Protecting Your Business' Intellectual Property Assets
By Jonathan T. Cain
It is hard to find the owner of an information technology start-up company who doesn't look forward to the day when his company will be able to attract deep-pocket investors, joint venturers or a purchaser seeking to acquire the start-up for its technology.
Apart from a novel technology, what separates the infotech start-up that generates substantial offers from those that fail to attract investors? Experienced investors look for management, market and competition. A key element of any due diligence of an infotech start-up will also involve an exhaustive examination of the extent to which the start-up has the exclusive claim to the unique technology that has brought the investor to the door. Technology that is inadequately protected from use by others, or is not clearly the property of the target, will fail to sustain investor interest.
A competent due diligence review of intellectual property assets ought to include answers to at least these questions:
Does the target company own the intellectual property rights to its important technology outright or have a license from a third party broad enough to cover all the intended uses of the technology?
Has any third party retained or been granted any intellectual property rights in the technology, and will those rights conflict with the target company's development of the technology or its marketability?
Have the intellectual property rights developed and owned by the target company been suitably protected by appropriate domestic and foreign registrations or other filings, and has it taken the necessary steps to maintain those protections in force?
Has the target company engaged in any practice that would render its intellectual property registrations or other protections invalid or otherwise unenforceable?
Will development, use or sale of any aspect of the technology infringe on the intellectual property rights of others?
Fully investigating each of these questions and assuring that the investor or acquiring company is actually obtaining the value that the target company's technology appears to represent is not a trivial task. Thorough due diligence of the possibility of infringement of the intellectual property right of a third party, for example, usually requires that everyone who contributed to the technology should be questioned to determine whether any contribution might involve work that was copied from another source (possibly a copyright infringement) or was "borrowed" from work the participant performed for a former employer (possibly a misappropriation of trade secrets). A patent search may be necessary to determine if the technology infringes on the patent rights of a third party.
Verifying the ownership of intellectual property rights requires equal diligence. Software presents unique challenges. Adequate due diligence will investigate whether every contributor was an employee of the claimed owner of the software or assigned all his rights to the owner.
Ownership of technology that began as a collaboration between two principles in a start-up frequently presents problems years later when the original collaborators have long since parted company. The target company also must demonstrate that it acquired appropriate licenses to use the tools employed in developing the software.
Due diligence often reveals that start-ups have failed to take the necessary steps to register or otherwise use legal procedures to protect their core intellectual property. These procedures are time-consuming and require diversion of scarce funds from development and marketing. Even the procedures necessary to properly protect trade secrets can be burdensome and appear to be unnecessary when the start-up is comprised of a handful of principles. Unfortunately, when rapid growth begins, new employees are hired, products are sent out for evaluation, and it is even more difficult to instill the disciplines necessary to protect trade secrets. It is at this time that companies are most in need of measures to protect intellectual property rights, and least likely to take them.
Start-ups frequently elect not to obtain patent protection in a truly unique technology because patents are expensive to prosecute and require that the technology be revealed. Software patents have limitations, and software developers often prefer to rely on copyright, trade secret and license protections to protect their technology. In choosing to rely on these less expensive means of protecting intellectual property in software, entrepreneurs should never lose sight of the fact that only patents reliably protect the value of a technology from reverse engineering by competitors.
The protections that will enhance the value of a start-up's technology cannot be achieved quickly when the time for due diligence arrives. Protection of the value of intellectual property must be a consideration from the first inception of the company's technology. Patent registrations, trademark registrations and the management discipline that is essential to the protection of trade secrets all take months or years to implement successfully. The time to begin is at the beginning.
Jonathan T. Cain chairs the Technology Practice Group of Mays & Valentine LLP, McLean, Va. His e-mail address is firstname.lastname@example.org.