equal market share, for example computers or shoes. Several lower royalty-rate licenses to several companies can earn substantially more total royalty revenue than a single higher royalty-rate license to just one company.

Exclusive license

An exclusive license gives the licensee the right to exploit the IP, and the licensor may not grant additional licenses to any other party, nor may the licensor exploit the IP himself. Consequently, the royalty rate is usually higher than for a non-exclusive license. The scope of exclusivity can be based many parameters, such as field of use, geographic territory, or market channel. Exclusive licenses can be advantageous for both parties when the licensee is a large company with national or international channels to market. But they can be disastrous for a licensor when the licensee has insufficient market power to create or satisfy market demand.

Sole license

A sole license gives the licensee the right to exploit the IP while permitting only the licensor to continue to exploit the IP. This is an uncommon arrangement that sometimes arises in cross-licensing agreements (where two parties each have intellectual property that the other wants to exploit).

 

Hedge your bets against an uncertain future.

An inventor may believe in the long-term market potential for his invention, but he may be uncomfortable relying solely on speculative future earnings from IP licensing. In this case the inventor may wish to trade-off some running royalties (future) for an up-front payment (present). 

Up-front payment (lump-sum royalty)

An up-front payment, also called a lump-sum royalty, is a dollar amount the licensee pays to the licensor usually at or near the start of the license term. If the licensor suspects the IP is so weak that it may be easily designed around or that the technology is changing so rapidly that what is valuable today may be obsolete tomorrow, he may wish to trade-off running royalties for an up-front payment. On the other hand, if the licensee believes the market is unstable or consolidating or that the market is so competitive that a design-around is inevitable, it may wish to omit an up-front payment altogether. However, maximizing an up-front payment can be detrimental to both parties. It can limit how much cash the licensee has available to commercialize the invention, resulting in either poor execution and a product failure or slow time-to-market and a missed market window.

Running royalties

Running royalties are amounts paid to the licensor over time based on the revenue earned by the licensee from sales of products that embody the licensed IP. A licensor may wish to forego an up-front payment for higher running royalties if he believes the IP is so strong that it may never be designed around or that the technology is either unchanging or so fundamental that its value will endure. Similarly, a licensee may wish to offer an up-front payment if it believes the market is stable or growing or that it has so much market power that design-arounds are not a concern. However, maximizing the running royalty can be problematic for both parties. If the licensee erroneously assumes a rapidly growing market and continued market power, it may fail to achieve the economies of scale necessary to support the high running royalty.

Combination of up-front payment and running royalties

Up-front payments and running royalties are not mutually exclusive. It can be beneficial for both parties to balance these appropriately.

 

Part II: How to optimize an IP license?

What types of products will embody your IP?

Running royalties, commonly just “royalties,” are generally proportional to how well the licensee exploits the IP. The two most common methods to compute royalties are based on sales revenues (dollars) and based on units sold.

Royalties as a percent of sales

Royalties as a percent of sales—typically net sales and rarely gross sales—can be beneficial for licensors whose IP is embodied by expensive and low-volume products, or for products whose price is expected to increase over time. The percentage is normally fixed but can vary proportionally with sales volume.

Royalties per unit sold

Royalties based on the number of units sold can be beneficial for licensors whose IP is embodied by inexpensive and high-volume products, or for products whose price is expected to decrease over time. Like percent-of-sales, the per-unit rate is normally fixed but can proportionally with sales volumes.

Royalties per use

Technology that tracks user’s usage has given rise to royalty rates based on the number of times a product is used. Example uses may be when a user opens a smartphone app or when he queries a cloud-based server. The former is similar to royalties per unit whereas the latter is similar to royalties as a percentage of revenue.

Royalties per unit time (lump sum)

Sometimes it can be easier to compute royalties based on time, for example how long a computer program is active. Time-based royalties can use computed per month, minute, or any duration make sense.

 

What should you base running royalties on?

Licensors often focus on the royalty rate—believing higher is always better. But this is only half the story:

Licensor: “I’m so happy. I negotiated a 10% royalty rate!”

Friend: “Great! But 10% of what? Gross sales? Net Sales? Profits?”

Royalties based on gross sales

In most cases gross sales is simply the total of all invoiced amounts, in other words what the licensee charged its customers. It is rare to base royalties on gross sales, especially in industries like retail where it is customary for vendors (licensees) to pay for shipping, markdowns, and volume discounts.

Royalties based on net sales

Net sales is gross sales minus expenses related to the sale of products, for example shipping, returns, and trade allowances. This is the most common basis for royalty rates; however, it can be easily overlooked or misunderstood. A seemingly high royalty rate can be eviscerated by excessive deductions.

