What is the number one asset of businesses today? Arguably, it is intellectual property (“IP”): copyright, trademark, trade secrets and patents. This is especially true of technology-based companies, but they are not alone. Consider Coca-Cola — its brand name and other trademarks are really its top assets.
Keep in mind that sophisticated investors and purchasers are often investing because of what you can do with your IP and are therefore interested in knowing that the IP is yours or properly licensed by you, and how you protect your IP from your competitors.
Yet, a significant number of companies take a neglectful or relaxed approach with respect to the documentation, registration, creation and/or ownership of IP, even when it is a top asset, if not the top asset, of the business.
What is the current state of your IP protection and documentation?
Many private companies sail along without any IP concerns or incidents rising to the surface. This can go on for years, or even decades, depending on the industry and the need for capital and a seeming lack of competitive benefits. But once they seek institutional financing or begin negotiating their acquisition, the investor or purchaser will have a lot of questions concerning the company’s IP — questions the operator should have been asking him/herself all along. Will you be prepared to answer those questions?
Have you documented the creation of intellectual property and the company’s exclusive (or joint) use rights? Have you registered your trademarks? What about IP that you have licensed from a third party? How do you protect your trade secrets from disclosure to, or use by, others?
Investors and purchasers will almost certainly request documents (and other evidence as applicable) that explain how the company’s IP has been developed, acquired or licensed and the terms of any associated agreements and relationships. They will want to understand, and will want the company to show:
- if and how the company used consultants, contractors and/or employees in the development of IP, as the difference may affect the nature (or existence) of the company’s ownership of IP if not properly documented for those differing relationships;
- if any of the company’s IP has been developed jointly with third parties;
- if the company has documented and signed invention disclosure, non-disclosure and non-use, work for hire, and invention assignment, agreements, with each of its employees, contractors, and joint venturers; whether or not the company has registered its trademarks, and filed any patents;
- how the company monitors the proper and improper use of its IP by third parties;
- whether any IP has been developed with funding, resources or personnel of any government entity, university, or research center, as these entities may retain certain important rights in the IP or be due a royalty or licensing fee; and
- in the case of a company sale, that all IP assets may be assigned or transferred to the purchaser.
Why can’t establishment of IP assets be deferred?
Many entrepreneurs run their businesses with nearly 100% focus on the operations of business itself, with the idea that establishment (or documentation can) be addressed later if and when it is needed. (I like to call the work needed “deferred maintenance”.)This may make a modicum of sense in certain contexts, especially when the company’s human and/or financial resources are limited to the point where taking care of such less important matters would cause business to be lost.
This approach, while far from ideal, might work to the benefit of the entrepreneur in some cases, because the “deferred maintenance” efforts can indeed be deferred. But this is simply not the case with respect to IP assets, as the value of the IP can be reduced or lost entirely if action is not taken in a timely manner!
If a competitor registers the trademark you want to use (domestically or in a foreign country) before you do, you may not be able to use it all. If you register your trademark only after another business in another city uses it (especially on the internet), that business will have certain pre-existing rights to use the mark in its territory (which may be the whole country due to the internet). Imagine what would happen if someone reduces your patentable idea to practice, or patents your same idea, before you file for a patent? In that case your patent may never be granted.
What if you did not document the ownership of IP with your employees or (especially) your contractors? People you need to sign documents may leave town or pass on. Competitors may take action first and cause you to lose an opportunity. You may not be able to sell or assign your IP, and you might not be able to prevent others from using it. The business may suffer from the uncertainty of ownership of (or the right to use) its most important IP.
Conclusion: Address your business’ IP issues early and in real time
Business owners should involve legal counsel as early as possible to plan ahead and set up systems and protection with respect to all of their IP. Securing and protecting its IP may be the top thing a business can do, and it is not something that can be put off with the expectation that it will be fine to handle at another time. This is so even if the operator has no intention of taking on investment capital or selling the business, as a business can be destroyed by its inability to keep a competitive edge and/or enforce what it believes are its IP rights. This result may be avoided simply by engaging competent legal counsel on a timely basis.
[Lee Weinberg is a partner in the Los Angeles office of Weinberg Gonser. He regularly encourages companies and business owners to record and protect their intellectual property before it is too late. He is also known for his work in partnership disputes and business divorces associated with privately held companies.]