Intellectual property for startups

By Michael J. Kasdan, Esq. and Richard P. Zemsky, Esq.

 

EY - Michael Kasdan, Esq.

Startups can conserve capital by doing some of their own legal legwork. But intellectual property (IP) attorneys Michael J. Kasdan and Richard P. Zemsky also pinpoint those scenarios that call for professional help.

Tackling legal issues early on

For young cost-conscious businesses, the prospect of incurring expensive legal costs can be daunting. But addressing key legal issues early on is crucial for your company’s initial and long-term success.

Kasdan and Zemsky specialize in IP issues at the law firm of Amster, Rothstein & Ebenstein LLP. They say that the owners of startup businesses can reduce certain legal costs by doing much of the preliminary legwork themselves. For more complex problems, it is crucial to retain an experienced attorney — without cutting corners. They offer six tips for curbing costs:

1. Forge basic legal agreements

Pre-incorporation agreements
Even for very early-stage startups, pre-incorporation agreements are a prudent choice, providing some measure of legal protection and clarity before the legal formation of the company. Luckily, it’s possible to draft and execute these relatively simple agreements at little cost.

The most cost-effective approach to simple legal agreements is to find examples and adapt them to your situation. However, it is critical to recognize a distinction between simple agreements and complex ones that require the experience of an attorney. Here’s a simple rule of thumb:

For a young company not yet legally formed, all agreements should be relatively simple and straightforward. If the agreements seem too complex, then you have probably reached an appropriate time to create an official company and should apply more rigorous legal diligence.

A founders’ agreement clarifies responsibilities
The most important aspect of pre-incorporation agreements is the founders’ agreement, a contract among the founding members of the company that governs issues such as responsibilities, compensation, ownership of the company and importantly, the consequences of a founder’s departure from the company. This agreement provides benefits at no monetary cost, from improved guidance and accountability to protection in the event of disputes among team members.

Founders can save on legal costs by drafting the founders’ agreement themselves. The internet contains numerous examples of such agreements. The goal is for the founders to develop the ground rules that will govern the young company, memorialize those rules, and then agree to abide by them. Each founder should sign and date the agreement in the presence of a witness who also signs and dates the document.

Protecting your ideas with a non-disclosure agreement (NDA)
The biggest asset of most young companies, aside from the people, is their ideas. As such, it is highly important to protect those ideas. Enter the NDA. Each outsider with whom you discuss your business should generally first be bound by a NDA. If NDAs are not used, the opportunity to acquire patent rights may be lost.

Fortunately, NDAs are relatively simple and straightforward agreements, and minimal effort and outlay is required to obtain a good NDA. Form NDAs can be found via the internet. In many cases, little to no modification will be necessary to make the NDA applicable to your company.

Addressing IP rights through technology transfer agreements and IP assignment agreements
While rigorous legal language should be used, technology transfer agreements can be adapted from one use to the next. Consult an IP lawyer to develop a good model or to check an agreement you drafted.

An experienced attorney should be able to review them fairly quickly and stay within your budget. From there, you should be able to adapt the agreement yourself. Consider technology transfer agreements for any development that might result in a patentable invention, any computer or web programming that will be copyrightable and any graphics design that might lead to logos or other trademarks. Ideally, you should have a clause or a section in your contractor and employee agreements addressing the assignment of IP rights before any work commences.

2. Address cross-border activities via contracts with non-US parties

Increasingly, startups have teams, particularly software development teams, located abroad. When seeking to apply contracts across borders, include choice of law and choice of forum clauses in your agreements. A choice of law clause specifies the jurisdiction whose law will govern the contract. Choose something familiar and predictable; businesses commonly designate New York law.

A forum selection clause can establish the place where any litigation arising out of the contract would take place. Choose a place conveniently located so that you will not waste travel expenses. Designating a forum will protect you from being dragged into court abroad or even into another state in the event of a dispute. The goal with these clauses is to avoid surprises and uncertainty while at the same time managing costs. Also, an arbitration clause may save costs, as arbitration is likely to be faster and less expensive than a drawn-out court battle.