In many industries it is common to deduct the following expenses:

  • Volume discounts. These usually increase total sales and therefore both parties benefit.
  • Product returns. It can be unfair to pay a royalty on such an unprofitable transaction.
  • Product freight and insurance. Customary.
  • Local taxes. Customary.

A licensor should generally resist permitting the licensee to deduct of the following expenses:

  • Sales commissions. This can encourage a licensee to pay excessive commissions.
  • Marketing and/or advertising. These are normally the licensee’s costs of doing business.
  • Unpaid debts. The licensor should not be accountable for the licensee’s customer management.
  • Vaguely specified fees. Such catch-all categories can become sources of contention.

It is beneficial for a licensor to cap the total amount of deductions to some percentage of gross sales.

Royalties based on profits

Because there is so much variability in companies’ financial management and accounting, it is best to simply avoid using profits as the basis for royalties.

 

When should running royalties accrue?

A licensee almost always computes royalties when it ships goods, invoices for those goods, or receives payment from its customers. 

Accrue royalties on shipment

Computing royalties when products ship can be an attractive option for licensors who rely on royalty payments for cash flow. However, if net revenue is the basis for royalties and there are extensive or delayed deductions, then accrual on shipment can complicate bookkeeping. For example, if the licensee pays the licensor quarterly royalties but it credits buyers for volume discounts annually, then the licensor may need to pay back the licensee for royalties paid in excess.

Accrue royalties on invoice

Computing royalties when products are invoiced is very common because it provides a clear basis for computation—the invoice quantity or amount. In practice, sellers often invoice buyers shortly after they ship products, so there may not be much practical difference in timing between accrual on shipment and accrual on invoice.

Accrue royalties on payment

Computing royalties on payment uncovers a subtle issue—not only does accrual determine when the royalty payments become payable, but it determines what the royalty payments are based on. Royalties that accrue on payment are based on products the licensee sold and received payment for. In other words, if the licensee never receives payment from a customer, then the licensee will pay no royalties on those products. A good way for licensors to negotiate against accrual on payment is to remind the licensee it is the licensee’s responsibility to choose its customer wisely.

 

How to ensure your IP is adequately commercialized?

An IP license can be worthless if the IP is never commercialized. Licensees sometimes exclusively license IP to prevent that IP from being commercialized (called shelving), usually if the licensee wants to protect its own competing product. A licensor should negotiate for some sort of assurance that the licensee will work diligently to adequately commercialize the IP.

Milestone payments

If the license agreement is for an invention that requires significant time to commercialize, then it is customary for the parties to determine a schedule of milestones for the licensee to achieve. The licensee almost always pays the licensor a lump-sum amount for each milestone it achieves. The license agreement should clearly express what happens when the schedule slips for various reasons. Example milestones are “building a functional prototype” or “starting clinical trials.”

Minimum royalties

A minimum royalty is a quarterly or annual amount that the licensee must pay the licensor whether or not the licensee sells enough products to generate adequate royalties. This may be the most important provision of an IP license because it provides the licensor with some certainty for future income.

Minimum royalties align the parties’ expectations of the commercial value of the licensed IP. For example, assume the parties want an exclusive license for a simple invention having a market size around $10 million and agree to a 5% royalty on gross revenue. This should generate expected annual royalties of roughly $500,000. So if the licensee refuses to agree to a minimum annual royalties above $100,000, then it means the licensee may expect to capture just 20% ($2 million) of this market ($2 million * 5% = $100,000). In this case the licensor may want to propose a non-exclusive license with this licensee or to explore exclusive licenses with other companies who are more confident that they will fully serve this market.

Importantly, minimum royalties provide a straightforward way for to modify or terminate an agreement with an underperforming licensee. For example, if the licensee falls short of one minimum royalty payment then the license could convert from exclusive to non-exclusive; if the licensee misses two payment then the license could terminate. Minimum royalties are no guarantee of commercialization, though, because the licensee can usually just pay these minimums out of pocket—as long as it can afford to do so.

 

Who should get rights to improvements to the IP?

It is important to consider whether the IP may be further developed and by whom. Which party will own and/or have rights to such improved IP depends on many factors, including: (1) the size, sophistication, and business models of the parties; (2) the strength and maturity of the IP; and (3) the amount of research and development required to commercialize the IP. A reasonable rule of thumb is that the party who creates some improved IP owns that improved IP.

