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Intellectual Property
Introduction
If you're not a high-tech company, don't have a staff of scientists or inventors, or aren't in the publishing business, you may be wondering whether this article is relevant to your particular business. It is. No matter what line of business you are in, you have two important reasons to read this article.
The first is that intellectual property laws help protect some of a company's most valuable assets. If your company has a name, logo, or business plan, or marketing, training, or promotional literature or software, it has intellectual property. Chances are very good that this intellectual property is worth protecting.
The second is that a violation, no matter how inadvertent, of the intellectual property rights of another company or individual can potentially expose a company to staggering losses in time and money. As an entrepreneur, you should be proactive and take steps to minimize potential infringement claims.
Intellectual property law is a complex and ever evolving legal specialty with innumerable subspecialties. The purpose of this article is to help you to identify the types of protection available and the variety of issues relating to intellectual property laws. You should always discuss intellectual property matters with qualified counsel, licensed to practice in the appropriate jurisdiction.
Intellectual property, or "IP" law can be divided into four primary subspecialties:
- Trade Secrets
- Copyrights
- Patents
- Trademarks
I. Trade Secrets: Keeping Your Competitive Edge
The California State Uniform Trade Secrets Act, (California Civil Code Section 3426.1), defines "Trade secret" as "information, including a formula, pattern, compilation, program, device, method, technique, or process, that (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Note that the definition does not limit the type of information that can be protected as a trade secret. Any form of information is eligible for trade secret protection provided that the preceding requirements are met. The following are examples of potentially protectable trade secrets:
- vendor or client contact databases
- manufacturing methods
- computer files
- marketing plans
- sales data
- secrets embedded in products or computer circuits
- software
- research and development data
Be creative and open-minded when attempting to identify your business' potential trade secrets. It is far better to err on the side of caution than to fail to protect less obvious sources of competitive advantage.
A Trade Secret is Not Generally Known To The Public
To be protectable as a trade secret information must not be generally known to the public or competitors, or be discoverable through legitimate means. Information typically loses its potential for trade secret protection in one of the following ways:
- it is contained in materials distributed by the company
- it has been mistakenly disclosed to the public or competitors
- it is obtained by others through legitimate reverse engineering
In many instances, releasing a product for sale may preclude the protection of any trade secrets it contains. However, trade secrets contained in prototypes and beta versions may be protected before they are released.
A Trade Secret Requires Reasonable Efforts To Maintain its Secrecy
The second prong of California's definition of trade secret requires the owner to take such steps to keep trade secrets confidential as are "reasonable under the circumstances." Reasonableness is determined with regard to such considerations as:
- the availability of the information both inside and outside the company,
- the company's financial and other ability to protect its secrets,
- the value of the information, and
- the competitors' ability to develop the information on its own.
Enforcement of Trade Secret Rights
Identifying and protecting your company's trade secrets is important because doing so will provide the potential for legal remedies against any person or entity that improperly uses or discloses your critical information. Legal remedies exist where trade secrets are disclosed or obtained through improper means, for example through breach of contract, misrepresentation, overt theft, bribery, and even espionage. Trade secret laws also protect information improperly disclosed in violation of some duty of confidentiality.
There are two primary origins of a duty of confidentiality. First, an employee, independent contractor, or other person may assume such a duty by signing a nondisclosure or confidentiality agreement with the trade secret owner. Alternatively, the duty may arise by operation of law, e.g., due to the person's position as an officer, director, or key employee of a company. If a competitor or other company acquires your trade secrets from someone that it knew or should have known owed a duty of confidentiality to you as trade secret owner, you may have legal rights against that company. Potential legal remedies include:
- money damages
- injunctive relief
- punitive damages
- criminal charges (rare, but increasingly used in cases of trade secrets theft)
You should be aware, however, that once trade secrets become public, even if through a violation of the owner's rights, they cease to be protectable.
Rather than relying on the specter of damages to keep others from violating your rights, be proactive in developing and implementing a trade secret protection program.
