Entrepreneurship

MGT- 3103

BS (Chemistry) – 2nd Semester

LECTURE: 10

PROTECTING THE IDEA AND OTHER LEAGAL ISSUES

WHAT IS INTELLECTUAL PROPERTY?

Intellectual Property—which includes patents, trademarks, copyrights, and trade secrets—
represents important assets to the entrepreneur and should be understood even before engaging
the services of an attorney. Too often entrepreneurs, because of their lack of understanding of
intellectual property, ignore important steps that they should have taken to protect these assets.

NEED FOR A LAWYER

Since all business is regulated by law, the entrepreneur needs to be aware of any regulations that
may affect his or her new venture. At different stages of the start-up, the entrepreneur will need
legal advice. It is also likely that the legal expertise required will vary based on such factors as
whether the new venture is a franchise, an independent start-up, or a buyout; whether it produces
a consumer versus an industrial product; whether it is nonprofit; and whether it involves some
aspect of computer software, exporting, or importing.

Lawyers, like many other professionals, are specialists not just in the law but in specific areas of
the law. The entrepreneur does not usually have the expertise or know-how to handle possible
risks associated with the many difficult laws and regulations. A competent attorney is in a better
position to understand all possible circumstances and outcomes related to any legal action.

In today’s environment, lawyers are much more up-front about their fees. In fact, in some cases,
these fees, if for standard services, may even be advertised. In general, the lawyer may work on a
retainer basis (stated amount per month or year) by which he or she provides office and
consulting time. This does not include court time or other legal fees related to the action. This
gives the entrepreneur the opportunity to call an attorney as the need arises without incurring
high hourly visit fees. In some instances, the lawyer may be hired for a one-time fee. For
example, a patent attorney may be hired as a specialist to help the entrepreneur obtain a patent.

Once the patent is obtained, this lawyer would not be needed, except perhaps if there was any
litigation regarding the patent. Other specialists for setting up the organization or for purchase of
real estate may also be paid on a service-performed basis. Whatever the fee basis, the
entrepreneur should confront the cost issue initially so that no questions arise in the future.

Choosing a lawyer is like hiring an employee. The lawyer with whom you work should be
someone you can relate to personally. In a large law firm, it is possible that an associate or junior
partner would be assigned to the new venture. The entrepreneur should ask to meet with this
person to ensure that there is compatibility.
A good working relationship with a lawyer will ease some of the risk in starting a new business
and will give the entrepreneur necessary confidence. When resources are very limited, the
entrepreneur may consider offering the lawyer stock in exchange for his or her services. The
lawyer then will have a vested interest in the business and will likely provide more personalized
services. However, in making such a major decision, the entrepreneur must consider any possible
loss of control of the business.

PATENTS
A patent is a contract between the government and an inventor. In exchange for disclosure of the
invention, the government grants the inventor exclusivity regarding the invention for a specified
amount of time. At the end of this time, the government publishes the invention and it becomes
part of the public domain. As part of the public domain, however, there is the assumption that the
disclosure will stimulate ideas and perhaps even the development of an even better product that
could replace the original.
Basically, the patent gives the owners a negative right because it prevents anyone else from
making, using, or selling the defined invention. Moreover, even if an inventor has been granted a
patent, in the process of producing or marketing the invention, he or she may find that it
infringes on the patent rights of others.

 Utility patent

utility patent basically grants the owner protection from anyone else making, using, and/or
selling the identified invention and generally reflects protection of new, useful, and unobvious
processes such as film developing, machines such as photocopiers, compositions of matter such
as chemical compounds or mixtures of ingredients, and articles of manufacture such as the
toothpaste pump.

 Design patents
Covering new, original, ornamental, and unobvious designs for articles of manufacture, a design
patent reflects the appearance of an object. These patents are granted for a 14-year term and, like
the utility patent, provide the inventor with a negative right excluding others from making, using,
or selling an article having the ornamental appearance given in the drawings included in the
patent. Traditionally, design patents were thought to be useless because it was so easy to design
around the patent. However, there is renewed interest in these patents.
Examples are shoe companies such as Reebok and Nike that have become more
interested in obtaining design patents as a means of protecting their ornamental designs. These
types of patents are also valuable for businesses that need to protect molded plastic parts,
extrusions, and product and container configurations.