Retain ownership to improvements

A licensor whose business is creating and licensing IP may want to negotiate to retain rights to all improved IP created by either party. This prevents the licensee from inventing around the licensed IP and thereby undercutting the licensor’s business. A licensor may retain ownership of improved IP but agree to license it to the licensee at some fair market value.

Grant ownership to improvements

Most licensees want to own improved IP that its employees create or which it paid to have created. This is a reasonable expectation, especially when the licensee is in a better position than the licensor to file, prosecute, and maintain the improved IP. Further, a licensee may ask for an automatic license to all improved IP created by the licensor. While seemingly unfair, the licensee is simply protecting its investment in the licensed IP. This prevents the licensor from creating improved IP and then demanding additional royalties and/or up-front payments while threatening to take the improved IP to a competitor.

Agree that each party owns improvements it develops

Licensors and licensees generally operate at arm’s length and may therefore further develop the IP without regard for the other party. In this common situation each party pays to develop and protect the improved IP it creates, and consequently owns such improved IP. Whether the other party gets rights to the IP up for negotiation.

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“We Don’t Have Any Intellectual Property”: Responding to a Common Startup Misconception

Whenever we meet with a new or potential startup client, one of the questions we always ask is what intellectual property the company has that it might want to protect. Frequently, entrepreneurs will respond with “we don’t have any intellectual property.” However, more often than not, this is not the case. This post aims to help an entrepreneur to begin thinking about the valuable intellectual property that her company may possess. It serves as an overview of all of your company’s assets that may fall under the “intellectual property” umbrella, and which you might be able to protect.

 

Patent

The first type of intellectual property that comes to mind for most entrepreneurs is the patent. Patents generally protect the following types of inventions:

  • Processes
  • Machines
  • Improvements
  • Composition of matter
  • Plants (asexually reproducing)
  • Designs (ornamental designs, separate from functional elements)

Patentable inventions must be useful, novel, and nonobvious. There is no patent protection for laws of nature, natural phenomena, or abstract ideas. This means that algorithms, especially purely mathematical ones, may not be patentable.

 

Copyright

Copyright protects literary and artistic expression that exhibit a modicum of originality and that are fixed in a tangible medium of expression. These literary and artistic expressions that may be eligible for copyright include:

  • Books, poetry, dramatic works
  • Music
  • Dance
  • Computer programs — both the underlying code and the interface
  • Movies
  • Sculptures
  • Images, paintings, drawings, photographs
  • Designs
  • Architectural works

Note that ideas that underlie a work are not copyrightable. Instead, they may fall under the umbrella of patent. Additionally, functional elements of anything are not copyrightable.

 

Trademarks

Trademark is another aspect of intellectual property law that you have likely heard a lot about. What you may not know is what exactly trademark law can protect. Under the federal trademark statute – the Lanham Act – words, symbols, and other attributes that serve to identify the nature and source of goods or services can be protected by trademark. The following marks may be protectable under trademark law:

  • Company names
  • Product names
  • Symbols
  • Logos
  • Slogans
  • Pictures or designs
  • Product configurations
  • Product design or trade dress
  • Colors
  • Smells

The limit here is that, to receive trademark protection, the mark needs to identify to consumers the source of the good or service it identifies. In other words, it must call your company or its goods or services to mind. Additional limits include that the mark must not be a generic description of the good or service or the class of goods or services, and that the mark cannot be a functional element of the product.

 

Trade Secrets

Trade secrets are information that adhere to the following three rules: the information (1) is not generally known to or reasonably ascertainable by the public, (2) confers to your company an economic advantage (meaning the secrecy confers the value, not just the information itself), and (3) is subjected to reasonable efforts by your company to maintain its secrecy. Trade secrets can include business or technical information of any sort. This means that things eligible for trade secret protection may include:

  • Formulas (chemical)
  • Recipes
  • Data
  • Methods or techniques
  • Processes
  • Business plans (e.g. product plans, sale and marketing plans, business strategies)
    Customer lists (current, past, and prospective)
  • Supplier lists
  • Pricing, price lists, pricing methodologies, profit margins
  • Market studies
  • Computer software and programs (including object code and source code)

Any information that meets the above three criteria can be protected under trade secret laws. The above list is not inclusive of all things that may qualify as trade secrets. Note that independent discovery or invention, as well as reverse engineering, of the information contained in your trade secrets is not prohibited under this regime.

 

Why Is This Important?

Intellectual property can be one of the most valuable assets to your company.

Disney’s stories and characters are protected by copyright. Nike’s famous swoosh logo and “just do it” slogan are protected by trademark. Trademark also protects the iconic red of the soles of Louboutin shoes. Coca Cola’s Coke formula is one of the most heavily guarded trade secrets. The curved designs of Apple’s Macbooks and iPhones casings are protected by design patents. Think of where all these companies would be without their intellectual property and the regimes that protect it.