Developing and Implementing a Trade Secret Protection Plan
As discussed above, in order to be eligible for trade secret protection, you must make reasonable efforts to protect the secrecy of protectable information. Developing and implementing a company trade secret protection plan can be a critical part of meeting this requirement. The plan should encompass written policies available to all employees and independent contractors and be discussed with all who may have access to trade secrets. The plan must be broad enough to provide protection without being so demanding that employees and contractors are unable or unwilling to comply. Each business will require different policies and measures to meet the reasonable efforts standard, so you should check with an attorney experienced in trade secret law to ensure your plan is sufficient. Most trade secret protection plans will address most or all of the following issues.
1. An Identification of The Company's Trade Secrets
The first step in crafting a protective plan is to identify all of your company's possible trade secrets. Employees and contractors should not be overlooked when attempting to identify the company's important sensitive information. The plan should set forth particular categories of information, (e.g., marketing plans, promotional materials, etc.) as well as an umbrella category such as "all other information not publicly known and of potential value to competitors." The need to be creative and think broadly when designating trade secrets must be met in a way that will convince courts that the legal definition of trade secret was taken seriously.
2. Employee Support
Employees are the primary source of both inadvertent and improper trade secret disclosures. Involving employees in developing a trade secret protection plan can serve as both a preventative measure and deterrent.
3. New Hires
In the high tech industry in particular, employees often work for multiple employers in a relatively narrow field. When hiring employees who once worked with a competing company or otherwise had access to a competitor's trade secrets, it is essential to inform that employee that he or she must not disclose or use any of the competitor's trade secrets. Where possible, obtain a copy of any nondisclosure agreement between the new hire and his or her former employer. As part of your employment or confidentiality agreement, ask the employee to acknowledge that he or she has been informed of his or her duty not to disclose the trade secrets of any former employers, and to promise that he or she has not brought to the job any documents, disks, journals or the like from any former employer.
4. Confidentiality Agreements
Perhaps the most critical element of any trade secret protection plan is the confidentiality agreement. Whether it is a separate agreement or part of a larger employment contract or invention assignment agreement, you should require employees at all levels to sign a confidentiality agreement promising that they will not use or disclose the company's confidential information without authorization and will exercise care to prevent the unauthorized use or disclosure of such materials by others. If you did not require employees to sign such an agreement upon hiring, some consideration beyond continued employment should be offered in exchange for their executing a confidentiality agreement now.
5. Noncompete Agreements
Noncompetition agreements (or covenants not to compete) bypass any difficulty of proof involved in seeking damages for breach of a confidentiality agreement by preventing the contracting employee from working for a competitor for a designated period of time or within a designated distance or industry. Noncompetition agreements are currently unenforceable in California.
6. Education
Perhaps the best method of preventing inadvertent disclosure of trade secrets is educating your employees. In addition to requiring employees to sign the appropriate agreements, it is helpful to find creative ways to make employees aware of the importance of protecting company secrets and to demonstrate how easily trade secrets can be inadvertently disclosed. As with all company policies, trade secret policies should be reviewed and acknowledged by employees annually.
7. General Preventative Provisions
The plan should provide for a number of elements designed to prevent the inadvertent disclosure of trade secrets. For example, the plan should establish a mechanism for reviewing any speeches or publications by employees. It should outline a system for marking documents that contain secrets as "Confidential." It should limit the dissemination within the company of confidential material and the circumstances under which such confidential information may be removed from company premises. It should establish policies for the protection of electronic and paper files. It should educate employees on how to protect trade secrets at trade shows and in conversations with competitors or customers. And it should provide rules for the secure disposal or recycling of confidential materials.
8. Exit Interviews
Most employers are unaware that termination is an important part of the employment relationship. You should conduct an exit interview with each employee departing the company for any reason. This will provide you with an opportunity to remind the employee of his or her continuing obligations with respect to confidential information. It also provides an opportunity to inspect the employee's personal belongings for materials potentially containing trade secrets, if necessary, and to obtain a written promise from the employee that all company information has been removed from home or portable computers. If you are aware that an employee will be going to work for a current or potential competitor, consider sending a letter to the new employer making it aware of the employee's exposure to trade secrets and its potential liability for using any such information if disclosed by said employee.