 Plant patents.
These are issued under the same provisions as utility patents and are for new varieties of plants.
These patents represent a limited area of interest, and thus very few of these types of patents are
issued

Start-Up without a Patent

Not all start-ups will have a product or concept that is patentable. In this case, the
entrepreneur should understand the competitive environment to ascertain any advantages that
may exist or to identify a unique positioning strategy.
With a unique marketing plan, the entrepreneur may find that striking early in the
market provides a significant advantage over any competitors. Maintaining this differential
advantage will be a challenge but represents an important means of achieving long-term success.
TRADEMARKS
A trademark may be a word, symbol, design, or some combination of such, or it could
be a slogan or even a particular sound that identifies the source or sponsorship of certain goods
or services. Unlike the patent, a trademark can last indefinitely, as long as the mark continues to
perform its indicated function.
Trademark law allows the filing of a trademark solely on the intent to use the trademark in
interstate or foreign commerce. The filing date then becomes the first date use of the mark. This
does not imply that the entrepreneur cannot file after the mark has already been in use. If this is
the case, the entrepreneur may file a sworn statement that the mark is in commercial use, listing
the date of first use.
 It is also possible to file for a trademark if you intend to use this mark in the future. You
are allowed to file in good faith along with a sworn statement in the application that there is
intent to use the trademark.
Trademarks vary widely in their application and use. There are many famous trademarks
that we sometimes take for granted but represent an important asset to the company.

COPYRIGHTS
A copyright protects original works of authorship. The protection in a copyright does
not protect the idea itself, and thus it allows someone else to use the idea or concept in a different
manner.
The copyright law has become especially relevant because of the tremendous growth of
the use of the Internet, especially to download music, literary work, pictures, and videos, to name
a few. In our opening profile, we can see the impact of issues involving the use of streaming or
downloading television programming.
The downloading of music has long been an issue for litigation. Years ago Napster
made headlines by offering users the opportunity to exchange music over the Internet. More
recently, Grooveshark, a music streaming service, and its parent company Escape Media Group
lost a major suit to the Universal Music Group for illegally uploading songs. The courts have
been particularly supportive of the music publishers forcing these streaming companies to obtain
licensing deals with the music industry players.
YouTube also has had issues with uploaded material that has been copyrighted. However,
they have found ways to avoid litigation through education and unique content identification
software that alerts holders of copyrighted material.
Copyright protection related to the Internet will continue to be a concern and a gray area
until precedents and regulations are made clear. Although these issues seem complicated, the
registering procedure for copyright protection is fairly simple.
Besides computer software, copyrights are desirable for such things as books, scripts,
articles, poems, songs, sculptures, models, maps, blueprints, collages, printed material on board
games, data, and music. In some instances, several forms of protection may be available.
 For example, the name of a board game may be protected by trademark, the game itself
protected by a utility patent, the printed matter or the board protected by a copyright, and the
playing pieces covered by a design patent.

TRADE SECRETS AND NONCOMPETITION AGREEMENTS

In certain instances, the entrepreneur may prefer to maintain an idea or process as
confidential and to sell or license it as a trade secret. The trade secret will have a life as long as
the idea or process remains a secret. Noncompeting agreements are documents that are prepared
by an employer and signed by an employee in order for the company to protect valuable assets
ranging from product information to clients, marketing ideas, and unique strategies.
A trade secret is not covered by any federal law but is recognized under a governing
body of common laws in each state. Employees involved in working with an idea or process may
be asked to first sign a confidential information agreement that will protect against their giving
out the trade secret either while an employee or after leaving the organization. This also applies
to client names or lists that may be contacted when employed by a competitor.
The entrepreneur should hire an attorney to help draw up any such agreement. The holder
of the trade secret has the right to sue any signee who breaches such an agreement. What or how
much information to give to employees is difficult to judge and is often determined by the
entrepreneur’s judgment. Historically, entrepreneurs tended to protect sensitive or confidential
company information from anyone else by simply not making them privy to this information.
Today, there is a tendency to take the opposite view that the more information
entrusted to employees, the more effective and creative employees can be. The argument is that
employees cannot be creative unless they have a complete understanding of what is going on in
the business.
Most entrepreneurs have limited resources, so they choose not to find means to protect
their ideas, products, client lists, or services. This could become a serious problem in the future,
since gathering competitive information legally is so easy to accomplish, unless the entrepreneur
takes the proper precautions. For example, it is often easy to learn competitive information
through such means as trade shows, transient employees, media interviews or announcements,
and even Web sites. In all instances, overzealous employees are the problem.
 To try to control this problem, entrepreneurs should consider some of the ideas listed
below.
 Train employees to refer sensitive questions to one person.
 Provide escorts for all office visitors.
 Avoid discussing business in public places.
 Keep important travel plans secret.