Identifying your intellectual property is your first step to protecting and monetizing it. Whether this means filing a federal application, maintaining a trade secret, or simply asking founders and workers to assign to your company intellectual property they have created, this can be one of the most important parts of your business. So go ahead and start keeping track of assets that may qualify as intellectual property.

 

Conclusion

 For a lot of this, there is a much deeper analysis of whether your particular work, mark, or invention is actually protectable under one intellectual property regimes, to what extent, and how to go about acquiring and maintaining such protection. For more details about those analyses, consult with other posts on this blog, or an attorney.

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Protecting Corporate Intellectual Property

Intellectual property is a critical asset in many startups, especially technology startups, and often provides the foundations for the value proposition of the business. As a result, it’s very important to ensure that this intellectual property belongs to the company and not to various founders, employees, contractors, or any other contributors.

 

There are numerous potential negative consequences that can occur when intellectual property isn’t adequately protected. For example, situations can arise where an individual informally yet intimately involved in the company leaves without ever transferring the intellectual property he or she has contributed. Even where an individual’s relationship with the company was formal and agreed upon in written contracts, if intellectual property is not properly assigned, the company may not own it. Both situations, along with a myriad of other possible scenarios, can result in costly litigation. Long, expensive legal battles over intellectual property can easily destroy a young company that often can afford neither the actual cost nor the corresponding damage to the company’s reputation, especially because relationships are so often critical to a startup’s success. There is also always the possibility that the company will ultimately lose in litigation, and the loss of critical intellectual property components can seriously damage a company’s value.

 

While it’s important to engage legal counsel to aid in protecting your company’s intellectual property, it’s still valuable to understand the basics as an entrepreneur. This post will describe a few of the basic notions central to the protection of intellectual property protection:

  • Intellectual property assignment
  • Proprietary information and inventions agreement (“PIIA”)
  • Works made for hire
  • Shop rights
  • Licenses

 

Intellectual Property Assignment:

A first step is often ensuring that all intellectual property created prior to these measures is affirmatively assigned to the company. Here, it’s important to think critically about who may have contributed any type of intellectual property. Beyond standard technology, consider anyone who might have contributed to the development of trade secrets, a designer who helped with a logo, or even someone who came up with the company name or slogan. If all the people involved in creating any form of intellectual property do not sign an assignment, then there are already gaps in your company’s foundation.

Once you determine who needs to sign an assignment, it’s important to make sure that the scope of the assignment includes the specific variety of intellectual property that you want assigned and that the correct legal words are utilized to make the assignment valid. These are points you should always be sure to confirm with legal counsel.

PIIA:

It’s also important to ensure that any intellectual property developed forward is retained within the company, and PIIAs can often help meet this goal. PIIAs include language constituting a nondisclosure agreement and provisions assigning intellectual property created during a specified term (commonly the term of employment) to the company. The breadth of the intellectual property that a PIIA covers is typically up to the drafter, and it will be important to discuss with counsel what you intend to accomplish with any PIIAs that you request. Some PIIAs can even assign ideas conceived by individuals during the term of their employment.

Works Made for Hire:

Some specific types of intellectual property are protected by the works made for hire doctrine under copyright law. This is a complicated doctrine, and is often less useful than anticipated by entrepreneurs. It only protects works that are created in a “fixed form,” and only applies to specific items. Moreover, it only applies to works created by employees or works specially commissioned and only in very specific circumstances. Because intellectual property protection under this doctrine is so scant, it’s best not to rely on it and to have other protection mechanisms in place.

Shop Rights:

Shop rights occur when intellectual property is created by an employee and applies to inventions or patents. This right is not codified in law, but is an equitable judge-made solution for instances where an employee utilized an employer’s resources in creating an invention but never assigned ownership to the employer. This right is similar to a non-exclusive, no-cost license; the company can use the invention without paying any fee to the former employee, but has no ownership rights and cannot prevent anyone else from using the invention. While shop rights can somewhat protect your business model because you are not at risk of losing a critical invention, they cannot protect you from competitors.

Licenses:

Licenses can also be a useful tool to gain access to more intellectual property that was not created within the company. There is often open source code available for use in software, and using these usually entails some type of license agreement. Licenses are also useful in obtaining freedom to operate if your company’s invention is not useful without utilizing the invention of another entity.