9. Outsiders
A comprehensive trade secret protection plan must cover dealings with third parties.
A. Confidentiality Agreements
Unlike employees, outsiders have no inherent legal duty to refrain from using or disclosing your trade secrets (except the prohibition against obtaining such information through improper means). Accordingly, independent contractors, consultants, potential investors, and other third parties with access to trade secrets should be required to sign confidentiality agreements.
B. Control Access to Company Premises
You should not overlook security measures relating to company premises as a method of protecting trade secrets. Consider whether theft or inadvertent disclosure will be minimized by locking doors, using locked files, requiring visitors to obtain passes, or other such measures.
II. Copyrights: Control the Use of Your Work
Copyrights are most commonly associated with such industries as publishing, film, and journalism, but, like trade secrets, almost every business has materials that fall under the scope of copyright protection. A copyright grants the owner of a work an enforceable legal right to govern the use of the work and to obtain any and all economic benefits arising from the work. Typical "uses" including selling, copying and distributing the work.
Copyrights Protect Works, Not Ideas
You are probably familiar with copyrights in the context of books, paintings, music, movies and other visual or written works of art. However, copyright protection may also protect such things as computer software, business and marketing plans, games, promotional materials, architectural plans, diagrams, and other creative works. Copyright protection also extends to two other categories of works: derivative works and compilations.
A derivative work is one derived from another work, for example, an adaptation of a book into a screenplay or a translation of a work into another language. A compilation is a collection or arrangement of other works that expresses creativity in its arrangement or presentation of the works. The copyright holder has the exclusive right to:
- copy, distribute, sell or license the original work
- develop derivative works or compilations
- perform or display the work publicly
A copyright owner's rights inure to the particular tangible expression of a work, not to the ideas or methods expressed. No copyright protection is available if the idea and its expression are so interconnected that they are said to merge. This distinction is particularly difficult, and important, in the area of computer software.
Obtaining Copyright Protection
1. Eligibility for Copyright Protection
Nearly any work of authorship can qualify for copyright protection. Three basic requirements must be met:
- The work must be fixed in a tangible medium (typed, entered in a log, recorded on tape, etc.).
- The work must have been created by the author claiming protection, but need not be unique or novel.
- The work must contain some level of creativity.
2. No Action is Necessary to Obtain Protection
Copyright exists from the moment an original work is first fixed in a tangible medium. While no action is required to secure copyright protection, certain actions will strengthen the copyright owner's rights:
- Display a copyright notice on the work. The display of the word "Copyright" or the familiar "c" enclosed in a circle, followed by the author's name, year of publication and the warning "all rights reserved", puts third parties on notice that the work is protected and will help ward off an "innocent infringement" defense.
- Register the work with the Register of Copyrights in Washington, D.C. Registration permits the copyright owner to file an infringement suit in the United States. Registration can be made following an infringement, but statutory damages provided by the Copyright Act and attorney's fees are available only if registration is made within three months of the date the work is first published.
3. Nature of Protection Granted
Copyright protects the tangible expression of an idea, not the idea itself. It is often difficult to distinguish between the two. For the most part, the likelihood that a work is copyrightable increases with the number of alternate ways the ideas contained therein may be expressed.
Copyright Infringement
Infringement usually takes one of two forms. Unauthorized duplication of a work is an obvious violation of the copyright owner's rights. A more challenging determination is whether a second work is "substantially similar" to a copyrighted work.
Proving Infringement
It is not necessary to offer direct proof of infringement. The owner of a copyright may demonstrate infringement by proving that the alleged infringer:
- had access to the copyrighted work, and
- created a work "substantially similar" to the protected work.
This is a fact-intensive determination, rendering infringement cases unpredictable and costly to litigate.
