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Protecting Intangible Assets: Intellectual Property Basics

Protecting Intangible Assets: Intellectual Property Basics

Posted on October 16, 2018

Originally published in October 2018

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

What Is "Intellectual Property"?

There is no standard definition for "intellectual property" (IP). The best description is intangible creations by individuals or businesses that, if certain criteria are satisfied, vest legal rights of exclusive use in the owner.

Public vs. Private IP

Private IP – Trade Secrets: Information, materials, or ideas that are kept confidential by a commercial entity and are protected by law because of this confidential treatment.

Public IP – Patent, Trademark, Copyright: Information, materials, or ideas that maintain their exclusive protection even though they are disclosed to the public.

Trade Secrets

What Constitutes “Trade Secrets”?

Federal law – “Defend Trade Secrets Act”: All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled or memorialized physically, electronically, graphically, photographically, or in writing if -

the owner thereof has taken reasonable measures to keep such information secret; and
the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information. 18 U.S.C. § 1839(3)

State law – “Pennsylvania Uniform Trade Secrets Act” (12 Pa. C.S.A. § 5301, et seq.): Information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that:

Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.
Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 12 Pa.C.S.A. § 5302.

"Misappropriation" of Trade Secrets is Prohibited Under State and Federal Law

Misappropriation is defined similarly under federal and state law:

(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means [defined as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means]; or

(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:

Used improper means to acquire knowledge of the trade secret;
At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (a) derived from or through a person who had utilized improper means to acquire it; (b) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (c) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. 12 Pa.C.S.A. § 5302 (federal equivalent: 18 U.S.C. § 1839).

Remedies for Misappropriation of Trade Secrets

Injunctive relief – preliminary or permanent injunction (12 Pa.C.S.A. § 5303/18 U.S.C. § 1836(b)(3)(A))
Monetary damages – money damages to the plaintiff for economic harm suffered as a result of a trade secret violation; may include losses resulting from the misappropriation and disgorgement of profits derived from it. (12 Pa.C.S.A. § 5304/18 U.S.C. § 1836(b)(3)(B))
Attorney fees – only if bad faith or willful and malicious misappropriation (12 Pa.C.S.A. § 5305/18 U.S.C. § 1836(b)(3)(D))
Civil seizure – only available under federal law (18 U.S.C. § 1836(b)(2)

Methods of Protecting Trade Secrets

Non-disclosure agreements with third parties
Confidentiality agreements and/or policies with employees
Restrictive covenants with employees—so long as reasonable in time and geographic scope and designed to protect disclosure of confidential information
Limit scope of individuals with access to the information
Limit access physically and individually

My Trade Secrets Have Been Misappropriated - What Now?

Act quickly before information is disseminated to a third party (e.g., a former employee’s new employer, which may be a competitor).
Investigate full extent of misappropriation: examine e-mail accounts, printer records, USB access, password login records, text messages. Consider outside forensic expert, depending on scope and capabilities.
Cease and desist letter from attorney to misappropriator.
If necessary, initiate legal action for preliminary injunction and/or damages.
If you don’t act to prevent disclosure, risk losing treatment of information as “trade secrets” under statutory definitions.

Trademarks

What Is a Trademark?

A word, design, or other branding mechanism (1) used by an individual, business, non-profit, or governmental entity, (2) in commerce, and (3) to identify and distinguish the user’s goods or services from those manufactured or sold by others, and (4) to indicate the source of the goods or services.

Word marks: The most prevalent—this is the business, product, or service name used to publicly market the business, product, or service.

Combination of characters, independent from color or design.
Separate and apart from corporate name or fictitious name
Examples: BUDWEISER, COCA-COLA, APPLE, PNC, NORTHWEST BANK

Design marks: Logo or other design. Examples include the Pepsi logo, Apple logo, etc.

Trade dress: Beyond just word or logo, can include overall look or design of a product or establishment.

Packaging, such as the Coke bottle, so long as design is not functional
Interior décor—color, layout, design—of restaurant or store. For example: Apple store, McDonalds’, etc.

Not All Marks Can Be Protected

Marks cannot be “merely descriptive,” but instead must be suggestive, arbitrary, fanciful, or inherently distinctive. The strongest marks are words or designs that are created in the first instance. For example, Kodak had no meaning before it was adopted as a trademark for photographs and photography equipment. Merely descriptive marks are generic and do not tie the mark to the specific source of the products or goods being sold. For example, “Coffee Shop” for a Coffee Shop.