 

In general, it’s important to establish measures to protect your intellectual property early. Many founders don’t like to spend time on this because it doesn’t typically have an effect in early day-to-day operations of the company, but it can make an enormous difference down the line if this framework is or isn’t in place in the event of a dispute. More importantly, it is very difficult if not impossible to remedy weak intellectual property protection once a dispute has already arisen.

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Employer-Employee Relationship Matters in Patent Ownership

When an employee creates an invention and later is issued a patent on that invention, does the employer get any rights to the patent? This might be a strange question to ask for some people, especially to those without expertise on patent law. They might take it for granted that an inventor owns all patent rights to his or her invention. However, this is not always the case.

 

Patent Law: Ownership is Different From Inventorship

A person must show that he or she contributed to the claims of a patentable invention in order to qualify as an inventor of the patent. By default, the inventor becomes the owner of the patent, but this ownership can be assigned away through a written document, or in some instances through an implied-in-fact understanding (discussed below).

It is the owner, not the inventor, who enjoys all property rights to the patent. With these property rights, the owner of a patent can license the patent to third-parties; sell the patent ownership; sue a potential infringer; and manufacture, offer to sell, sell, or use a product covered by the patent. If the inventor assigns his ownership to someone else, then he or she will not have any of these rights.

 

Ownership and Inventorship in Employer-Employee Relationship

The general rule is that the employee who creates an invention owns the patent rights to the invention. There are two exceptions to this general rule: (1) intellectual property (IP) was explicitly assigned to the employer or (2) the employee was specifically hired to create the invention at issue.

Explicit assignment of IP usually occurs in the form of signing an IP Assignment Agreement. The agreement would provide that all IP that the employee has created or may create in connection with the services provided to the company and/or derived from the company’s proprietary information shall be the property of the company. Different states have different laws regarding the scope of work that this assignment can cover. For example, California’s labor law stipulates that an employee owns the patent rights to his or her invention if the invention is made entirely on the employee’s own time, without using any of the company’s equipment or technology, as long as the invention (a) does not related to the company’s business, and (b) did not result from work performed by the employee “as an employee” of the company.

Even if an agreement was not signed between the employee and the employer, the employer might still have been assigned the patent rights if the employer explicitly hired an employee to invent the product that was patented. This arises from the implied-in-fact understanding that the employee was specifically hired and paid to create the invention and therefore, any fruition of patenting the invention should be the employer’s.

 

Where Assignment Has Not Been Made, Employer Might Still Have “Shop Right”

So is the employer completely without any remedy if the assignment scenarios above do not apply? Not if the employee used the employer’s resources, such as its computers or laboratories, to create the invention. A judge-made doctrine called a “shop right” allows employers to practice inventions created by employees that the employer helped to subsidize.

However, a shop right does not involve transfer of ownership. A shop right is basically a non-exclusive and royalty free license given to the employer. The employee still holds the ownership of the patent and is free to go to third parties and negotiate non-exclusive licenses. Also, the employer cannot sell or transfer this shop right to a third-party.

One important note: the shop right doctrine is not a substitute for an assignment. The doctrine is only a defense to patent infringement in court. In other words, it only arises in situations where the employer is sued by the employee for infringing the patent that the employee was issued by practicing the invention.

 

Implications for University Students and Faculty

Many startups are formed by the students and faculty of universities. Graduate students and faculty typically sign an IP assignment agreement with the university, which means that the employer-employee relationship discussed above is established. A good example of this relationship is Larry Page, one of the co-founders of Google, and Stanford University. As you can see from the excerpt of patent number US 6,285,999 below, the inventor of this patent that served as the foundation of Google was Larry Page. However, he was not the owner of the patent because he was a Ph. D. student at Stanford. As a result, the assignee of ownership was Stanford University, and the university received 1.8 million shares of Google stock in exchange for long-term license of this patent, which translated to $ 337 million.

Meanwhile, each university has its own policy regarding IP assignment of undergraduate students and other students who are not employees, but typically, universities do not seek to claim rights to patents issued as results of class participation. For example, the University of Michigan policy states that:

“The University will not generally claim ownership of Intellectual Property created by students. (A “student” is a person enrolled in University courses for credit except when that person is an Employee.) However, the University does claim ownership of Intellectual Property created by students in their capacity as Employees. Such students shall be considered to be Employees for the purposes of this Policy. Students and others may, if agreeable to the student and Tech Transfer, assign their Intellectual Property rights to the University in consideration for being treated as an Employee Inventor under this Policy.”

 

Advice for Startups

If you’re a startup, there are many other issues regarding IP that should concern you. Regarding the employee IP assignment issue, make sure that all employees sign IP assignment agreements. Litigation is expensive. You don’t want to go to a court to argue that you had an implied-in-fact assignment or that you have a shop right defense to infringement. IP assignment agreements are a lot easier.