Fair Use
The Doctrine of Fair Use allows third persons to make limited use of copyrighted material. Fair use permits people other than the copyright owner to copy certain works, or portions thereof, for purposes such as research, teaching, criticism, comment, and news reporting. Whether a particular unauthorized use constitutes "fair use" is a fact intensive determination. As a general rule, however, any use that is commercial or otherwise reduces the value of the owner's rights is unlikely to fall within the fair use doctrine.
Duration
For an individual author, copyright protection lasts for the life of the author plus fifty years. In the case of a work owned by a corporate entity, the length of protection is the shorter of 75 years from the date of publication or 100 years from the date of creation.
Ownership
By default, a copyright is owned by the author of the underlying work. Under the Work for Hire Doctrine, however, an employer owns the right to works made by its employees within the scope of employment. Independent contractors are not technically employees. A company contracting with an independent contractor will own the work and copyright only if there is a written agreement stating that the work is a "work for hire" and the work falls into one of nine categories of works set forth by law as commissioned works for hire. To ensure ownership of the work and rights thereto, it is a good idea to have both employees and independent contractors sign agreements assigning to the company all rights to any works created during their tenure with the company. This is especially important for works such as computer software that do not fall into one of the nine legally created categories.
Cyberspace Implications
The intersection of "cyberspace" and intellectual property law is constantly raising new issues. Be aware that owners of copyrights in works available on the web are obligated to act aggressively to protect their rights against unauthorized use. Keep in mind that any unauthorized use of copyrighted art, music, etc. on your company web site is an infringing use and is subject to suit by the copyright owner.
International Considerations
United States copyrights are valid in those countries that signed the Berne Convention. Unfortunately, enforcing such rights may be prohibitively costly and difficult, and may require intervention by the US government.
III. Patents
Patent law is a complex and highly technical legal specialty. You should always discuss patent issues with a qualified attorney. This section provides a general overview of patent law and its strategic uses.
Patent Defined
A patent is a federally protected exclusive right to make, use or sell an invention or process. There are two primary types of patents, utility and design patents.
1. Utility Patents
The most common type of patent is the utility patent. Protection for utility patents lasts for twenty years. The clock begins to run at the filing of a patent application. Examples of the types of inventions protectable under a utility patent include:
- machines
- processes
- articles of manufacture
- new compositions of matter
- improvements to any of the above
Utility patents do not protect such things as methods of doing business, mathematical principles, or laws of nature.
2. Design Patents
An invention need not be useful to be patentable. Design patents protect ornamental designs that are both novel and original.
Summary of Requirements
Not every new invention is eligible for patent protection. In order to qualify, and invention must meet the following requirements:
- the invention must qualify as patentable subject matter,
- the invention must be useful, and
- the invention must be novel, meaning that
- it is neither patented, known or used by others in the U.S.,
- is not previously patented or described in a printed publication outside the U.S., and
- is not an obvious extension of existing technology.
The Statutory Bar
One of the many traps for the unwary in patent law is the statutory bar, which limits an inventor's ability to file a patent application if the invention is publicly used or sold in the United States or described in a written publication anywhere more than a year prior to the date an application is filed. The U.S. and the Philippines are the only countries with this grace period. Accordingly, any publication or disclosure of the invention prior to filing a U.S. patent may prevent the invention from being patented in most European countries.
Procedures for Obtaining a Patent
It cannot be overstressed that obtaining a patent is a complex process that should be undertaken with the help of an attorney experienced in patent law. The following is intended as a brief overview of the process only.
1. The Application
In order to obtain a patent, the inventor must file a complex application with the U.S. Patent and Trademark Office (PTO). A patent application must describe the invention in sufficient detail that it may be recreated and must include a diagram or illustration. The application must also set forth the intended scope of the patent.
Inventions almost always contain both patentable and unpatentable material. The application must clearly distinguish between them.
