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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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Hiring New Employees: Beware the Risks of Assignor Estoppel

Slinky!

A drawing included for the patent for a slinky (Patent #: US 2415012 A), issued in 1947.

Startup companies frequently hire new employees from established technology companies — or even competing startups. New employees often provide creative energy and technical expertise critical to the growth of a startup. However, new employees may also bring unforeseen liabilities as a consequence of their past employment. One such liability in the domain of patent law, called assignor estoppel, could prove hugely detrimental to a startup in potential patent disputes down the line.

 

Patent Basics

Patents provide their owners exclusive rights to exclude others from practicing the invention detailed in the patent. Patents can cover a huge swath of technology areas ranging from pharmaceuticals to software. The Patent Office has even issued a patent on a method of swinging a swing.

All patented inventions must have an inventor or a set of inventors, but the inventor can assign, or transfer, her rights to the patent to another person or entity. Most commonly, this occurs when an employee at a company invents something during the course of her employment. Many employers require employees to assign all of their intellectual property rights if the intellectual property connects to the employee’s work at the company. As patent applications have flourished in recent years, particularly in the field of software, many technology employees have pending or issued patents that are assigned to previous employers.

Once a patent has issued, patent owners can sue others who infringe the patented invention; these cases generally arise in federal district courts. Defendants battling against patent owners in these cases typically have two primary lines of defense: non-infringement and invalidity. Non-infringement means that the defendant did not actually practice the invention and thus did not violate any of the patent owner’s rights. Invalidity, on the other hand, means that the Patent Office should have never issued the allegedly infringed patent in the first place, because the patent did not satisfy the criteria necessary for a valid patent. Increasingly, district courts have been invalidating patents, particularly software patents deemed to cover un-patentable abstract ideas.

 

Assignor Estoppel

The rise of patent invalidations has rendered invalidity defenses invaluable weapons in defendant companies’ arsenals. But the doctrine of assignor estoppel can eliminate a company’s invalidity defense, potentially subjecting a company to millions of dollars in patent damages.

Assignor estoppel poses the following proposition: If an inventor files an application for a patent and assigns his patent rights to someone else, he cannot later claim that his assigned patent is invalid during a district court battle. Essentially, the doctrine prevents inventors from patenting an invention and later claiming that the patent is worthless.

For example, an inventor may create a new software application and then assign his patent rights to a large company in exchange for money. Later, the inventor may want to sell the software application to others, even though he assigned away his patent rights already. If he sells the application anyway and thus infringes the company’s patent, assignor estoppel will prevent him from trying to invalidate the patent if the company sues him.

This doctrine can also apply to the new employers of inventors as well. For instance, if the inventor in the previous example joined a new company (Company B) and helped that company develop a competing application, the original company with the patent rights (Company A) might sue Company B. During the ensuing district court battle, Company B may be prohibited from raising an invalidity defense because its new employee has infected his new employer with assignor estoppel.

Assignor estoppel will transfer from a new employee to his new company if a number of factors are met. Some of these factors include the employee’s leadership role at the new company, the employee’s role in allegedly infringing activities, and the employee’s ownership stake in the new company <http://www.ptabblog.law/?p=313>. Roughly, employees with larger influences at their new company pose a higher risk of infecting their new employer with assignor estoppel. At small startup companies, this risk can be significant and pervasive.

 

Nipping Assignor Estoppel in the Bud

So how can startups hedge their risk against a potentially “infectious” employee and secure the availability of legal defenses in patent suits should the need arise? Here are a few tips that entrepreneurs and startups should consider when hiring new employees or taking on additional founders:

  1. Have new founders and employees sign a form that assigns to the company all of the employee’s intellectual property rights that relate to the company’s business.
  2. Ask new founders or employees if they have any issued patents from when they worked at previous employers. Most companies require employees to assign their IP rights, but some employees may not remember that they assigned their patent rights to a previous employer. Consequently, you should search for any issued patents or published pending patent applications with the prospective employee’s name on them.
    1. If a prospective employee has issued patents or pending applications assigned to a competing company, ensure that your new products will not infringe or potentially infringe these patents. It may be prudent to enlist the services of a patent attorney to counsel the company on potential litigation risk relating to these patents.
    2. If the prospective employee will have a leadership role or ownership stake in the startup, the risks of assignor estoppel will be higher. If, however, the employee won’t be working on product development and receives no equity, the risks of assignor estoppel, while still potentially present, will be lower.

Hiring great employees involves a number of important considerations completely divorced from legal risks down the line. However, an employee’s prior patent assignments can create huge legal risks for burgeoning startups. Consequently, startups should be mindful of these risks when making hiring decisions.