Also, find out whether you are working with university faculty or grad students already in an employment relationship with a university. This pertains to your employees as well as independent contractors who will participate in creating inventions for the company. Your employee or independent contractor signing multiple IP assignment agreements could cause ownership problems further down the line.

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The On-Sale Bar to Patentability: A Pitfall for the Startup

onsaleSales are generally a good thing. A startup company’s first sales of a new technology, “must-have” product, or innovative service are proof that the company has arrived. They can initiate a steady source of income and signal legitimacy to creditors, including friends and family who have kept the venture afloat through its early days. Most importantly, sales validate founders’ excitement for sharing their passion with the world.

But sales can also spell disaster. Due to a pitfall built into United States patent law, first sales of a product or service can prevent a startup from pursuing patent protection on its key technologies. Startup founders should be aware of the “on-sale bar” to patentability, which can kill an early-stage venture’s ability to attract investors and ground the company just as it about to take flight.

 

Getting to Know the On-Sale Bar

Patent protection is not usually the first thing on busy entrepreneurs’ minds. That is, until they begin seeking funds from investors. Venture capital firms, especially those investing in tech startups, often insist on robust patent protection before bankrolling a small company’s growth. This makes sense when one considers what a patent is: the right to exclude others from practicing the subject technology. Investing in startups is risky and expensive. Exclusivity reassures investors that they have a chance of recuperating their investments if the company ever gets up and running full tilt. That is why, for many, lack of patent protection is a deal killer.

As it turns out, those celebrated initial sales can doom the startup. Under American patent law, certain acts by an inventor can prevent him or her from ever patenting his or her invention. The Patent Act reads, in relevant part:

A person shall be entitled to a patent unless . . . the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.

35 U.S.C. § 102(a)(1) (2012). There is a one-year grace period built into this law. The upshot is that an inventor who places his invention “on sale” anywhere in the world one year or less before filing a patent application cannot obtain a patent on that invention. This means losing the exclusivity some investors demand.

Furthermore, the Supreme Court and the Federal Circuit have interpreted the law to mean that the on-sale bar applies where the claimed invention (1) is the subject of a commercial offer for sale and (2) is ready for patenting. With respect to the second prong, we can assume for our purposes that if a startup is selling its product or service, the technology at issue is mature and “ready for patenting.” But what about the first prong? When is a product or service “on sale” under the law? Startups should familiarize themselves with what constitutes an “offer for sale” and why our laws discourage patenting an invention that has been on sale for too long.

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How Can Sales Be a Bad Thing?

Patent law reflects a quid pro quo between the inventor the public. In exchange for full public disclosure of new technology, the inventor gets a temporary exclusive right. The idea is that we can incentivize rapid technological innovation by granting a temporary “monopoly,” while the public receives technological knowledge and the certainty that comes with legal notice as to what it can and cannot do. The public also gets freedom to practice the technology after the patent term expires, when the invention becomes part of the public domain.

Once something is in the public domain, it is unfair to remove it. Imagine the uncertainty that would surround any new technology if it could be given to the public, then taken back. Anybody building upon known technologies to create the next big thing would be on shaky ground if an inventor could remove that technology from the public domain at any time, then threaten an infringement action. Such a policy would discourage the technological progress that the patent system was designed to promote.

Although we like the idea of incentivizing innovation, we are also fond of concepts like certainty and notice. This is where the on-sale bar comes in. Selling a patented widget to the public is, in effect, putting it out there for the public to see. And the business community wants to know what it can do with the widget. Can innovators invest huge sums of money around using the widget to make the next next big thing, or are their resources better spent on alternative approaches? The longer the widget is on sale, the more patenting it feels like taking it out of the public domain. Therefore, United States patent law does not allow inventors to commercially exploit their inventions for long before public policy demands they patent it or dedicate it to the public.

  

What the Startup Should Know

With the above discussed public policy in mind, below are some helpful guidelines entrepreneurs should remember to avoid falling prey to the on-sale bar:

  • Courts have signaled that they will look to the Uniform Commercial Code (UCC) when determining whether a communication rises to the level of a commercial offer for sale. A key feature of such an offer is that acceptance by the other party would create a contract transferring title of the goods. If the seller retains title to the goods themselves, a transaction might not constitute an offer for sale.
  • The invention itself must be the subject of the offer for sale. Offering to sell rights to the invention or promotional items related to the technology at issue won’t trigger the on-sale bar.
  • A finalized sale is not required. A mere offer for sale is enough to spell trouble. In fact, even a rejected offer has been held sufficient to bar a patent. Similarly, delivery is not required. For example, courts have held that a signed purchase agreement is enough to bar a patent, even when the subject goods or services are never delivered.
  • Conditional sales count too. The fact that a sale is conditioned upon the buyer’s satisfaction, for example, does not get around the on-sale bar.
  • The on-sale bar applies anywhere in the world. Under the old U.S. patent laws, which applied to patent applications filed before March 16, 2013, only offers to sell within the United States would trigger the on-sale bar. Today’s startups must proceed more cautiously. Under the America Invents Act (AIA), passed in 2011, the on-sale bar now has no geographic limitation. Offering to sell your widget in Nepal or on the internet can trip you up as easily as selling it from a booth down the street.
  • Secret sales may trigger the on-sale bar. Under the old patent laws, the “on sale” provision was interpreted as including secret or private commercial activity. It remains unclear whether the courts will interpret the “on-sale” provision in the same way following enactment of the AIA.
  • Even unauthorized third party sales may trigger the on-sale bar. This is important for a startup to keep in mind when entering into a manufacturing or distribution agreement.

Although these guidelines do not outline all the contours of the “on sale” provision, the take home point is clear. Startups with patentable technologies should not offer goods or services for sale to anyone, anywhere, before filing for patent protection. 

Conclusions 

Startup companies considering patenting their products or processes should be cautious about offering to sell their products or services, in public or in secret. More precisely, if a startup’s founders envision fundraising through investors, they should make sure a patent application is on file before putting their company’s goods or services on the market, whether that be through a brick-and-mortar operation or, more likely, the internet. Taking precautions to secure patent protection now can help the tech startup avoid pitfalls, like the on-sale bar, that could keep it from realizing its long-term fundraising and development goals.

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U.S. Trademark Law & The Hashtag: #canthisviolatetrademarklaw?

In the past decade, with the advent of social media, companies have found a multitude of new avenues for reaching potential consumers. Instead of solely relying on traditional marketing avenues, companies have been able to take advantage of the connective world of social media to reach consumer consciousness at an unprecedented rate. The implementation of the “hashtag,” a metadata tag that allows social media users to group their posts with others who have used the same hashtag phrase, has greatly increased visibility among social media users. By using a particular hashtag, companies are able to connect directly to consumer posts, while also encouraging consumers to spread company branding through their own social media use. In addition, the hashtag has in some ways served as the great equalizer in online advertising. Even companies with limited capital have been able to engage in this grassroots marketing, since the cost of using a social media account and a hashtag is often completely free.

As companies increase their presence on these social media platforms and continue to engage in hashtag marketing, legitimate questions about trademark protection have arisen. Namely, individuals in the legal and business community have begun to wonder if there are potentially damaging trademark violations lurking in this newfangled hashtag regime. Many startup companies are reliant on their ability to gain traction through these highly cost-efficient marketing streams, and therefore, founders must ensure that they understand the rules governing the use of “hashtags” in the social media marketplace.

While there are a number of different angles to approach this topic, this post will focus on the legal community’s current (but ever evolving) understanding of the role trademark law plays in policing hashtag marketing in two instances: (1) the use of certain word marks (i.e. words or slogans that are used as source identifiers for a company which are protected trademarks) in a hashtag and (2) the acquisition of protection for hashtag phrases (so, a word mark that includes the actual hashtag symbol at the beginning).

 

(1) Can the use of trademarks in a “hashtag” on social media ever violate federal trademark law?

 In short, the answer appears to be (potentially) yes – in the very limited case law discussing this question, courts appear to indicate that the unauthorized use of a trademarked word or phrase can constitute trademark infringement. To briefly outline what federal trademark infringement entails, a plaintiff (the company attempting to prove that the defendant infringed on their trademark rights) must demonstrate that: (1) the mark in question merits protection under federal trademark law; and (2) that the allegedly infringing use is likely to result in consumer confusion, causing damage to the plaintiff. For example, if a relatively unknown cell phone company began placing the Apple and iPhone words and logos on their products (in other words, trying to pass their phones off as genuine Apple iPhones) this clearly has the potential to cause significant consumer confusion in the marketplace. The question with “hashtags,” therefore, is whether one company’s use of another company’s (or individual’s) trademarked word or phrase could result in a similar type of consumer confusion.