2. Search for Prior Art
In order to constitute patentable material, an invention must be novel and nonobvious. "Prior Art" is any earlier invention, whether patented or not, in the public domain that undermines the inventor's claim that his or her work is novel. Conducting a search for prior art is a good strategy to avoid wasting resources on a futile attempt to patent unpatentable material and may help gauge the PTO's likely response. In addition, the patent application requires the inventor to disclose all prior art of which he or she is aware. It is typically worth the expense to have the search for prior art conducted by a professional search firm.
3. The Patent Examination
Patent applications are assigned to a patent examiner, who then conducts his or her own search for prior art. Often the patent examiner and applicant will undertake a lengthy negotiation over the claims (scope) of the patent. This is called the prosecution, and typically takes at least 1-2 years. You should consult with a patent attorney to consider whether the potential advantages of using or selling the invention while the patent is still pending outweigh the risks that it is in fact an infringement of a pre-existing patent.
4. Competing Claims
Currently in the United States (and the Philippines), a patent is awarded to the person who first invented the patentable subject matter, not the first to apply for a patent, but this may soon change. In every other county, the patent is awarded to the first-to-file.
The first-to-invent may lose the right to be awarded the patent if he or she was not diligent in reducing the invention to practice. An inventor reduces an invention to practice when he or she produces a working prototype or files a patent application containing the requisite level of detail. Thus, keeping detailed and accurate logs can be an important part of obtaining a patent. Such logs or lab books should be signed and dated by the inventor and a witness not involved with the invention. Consult with a patent attorney for help drafting and adopting effective invention record keeping policies.
Other Issues About the Patent Process
1. Frustration and Delay.
Patent examiners have some technical training but cannot be expected to have knowledge of all pertinent technology. Be prepared for frustration and delay.
2. Challenges to Existing Patents.
The award of a patent can be reviewed--and revoked--by the PTO and the courts. This often occurs when prior art comes to light that was not uncovered during the initial patent search.
3. Transfer of Ownership.
Like trade secrets and copyrighted works, it is important to obtain the appropriate assignment of rights to inventions made by employees and independent contractors.
International Patent Issues
A United States patent bars foreign companies from exporting to the U.S. any products violative of that patent. However, U.S. patent protection is not otherwise recognized in foreign countries. You may therefore want to consider obtaining patent rights in other countries. Unlike U.S. patent applications, many foreign countries publish applications eighteen months after filing. This obviously destroys any trade secret protection, which is yet another reason to consult with a patent specialist before taking any action.
Infringement
A patent is infringed by the unauthorized use, sale or production of a patented invention or process. No element of intent is necessary, and the infringing party need not even be aware of the existing patent. Knowingly inducing a third party to infringe a patent is considered infringement. A patent infringer may be forced to disgorge any profits arising from the infringing product. Where the infringement is intentional, courts may award both treble damages and attorney's fees.
Is a Patent Right For You?
Given the cost and complexity of obtaining a patent, you will need to determine, with the help of a qualified attorney, whether the protections of patent law are worth the time and expense, or whether trade secret or copyright protections will suffice. For a small company, technologies that are not a direct source of its competitive advantage or business success are probably not worth patenting.
Strategic Use of Patents
Patents can be helpful in attracting investors, and tend to portray your company as technologically advanced and highly innovative. There is also a defensive element to the patent game. Larger companies often engage in "bracketing", a process in which they keep abreast of patent applications and awards and attempt to either obtain a patent on an improvement to the owner's existing patent (and thereby exact licensing fees or block use by the owner of the original patent) or develop a functionally similar, but non-infringing product, and exploit their greater sales and marketing resources to capture the market.
Competitor's Patents
Even if you do not intend to file for patent protection of your own invention, it is always advisable to conduct periodic patent searches. This will keep you aware of technological innovations and help prevent your company from inadvertently infringing others' patents.
IV. Trademarks--Make an Impression
More likely than not, you know that athletic shoes sporting a "swoosh" are made by Nike. Simply seeing that symbol causes you to make certain assumptions about the product based on the company's advertising, reputation, and your past experience with Nike products. This is the power of a trademark in action.
What is a Trademark?