TRADE SECRETS
Protection against others revealing or disclosing information that could be damaging
to business. Control information that might be presented by employees at conferences or
published in journals.
 Use simple security such as locked file cabinets, passwords on computers, and shredders
where necessary.
 Have employees and consultants sign nondisclosure agreements.
 Debrief departing employees on any confidential information.
 Avoid faxing and e-mailing any sensitive information.
 Mark documents confidential when needed.

LICENSING
Licensing may be defined as an arrangement between two parties, where one party has
proprietary rights over some information, process, or technology protected by a patent,
trademark, or copyright. This arrangement, specified in a contract requires the licensee to pay a
royalty or some other specified sum to the holder of the proprietary rights (licensor) in return for
permission to copy the patent, trademark, or copyright.
Thus, licensing has significant value as a marketing strategy to holders of patents,
trademarks, or copyrights to grow their business in new markets when they lack resources or
experience in those markets. It is also an important marketing strategy for entrepreneurs who
wish to start a new venture but need permission to copy or incorporate the patent, trademark, or
copyright with their ideas.
A patent license agreement specifies how the licensee would have access to the patent.
For example, the licensor may still manufacture the product but give the licensee the rights to
market it under their label in a noncompetitive market (i.e., foreign market). In other instances,
the licensee may actually manufacture and market the patented product under its own label. This
agreement must be carefully worded and should involve a lawyer, to ensure the protection of all
parties.
Licensing a trademark generally involves a franchising agreement. The entrepreneur
operates a business using the trademark and agrees to pay a fixed sum for use of the trademark,
pay a royalty based on sales volume, buy supplies from the franchisor (examples would be Shell,
Dunkin’ Donuts, Pepsi Cola or Coca Cola bottlers, or Midas muffler shops), or some
combination of these. Franchising is discussed later in the text as an option for the entrepreneur
as a way to start a new business or as a means of financing growth.
Copyrights are another popular licensed property. They involve rights to use or copy
books, software, music, photographs, and plays, to name a few. Computer games have been
designed using licenses from arcade games and movies. Television shows have also licensed
their names for board games or computer games. Celebrities will often license the right to use
their name, likeness, or image in a product (i.e., Tiger Woods golf clothing, Beyonce Heat
perfume, Kate Hudson clothing, Elvis Presley memorabilia, or Mickey Mouse lunch boxes). This
is actually analogous to a trademark license.
Microsoft Corporation has entered into more than a thousand licensing agreements that
have allowed start-ups, customers, and even competitors to market their technology. Microsoft
has also licensed with Hewlett Packard, Dell, and Fujitsu to allow them to utilize Azure cloud
based applications for their customers. These agreements have generated millions of dollars in
revenue for Microsoft. IBM continues to generate significant revenues from its licensing
strategies.
Although technology is one of the largest generators of licensing revenue, there are
other significant players in this market. The entertainment industry, particularly motion picture
studios such as Disney, DreamWorks, Fox, Sony, and Warner Brothers, generates millions of
dollars for its bottom line with licensing agreements for clothing, toys, games, and other related
items. Disney is by far the world leader in licensing having amassed nearly $41 billion from its
licensed merchandise. It is ramping up efforts to offer many licenses based on releases of
Cinderella, Star Wars: Rebels, Star Wars: Episode VII, and animated films such as Inside Out
and Big Hero 6 to mention a few. Action heroes seem to be the most recent popular trend for
licensing. For example, Warner Brothers has a deal with Mattel that will allow Mattel to create
toys around superheroes such as Batman, Superman, Arrow, and the Flash.
Licensing is also popular around special sporting events, such as the Olympics,
marathons, bowl games, and tournaments. Licenses to sell T-shirts, clothing, and other
accessories require written permission in the form of a license agreement before sales are
allowed.
Licensing represents opportunities for many firms to expand into new markets, expand
product lines, or simply reach more customers within its existing target markets. This strategy
has become necessary in markets where revenue has become stagnant.
Before entering into a licensing agreement, the entrepreneur should ask the following
questions:
 Will the customer recognize the licensed property?
 How well does the licensed property complement my products or services?
 How much experience do I have with the licensed property?
 What is the long-term outlook for the licensed property? (For example, the loss of
popularity of a celebrity can also result in an end to a business involving that celebrity’s
name.)
 What kind of protection does the licensing agreement provide?
 What commitment do I have in terms of payment of royalties, sales quotas, and so on?
 Are renewal options possible and under what terms?