Descriptive marks can acquire secondary meaning over time, thus becoming distinctive. For example, Erie Insurance, or Holiday Inn. Some marks can go from distinctive to generic if the user is not careful. For example, Xerox was a distinctive mark that became a common word for photocopying. Xerox ended up undertaking a marketing campaign to get people to use the phrase “photocopy” instead.

The user must have priority of use in order to have protection. In other words, if another company is using the same mark for the same goods or service, then the other company has priority. Only applies if for the same goods of services, hence why Dove can be a trademark for both chocolate and soap.

Common Law vs. Federal Registration Process

Marks do not need to be federally registered in order to have protection. In Pennsylvania and most other states, the law applies “common law” protection to trademarks, provided that (a) mark is distinctive, (b) mark is first in use in that geographic area for those goods and services, and (c) mark is actually used in commerce.

Common law protection gives the owner exclusive use of the mark for the goods and services for which they use it BUT only in the geographic area in which they are using it. For example, a food truck in business only in Erie cannot prevent another food truck with the same name in Philadelphia.

There is no need to formally register or take any other action in order to have “common law” rights in trademark, although it is advisable to put the public on notice by using the ™ logo after the mark. Federal registration, however, has a number of advantages:

Nationwide protection, rather than protection in geographic area in which it is used;
Registration database puts public on notice of your use of the mark;
Ability to file federal lawsuit to protect against infringement; and
Ability to file “intent to use” application—before any actual use—giving you early priority.

Overview of Federal Registration Process

Prior to submitting an application, a search of the USPTO database is recommended to ensure that no conflicting marks exist that would cause application to be rejected.

The process is pseudo-adversarial, in that the U.S. Patent and Trademark Office Examining Attorney reviews substance of application to make sure it meets all requirements, including that (a) distinctive and (b) no conflicting marks. If the Examining Attorney finds an issue, they can preliminarily refuse an application and the applicant has an opportunity to respond to the preliminary refusal. Final refusals can be appealed to the Trademark Trial and Appeal Board. Adverse decisions of the Trademark Trial and Appeal Board can be appealed to federal court.

If an Examining Attorney does not identify any issues, the application will proceed to “publication” in which members of the public could file oppositions to applications. Oppositions are incredibly rare. After the publication period, the mark is officially “registered” and the applicant will receive a registration certificate.

The cost of a trademark application includes: (a) government filing fee of $400 per class (i.e., category of goods and services), and (b) any attorney fees associated with searching and submitting an application (as of October 2018).

While an attorney is not required to submit an application, an attorney can help perform searches to identify potential issues, navigate the process, and resolve issues raised by the Examining Attorney.

Once registered, put public on notice of claim by using ® after mark. This indicator can only be used for federally registered marks. All other claimed marks should use the superscript TM logo.

Post-registration, a registered trademark must be maintained with periodic filings, beginning every 5-6 years and then eventually every 10 years. A mark can maintain its registration indefinitely, but only so long as the same mark is still in use for the same products.

Trademark Rights Are Not Unlimited

Although trademark law grants the owner the exclusive right to use the mark for the associated goods and services in the relevant geographic territory, some uses of the mark by third parties are permissible:

Parody: Legal standard: “[A] simple form of entertainment conveyed by juxtaposing the irreverent representation of the trademark with the idealized image created by the mark’s owner . . . A parody must convey two simultaneous—and contradictory—messages: that it is the original, but also that it is not the original and is instead a parody.” People for the Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 366 (4th Cir. 2001). “A parody relies upon a difference from the original mark, presumably a humorous difference, in order to produce its desired effect.” Jordache Enterprises, Inc. v. Hogg Wyld, Ltd., 828 F.3d 1482, 1486 (10th Cir. 1987). Example:Chewy Vuiton (Louis Vuitton)
Nominative Fair Use: Legal standard: A user must satisfy the following: “(1) Is the use of the mark necessary to describe both plaintiff’s product or service and defendant’s product or service? (2) Is only so much of the plaintiff’s mark used as is necessary to describe plaintiff’s product or services? (3) Does the defendant’s conduct or language reflect the true and accurate relationship between plaintiff and defendant’s products or services.” Century 21 Real Estate Corp. v. Lendingtree, Inc., 425 F.3d 211, 232 (3d Cir. 2005).
Examples:Compatability: An aftermarket car dealer might advertise that “wheels fit a Ford Mustang,” or a computer software company might sell “software compatible with both Windows and Apple.” Criticism: “The New York Times is fake news!” Comparison: Coke vs. Pepsi surveys.