A trademark can be almost anything that helps consumers identify your company's product. It can be a word, phrase, symbol, image, sound, device or even color. It can also be a purely ornamental form of packaging, called "trade dress." According to a recent ruling by the United States, potential trademarks should be considered "in the broadest possible sense."
Where do I get mine?
A trademark does not suddenly manifest itself. You will need to establish a trademark for your company.
What Do You Want Them to See?
Your first step in establishing a trademark is selecting the mark itself. Consider what image you wish to convey to the public. Consider also what level of protection would be available for a given mark. The degree of protection is directly correlated to the distinctiveness of the mark.
Inherently Distinctive Marks
The most highly protected trademarks are those that are inherently distinctive. These are words, phrases, symbols, etc., with no particular meaning within a given market or industry. Such marks are immediately protectable. Inherently distinctive marks take three primary forms:
- Fanciful Marks - e.g., made-up words.
- Arbitrary Marks - e.g., real words that are meaningless in relation to the product.
- Suggestive Marks - e.g., words that say something about the product but are not descriptive.
Descriptive Marks
Marks that describe a product or its characteristics are not inherently distinctive and are not immediately eligible for trademark protection. The key to earning protection for a descriptive mark is to establish secondary meaning in the relevant market. This occurs when a significant number of consumers and other companies associate the mark with the specific company or product.
Make Sure You're the First
Once you have come up with a potential mark, you must perform a search to ensure that no one has previously established rights in the mark or one "confusingly similar." In addition to federal trademarks, you should include in your search any states or foreign countries where you plan to use your mark. Be sure to ask your business contacts if they are aware of any similar marks. The more extensive your search, the less likely you will infringe another's mark.
Establish Rights in Your Trademark
To establish trademark rights, you must begin using your mark. For trademark purposes, you use a mark by attaching it to a product and using it in promotion and advertisement. As noted above, inherently distinctive trademarks are immediately protected. In the U.S., the first person to use an inherently distinctive mark owns the trademark rights. In the case of descriptive marks, use is just the first step in cultivating the secondary meaning necessary to acquire full protection. In other countries, a trademark belongs to the first to register the mark.
Advantages to Registering Your Mark
Registering your mark on the Principal Register of the U.S. Patent and Trademark Office, confers additional rights. First, registration is evidence of ownership. Second, registered marks are presumed by law to be known by everyone, rendering the "good faith" use defense unavailable. This has the added advantage of increasing your available damages. Third, a trademark can be declared incontestable after five consecutive years of registered use. Finally, and perhaps of most financial advantage, a registered trademark owner can prevent products bearing an infringing mark from being imported into the U.S.
Descriptive marks are not eligible for registration with the Principal Register. Talk to a patent attorney about alternative filing procedures that offer some protection. An examiner from the PTO will be assigned to process your application--performing an independent search for "confusingly similar" marks and determining whether your mark is sufficiently distinctive. If you have chosen a mark, but are not yet prepared to put it to use, you can file an "intent-to-use" application. An intent-to-use application will temporarily grant you the benefits of trademark ownership. If the application is granted, you have six months (renewable up to two years with good cause) to use the mark in business, or this protection will be sacrificed.
International Issues
You need to register your mark in every country in which you anticipate the need for protection. Remember, as stated above, all countries other than the U.S. grant ownership to the first to apply for trademark registration.
Preserving Your Rights
Once you gain ownership of a mark, you must still take particular actions to avoid losing your trademark rights.
1. Avoid Abandonment
The PTO highly favors trademark use. If you fail to use the mark in business for two or more years, you may be presumed to have abandoned your mark and thus lose ownership and its benefits.
2. Renewal Options
Federal trademark registration lasts for ten years. Timely renewal of your registration can provide indefinite protection.
3. Police the Use of Your Mark
You want your trademark to create a strong association with your company and its reputation. However, if your mark becomes too popular you risk losing protection altogether. If a trademark loses its distinctiveness by becoming the generic word used to describe a particular type of product (e.g., aspirin, kleenex, band-aid, etc.). It is essential to monitor the use of your mark and, if necessary, educate consumers as to its proper use.