3. Incorporate to establish a legal company

When a fledgling company begins to more fully develop its ideas, gain momentum in the marketplace and especially create intellectual property, an official legal company should be formed. While we focus here on incorporation, the same advice applies to LLCs and other business entity types. We identify three paths:

  1. Hire an attorney to handle the incorporation.
  2. Handle it yourself.
  3. Draft a charter yourself but then seek review by an attorney.

Scores of online guides can assist a founder in the process of creating a legal entity. For example:

Search for charters for companies similar to your own or in the same industry and use them as models for your own charter. Because of the importance of incorporating properly, hiring a corporate attorney to review your charter before you file it is a good idea.

An experienced attorney should be able to review and provide feedback concerning your document relatively quickly — thus hopefully at relatively low cost. Be sure to explain your budget up front so you can get the service you need at an acceptable cost.

4. Protect websites and apps via terms of use/terms of service

These days, many startups are built around websites, mobile apps or both. For these companies, terms of use and terms of service can protect the company, users and third parties, and may be necessary to comply with legal requirements. Because of the variety of websites and apps, not all terms of service will be the same. Terms should be tailored to your company and avoid boilerplate language.

For sites and apps that allow users to submit or post content, the terms of service should set forth the company’s right to use that content. However, companies should avoid overreaching. A good model is to use content to the extent necessary to provide the services of the website/app. For the user’s ease of mind, you may want to explain, as long as it is true, that your company does not claim ownership over any submitted content.

Terms of service should also specify content restrictions and removal policies. A company may prohibit inflammatory content, offensive content, content that infringes on others’ intellectual property rights or any other content deemed inappropriate. The terms of service, in addition to stating the prohibition, may also explain the company’s right to remove such content. The company should state its compliance with the Digital Millennium Copyright Act (DMCA) and ideally provide notice and takedown procedures. Such procedures enable third parties to request removal of content that they believe infringes on their IP rights. These procedures may be as simple as providing an email address for complaints and corresponding internal policies to address the complaints.

The privacy policy addresses the question of how users’ data are collected and used. Federal Trade Commission (FTC) guidelines require a “clear and concise” privacy policy for any websites that collect personal information. Your policy should balance your users’ concerns with the needs of your business.

When drafting your terms of service, look to similar websites or apps for examples. Recognize that plain English is acceptable and often preferable, but that the terms of service must also provide the appropriate protections.

5. Get educated to avoid IP infringement

Getting embroiled in legal actions concerning the potential infringement of another’s IP rights can be costly and distracting. DITTO Technologies, Inc., a startup that sells eyewear and allows users to try on glasses virtually, was sued by 1-800 CONTACTS , Inc. for patent infringement relating to the virtual demos. 1-800 CONTACTS purchased the patent after DITTO launched and is now attempting to use it to shut down DITTO. Had DITTO first performed a patent clearance search and discovered the patent, it may have been able to buy the patent itself, obtain a license or modify its business before investing heavily in the virtual demo feature.

Educating oneself on the landscape of third-party patents and trademarks at an early juncture is a sound and best practice. An initial search of trademarks and patents can provide a lay of the land, enabling you to determine whether obvious obstacles exist.

Powerful, free search tools are available online. The US Patent and Trademark Office (USPTO) offers the Trademark Electronic Search System (TESS), available at http://www.uspto.gov/trademarks/index.jsp. A basic word mark search allows you to enter words such as your desired business name or slogan, to determine whether it is already registered as a trademark. The search results will include marks containing those words and will indicate whether the trademark is “live,” meaning it is still in use and should not be infringed or “dead,” meaning it was abandoned and will not present a problem.