Licensing is an excellent option for the entrepreneur to increase revenue, without the risk and
costly start-up investment. To be able to license requires the entrepreneur to have something to
license, which is why it is so important to seek protection for any product, information, name,
and so on, with a patent, trademark, or copyright. On the other hand, licensing can also be a way
to start a new venture when the idea may infringe on someone else’s patent, trademark, or
copyright. In this instance, the entrepreneur has nothing to lose by trying to seek a license
agreement from the holder of the property.
 Licensing continues to be a powerful marketing tool. With the advice of a lawyer,
entrepreneurs may find that licensing opportunities are a way to minimize risk, expand a
business, or complement an existing product line.

PRODUCT SAFETY ANDLIABILITY

Responsibility of a company to meet any legal specifications regarding a new
product covered by the Consumer Product Safety Act
It is very important for the entrepreneur to assess whether any product that is to be
marketed in the new venture is subject to any regulations under the Consumer Product Safety
Act. The original act, which was passed in 1972, amended in 1990, and again in 2008, created a
five-member commission that has the power to prescribe safety standards for more than 15,000
types of consumer products.
When a violation is reported, the commission reviews the report and if necessary
orders a recall of the product. The manufacturers must then proceed with a recall or face daily
fines that can be substantial.

INSURANCE

It is also in the best interests of the entrepreneur to purchase insurance in the event that
problems do occur. Service-related businesses such as day-care centers, amusement parks, and
shopping centers have had significant increases in the number of lawsuits.
The main problem is that the entrepreneur usually has limited resources in the
beginning. Thus, it is important to first determine whether any of these types of insurance are
needed. Note that some insurance, such as disability and vehicle coverage, is required by law and
cannot be avoided. Other insurance, such as life insurance of key employees, is not required but
may be necessary to protect the financial net worth of the venture. Once the entrepreneur
determines what types of insurance are needed, then a decision can be made as to how much
insurance and from what company. It is wise to get quotes from more than one insurance firm
since rates and options can also vary. The total insurance cost represents an important financial
planning factor, and the entrepreneur needs to consider increasing premiums in cost projections.
CONTRACTS
“A legally binding agreement between two parties”

The entrepreneur, in starting a new venture, will be involved in a number of negotiations and
contracts with vendors, landlords, and clients. A contract is a legally enforceable agreement
between two or more parties as long as certain conditions are met.
It is very important for the entrepreneur to understand the fundamental issues related to contracts
while also recognizing the need for a lawyer in many of these negotiations Often business deals
are concluded with a handshake. Ordering supplies, lining up financing, reaching an agreement
with a partner, and so on are common situations in which a handshake consummates the deal.
Usually, when things are operating smoothly, this procedure is sufficient.
However, if there are disagreements, the entrepreneur may find that there is no deal and that he
or she may be liable for something never intended. The courts generally provide some guidelines
based on precedence of cases. One rule is to never rely on a handshake if the deal cannot be
completed within one year.
In addition to the one-year rule of thumb, the courts insist that a written contract
exist for all transactions over $500. Even a quote on a specified number of parts from a
manufacturer may not be considered a legal contract. For example, if an entrepreneur asked for
and received a quote for 10 items and then ordered only 1 item, the seller would not have to sell
that item at the original quoted price unless a written contract existed. If the items totaled over
$500, even the quoted price could be changed without a written contract.
Most sellers would not want to try to avoid their obligations in the preceding example.
However, unusual circumstances may arise that force the seller to change his or her mind. Thus,
the safest way to conduct business deals is with a written contract, especially if the amount of the
deal is over $500 and is likely to extend beyond one year. Any deal involving real estate must be
in writing to be valid. Leases, rentals, and purchases all necessitate some type of written
agreement.
Although a lawyer might be necessary in very complicated or large transactions, the
entrepreneur cannot always afford one. Therefore, it is helpful for the entrepreneur to understand
that before signing a contract he or she should do the following:
1. Understand the terms and conditions in the contract.
2. Cross out anything that you do not agree to.
3. Do not sign if there are blank spaces (these can be crossed out).
4. Make a copy for your files after signing.