4. Trademark Infringement
Proving trademark infringement is a highly fact-specific venture. In essence, you must prove that another mark could confuse potential consumers as to the source of the product they are purchasing or using. This can be expensive and take time. If infringement is found, you may be granted an order preventing the infringer from further using the mark and may receive money damages.
Unfair Competition
Unfair competition laws specifically target the area of sales and advertising. These laws attempt to prevent false, deceptive and unauthorized representations. The most common forms of unfair competition are:
- Passing Off - attempting to pass off your goods as those of a competitor.
- False Advertising - making deceptive, unsubstantiated or false claims in advertising.
- Disparagement - making false, damaging claims about a competitor's product or business.
- Bait and Switch - luring potential customers into your business with an unrealistic price only to induce them into purchasing a more expensive product once contact is made.
- Dilution - using the power of an existing mark to confuse consumers about the origin of your goods.
- Right of Publicity - using the name or likeness of another person for financial gain without that person's permission.
Unfair competition laws entitle victims to injunctive relief as well as actual and punitive damages. In some cases, criminal penalties may also be available.
V. Transferring Rights to Intellectual Property
It is a common practice to transfer intellectual property rights, from requiring employees and contractors to assign to a company all rights to items created in the course of their work, to acquiring a company and all its patents, trademarks, copyrighted material, and other intellectual property. An "assignment" transfers the entirety of a person's rights in a particular mark, invention, etc. to the new owner. As discussed, assignments are often used to acquire the rights in works made by a company's employees and independent contractors. If you wish to allow others to use your intellectual property, but want to retain both ownership and ultimate control over its use, you may want to consider a licensing agreement.
Licensing Agreements
1. Specification of License
The "specification" is the precise description of what is covered by the license. It should be inclusive of all necessary elements to achieve the purpose of the assignment, but should not be too broad.
2. Scope of License
Perhaps the most critical element of the license agreement is the scope-of-license provision, which sets forth what the licensee may and may not do with the intellectual property. Limitations may be in the form of geographic scope, duration of the license, renewal, and rights to make improvements or modifications to the property. The scope-of-license provision should also set forth whether the license is exclusive, i.e., whether the licensor may simultaneously grant a license in the same property to additional licensees. It should also include provisions for license termination.
3. Payments
The licensing agreement must set forth how payment will be made. Payment may take almost any form, but the most common are lump sum, installment, and royalty. These can be used individually or in combination. When using royalty payments, you must decide the measure on which to base the royalty payments. Common options include unit sales, percent of gross revenue, and percent of profit. Your agreement may also include minimum payments and sliding-scale royalty payments to avoid any negative impact of the form of royalty calculation.
4. Representations, Warranties and Indemnification
As a licensee, you will want assurances that the licensor owns the rights you seek to acquire so that you will not violate another's rights by using the licensed property. Representations and warranties set forth the licensor's promises with respect to these issues. Indemnification grants the licensee a right to seek damages from the licensor if these representations are false and cause the licensee to suffer a loss. As a licensor, you may also demand representations, warranties, and indemnification from the licensee regarding such issues as financial stability.
5. Covenants
A covenant is a promise to do or refrain from doing a particular thing. In the intellectual property context, covenants take the form of promises by the licensee to use intellectual property in such a way as to maintain its value and protectability. Covenants can be phrased in terms of "best efforts" or "reasonable efforts." The latter allows cost-benefit considerations in determining whether a licensee has fulfilled his or her promise under specific conditions.
6. Due Diligence
To assure legal protection, you must perform due diligence, the legal name for a thorough investigation, to determine whether:
- the other party to a licensing agreement possesses the rights he or she is claiming to transfer,
- all rights are being transferred that are needed to fulfill the purpose of the acquisition, and
- the other party has the reputation, financial strength and future potential to make the license worthwhile.
Copyright © 2002 FindLaw
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