Licensing and Selling Trademark RIghts

Trademarks—whether federally registered or common-law—can be licensed or sold like any other asset. Only the owner of a mark has full rights in the mark. To the extent the owner wants to allow others to use the mark, it must do so via license or assignment.

Licensing:

Can be exclusive – one licensee vs. several
Can be sub-licensable – the licensee can license out to others
License should include all covered marks—for example, both registered and non-registered marks
License also should provide terms by which the trademark can be used
Even related entities should ensure proper licensing
Franchise agreements are essentially complex licensing agreements

Selling—i.e., “assignment:”

Done by agreement, likely as part of the sale of a business, but also sometimes as part of a settlement agreement between holders of similar marks.
If common law, no need to file any paperwork—the agreement is sufficient. If federal registration, need to file assignment paperwork with the USPTO.

Retaining Trademark Rights Post-Business Closing

If a trademark is not used for three years, it is considered abandoned. If a business wants to close, but retain its trademark ownership, what can it do? License the trademarks to a continuing business operation—whether related or not—that will continue using the mark, even if on a limited basis, and then transfer the mark back to the original owner.

Copyrights

What Is a Copyright?

A federal right that grants the creator of an original work exclusive rights to determine whether, and under what conditions, this original work may be used by others. It applies to “works”: Literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. It does NOT apply to facts, ideas, systems, or methods of operation UNLESS they are expressed in a unique way.

The work must be fixed in a tangible medium of expression—i.e., in physical or electronic documents, on a CD or other recording medium, etc.—and not merely in the creator’s mind.

U.S. Constitution, Article 1 Section 8, Clause 8: The Congress shall have the power “[t]o promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The federal statute is the U.S. Copyright Act.

Lifespan of a Copyright

Copyright protection begins at the moment a work is created and fixed in a tangible medium; federal registration is not required for copyright to vest.

Duration of copyright protection:

Works created on or after January 1, 1978: the author’s life plus an additional 70 years
Works created prior to January 1, 1978: It depends on the governing statute at the time of creation

Abandonment: Copyright owners can voluntarily abandon their copyright and allow it to enter the public domain by (1) intending to abandon their rights in the work, and (2) manifesting this intent through an “overt act”.

Forfeiture: If a copyright owner fails to abide by statutory requirements or put the public on notice of a copyright, the copyright may be forfeited.

Unlike trademarks, copyrights need not be used or published to be maintained.

Benefits of Federal Copyright Registration

Although federal copyright registration is not necessary to vest copyright ownership, it does provide a number of benefits:

Establishes a public record of the copyright holder’s ownership.
Enables copyright holders to sue infringers in federal court.
If made before or within 5 years of publication, establishes sufficient evidence in court concerning the validity of the copyright and the facts stated in the copyright certificate.
If registration is made within 3 months of publication of the work or at any time prior to an infringement of the work, the copyright owner is entitled to seek statutory damages and attorney’s fees in federal court. Without registration, only an award of actual damages and profits will be available.
Allows the copyright owner to record the registration with U.S. Customs to protect against the importation of infringing copies into the U.S.

What Constitutes Copyright Infringement?

Legal standard: “substantial similarity”: Must be more than de minimis and substantial both qualitatively and quantitatively.

Music examples:
Ice Ice Baby (Vanilla Ice) vs. Under Pressure (Queen)
Blurred Lines (Pharrell and Robin Thicke) vs. Got to Give It Up (Marvin Gaye)

Literary examples:
Harry Potter Encyclopedia found to be infringing on numerous copyrights owned by J.K. Rowling and Warner Brothers.
Shape of Water movie vs. Let Me Hear You Whisper play: Playwright alleged that Shape of Water (a 2017 movie about a swamp creature held in a government lab) infringed his copyright in a play about a dolphin held captive in a military lab. A judge dismissed the lawsuit given that both included common themes in the public domain.

Copyrights Are Not Unlimited: The "Fair Use" Defense

Although copyright law grants the owner the exclusive right to use—or not use—a copyright, some uses of the copyrighted material by third parties are permissible:

Fair Use: use “for purposes such as criticism, comment, news reporting, teaching, scholarship, or research is not infringement” (17 U.S.C. § 107). Four factors must be analyzed:

The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;
The nature of the copyrighted work;
The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
The effect of the use upon the potential market for or value of the copyrighted work.

Examples:
Parodies – Weird Al, The Wind Done Gone
Textbooks – excerpts from poems or books
News reporting – clips from videos or music
Music sampling? Effectively impermissible, has to be in such minor uses that song would be unrecognizable.