In a recent case in Massachusetts, Public Impact v. Boston Consulting Group, the court determined that the defendant’s use of the hashtag “#publicimact” (as well as the use of a twitter handle “@4PublicImpact”) was an infringement of plaintiff’s protected word mark, “Public Impact.” Specifically, the court stated that the defendant’s use of the same two words that constitute plaintiff’s mark as a source-identifier would be concerning in any context where the words are used without other distinguishing features. The logical conclusion, therefore, is that the court believes that “hashtags” are capable of being used as source identifying mechanisms in social media, and not just merely categorization tools. In other words, the court here seems to recognize the role social media advertising plays in generating revenue for companies, and the potential need for adequate trademark protection for companies in this sphere. As a result of this finding, the court actually ordered a preliminary injunction against the defendant’s continued use of both the twitter handle and infringing hashtag — a result that clearly demonstrates the impact these rulings could have on a company’s ability to continue conducting business as usual.

While no other cases answer this question quite as directly, courts have at least demonstrated an openness to evaluating claims of infringement via “hashtags” on the merits (meaning, that there is at least a colorable claim of infringement). For example, in Fraternity Collection v. Fargnoli, the Southern District of Mississippi stated a willingness to accept, at least theoretically, that “hashtagging a competitor’s name or product in social media posts could, in certain circumstances, deceive consumers.” While there is no judgment on the merits in this case, it at least further shows the general understanding that “hashtags” are capable of doing more than just acting as convenient grouping labels, but instead serve a valid role in company marketing.

Additionally, trademark holders have increasingly threatened litigation over what they perceive to be improper use of their trademarks in hashtags. For example, the U.S. Olympics Committee made various statements during the lead up to the 2016 Rio Summer Olympic games that they would vigilantly seek to prevent the use of their marks (e.g., “usolympics,” “teamusa”) from being used by non-sponsors of the U.S. Olympic team, including in hashtag format. Differentiating individual non-commercial use of these marks from the alleged infringing use, a representative from the USOC stated: ““athletes can certainly generically say, ‘Thank you for your support’ during the Games, but a company that sells a sports drink certainly can’t post something from the Games on their social media page or website. They’re doing nothing but using the Olympics to sell their drink.”

This should give young companies pause when thinking about how to interact in the social media marketplace. While this increased protection is potentially a boost for companies looking to protect fledgling brands, start-ups should also be wary of the potential for using other more prominent marks, especially when doing so could be interpreted as an attempt to palm off on the goodwill of the more established mark.

 

(2) Are “hashtags” trademarkable? Is this a desirable form of protection?

In addition to filing infringement claims for use of a mark within a hashtag, many companies, and other entities, have begun acquiring trademarks for actual hashtagged phrases (in their hashtag form) as a second way of increasing protection. For example, the USOC actually owns the mark: #rioready. Recently, National Football League super-star wide receiver Dez Bryant successfully filed the mark: #throwupthex, which had become his trademark slogan (to go along with his popular touchdown victory move where he crosses his arms in the air). Mr. Bryant noted at the time of the filing of the application his concern that companies would engage in misuse of the mark to generate marketing for their own brands.

While it is clear from these examples that hashtag phrases have been accepted as proper trademarks by the USPTO, there are a few observations that companies should keep in mind when evaluating the decision to register their hashtag marks.

First, the addition of a hashtag symbol (#) in front of an otherwise generic word or phrase does not elevate that word or phrase to a level of distinctiveness. In other words, if the mark is not protectable without the hashtag, it cannot gain protection simply from its inclusion. Second, it may not even be an expedient business decision to acquire this mark. For starters, if the company has not already obtained protection for the wordmark within the hashtag phrase itself, then there is no reason to believe that this mark would be enforceable. Further, companies should be careful to ensure that, if they do acquire a trademark in a hashtag phrase, that they are making sure to use it in a source-identifying way. It is perhaps not terribly difficult to see how (and make the argument that) another company is using an already established source-identifier to palm off the goodwill of that mark by using a hashtag containing that mark (the scenario discussed above). However, if a company obtains a trademark in a hashtag phrase, and then only uses that phrase in a hashtag context (to group their posts together) in a way that doesn’t seem to serve as a source identifier that company may have a tougher time demonstrating that the trademark in that hashtag phrase is valid. A better course of action would be to ensure that trademark protection is obtained first in the actual phrase (without the hashtag symbol).

In all, startup (and more established) companies should not rush to protectionist measures when it comes to trademarks. Much of the marketing benefit arises directly from the consumer’s ability to link directly through the use of trademarks, and owners of the contained marks should not necessarily assume that their usage by others, even other companies, is always an undesirable outcome. Further still, over-protectionist measures may generally be an objectionable decision from a business point of view. That being said, companies and their counsel should be advised to take full note of the rapidly changing landscape governing trademarks and their place in social media advertising.