When reviewing the search results be concerned with similar matches, not just exact matches. For example, Fitbug Limited recently sued Fitbit, Inc. for trademark infringement. While the names are not identical, they are sufficiently similar to expose Fitbit to a lawsuit. Engaging a lawyer for a more thorough search should follow once you have found a name that is not immediately preempted. The legal cost here is manageable. For example, at our firm, a trademark clearance search can be performed for about $1,250.

For patents, Google Patents, available at http://www.google.com/patents/, provides a powerful tool that can be used to search for patents using keywords. Enter search terms that describe the heart of your invention and browse through the results. When looking at a patent, the summary section should describe the invention and provide you with enough information to at least know whether the patent is relevant. You can flag the patents you think are relevant and provide them to an attorney to analyze.

If you have performed this search first, you can reduce the work needed from the attorney, which should also reduce cost. A law firm often can engage professional searchers to perform a more thorough search, typically for less than $1,000. Attorney review of the search results costs a few thousand more, depending on the number of results and the level of analysis. As always, you should communicate your budget at the start and require your authorization before any work is performed beyond that budget.

6. Protect functionality with these cost-effective alternatives

To protect the functionality of an invention you will want a utility patent. This will require the services of a patent attorney or a registered patent agent. While this is the most expensive form of IP, it also provides the most complete protection. When first consulting with an attorney, explain your budget. Also offer to provide a detailed description of your invention, including figures. This may be incorporated into the patent application, thereby reducing the drafting work that the attorney must perform.

A step below a full utility patent application is a provisional patent application, an invention disclosure, costing a fraction of a full utility application and consisting of a description and figures. It provides you with a one-year window in which to decide whether to file a full application, which will benefit from the filing date of the provisional. The provisional application is like a placeholder, ensuring that your invention is not rendered un-patentable by similar inventions disclosed after your provisional filing date but before you file a full non-provisional application. Additionally, provisionals enable you to say "patent pending."

While provisionals are much less expensive than non-provisional applications, you can again reduce costs by providing a detailed disclosure. The more detailed your disclosure, the less work your attorney must do, and the lower the total cost. In fact, while not recommended, it is possible to cut the attorney out of the provisional application process entirely by publishing (making publicly available) your invention disclosure without filing with the USPTO.

Colloquially called the "poor man’s provisional," publication will cut all legal costs while preserving US patent rights for one year. However, publication without first filing with the USPTO may result in a loss of patentability in foreign countries, and so is strongly discouraged unless you are certain that you will not seek rights abroad.

In addition or instead of a utility patent, you may seek a design patent, which protects ornamental appearance, not functionality, and as such, has a much narrower scope. However, they are far less expensive to obtain than utility patents, and enable you to say "patented" and prevent others from copying your design, in terms of its appearance.

Finding a balance

As a young company develops, its leaders have to find a balance between legal costs and other financial demands. Employing the techniques we mention can reduce legal costs while ensuring that the business venture is well protected. With any of the above mentioned approaches it is best to recognize these as the first steps prior to seeking a true legal opinion. These steps can save you money, but failing to seek proper legal guidance can be a costly mistake.

About the authors

Richard P. Zemsky is an associate at Amster, Rothstein & Ebenstein LLP. The practice specializes exclusively in intellectual property issues, including patent, trademark and copyright. He may be reached at rzemsky@arelaw.com.

Michael J. Kasdan is an attorney at Wiggin and Dana in New York City and specializes in intellectual property issues, including patent, trademark and copyright. He works with established companies and startups to obtain, value, license and develop patent portfolios and trademarks. As a litigator, Michael negotiates, defends and asserts IP rights before the courts, the US Patent and Trademark Office, the International Trade Commission and in private arbitrations and mediation. He has been on the ground floor of efforts to turn New York City and State into a hub for innovation and entrepreneurship in technology, internet, e-commerce and new media. Michael also teaches as a guest lecturer at his alma mater, NYU, and as an adjunct professor at New York Law School and Seton Hall University School of Law.

The views of third parties set out in this publication are not necessarily the views of EY. Moreover, the views should be seen in the context of the time they were expressed.