Remedies For Infringement

Statutory damages vs. actual damages: (a) Plaintiff’s choice; (b) Statutory damages of $750 to $30,000 (“as the court considers just”) (17 U.S.C. § 504(c)); (c) Disgorgement of profits (17 U.S.C. § 504(b)).
Injunction – to prevent further publication (17 U.S.C. § 502).
Impoundment of infringing articles (17 U.S.C. § 503).
Costs and attorney’s fees – in the court’s discretion (17 U.S.C. § 505).

Who Owns the Copyright: Creator or Employer?

Default rule: Ownership vests in the author.

Exception: “work made for hire” rule (17 U.S.C. § 101):

A work prepared by an employee within the scope of his or her employment, which is a complicated, fact-intensive inquiry; or
A work specially ordered or commissioned for use (a) As a contribution to a collective work, (b) As part of a motion picture or other audiovisual work, (c) As a translation, (d) As a supplementary work, (e) As a compilation, (f) As an instructional text, (g) As a test, (h) As answer material for a test, or (i) As an atlas.

Maximizing the Benefit of Copyright Protection For Businesses

Incorporate work made for hire language and/or pre-authorship assignment agreements into the employment agreement or on-boarding documents to ensure greatest level of protection over works created by employees. Also, designate all business records—including, operations manuals, policies, templates, PowerPoint presentations, etc.—as copyrighted materials to provide greater protection in the event misappropriated by an employee.

Patents

What Is a Patent?

A Patent is a statutory right conferred by the government that gives the owner the exclusive right to exclude others from making, using, or selling a given invention. Patents are granted in exchange for public disclosure of the invention and its details. Patents are exclusively statutory and can be granted only by the government.

The first U.S. patent was issued in July 31, 1790 to Samuel Hopkins for a process of making potash, an ingredient used in fertilizer. There were two (2) other patents granted that year. In 2017, 318,849 patents were granted.

What Can Be Patented?

Statutory definition: “[A]ny new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof . . .” 35 U.S.C. § 101.

Legal requirements:

Subject Matter Eligibility: The invention must fit within the statutory scope of what can be patented—“processes, machines, articles of manufacture, and compositions of matter.”

Examples:

A new way to manufacture something
A machine with moving parts or circuitry
A new chemical composition, such as a pharmaceutical
An asexually reproduced and new variety of plant
Software? Not necessarily
Business ideas and process? Sometimes, but rarely

Novelty: The invention must be new (i.e., not the same as a prior product or process) and NOT have been previously disclosed to the public.

Usefulness: The invention must have a specifically identifiable use.

Nonobviousness: Must be a nonobvious improvement over any prior art. Would the invention have been obvious “to a person having ordinary skill in the art to which the claimed invention pertains.”

Patent Process

Assess patentability: Consult with attorney and research prior arts to determine patentability of invention.
Prepare and submit application: Includes drawing of invention, identification of prior arts, and fee (varies depending on size and scope of application).
Application is reviewed by USPTO: In a substantive review process, patent examiner’s search prior arts and assess whether patentable.
Consider whether to apply for a provisional patent: A provisional patent allows the recipient to submit a preliminary application as a placeholder before submitting a full application within a year.
Maintain: Submit maintenance filings every four (4) years until patent expires (20 years).

Who Owns the Patent: Inventor or Employer?

If an employee invents something patentable, their employer may have an ownership claim over the patent.

Default rule: The inventor owns the patent rights to an invention created during the course of their employment.

Exceptions:

The employee signed an employment agreement assigning invention rights to the employer; or
The employee was specifically hired (even without a written agreement) for inventing skills or to create the invention or product at issue.

Employer may still have “shop rights” which is an implied license under which the employer has rights to make use of an invention invented by an employee who was working within the scope of their employment, using their employers’ equipment, and at their employers’ expense. Rights are much limited then full patent rights.

Typical practice is “Pre-Invention Assignments”: These are agreements, either in employment agreements or as a separate agreement signed upon commencing employment, in which the employee agrees to assign all rights to any inventions creates while they are an employee. The scope varies. These are prevalent in certain industries (e.g., chemical companies, technology firms, etc.) or for certain positions (e.g., engineers).

Licenses, Sales and Assignments

Patents can be licensed just like any other IP. The license can be exclusive, revocable, sub-licensable, etc.

Patents, like other IP, can be marketed and sold, either individually or as part of the sale of a business. Sales are accomplished through assignments, which must be formally filed with the USPTO.

Author: Alexander K. Cox

Originally published in October 2018