Mediation of Patent Disputes—Part 3 of 3

In the first two parts of this series (Part 1, Part 2), we examined what mediation is and considered reasons why a party might desire to engage in mediation. In our final segment, we discuss how parties may come to mediate a patent dispute and provide an overview of the mediation process.

Getting to Mediation

Parties can arrive at mediation in various ways.

1. Some courts order parties to a patent litigation to participate in compulsory mediation. The old adage “you can lead a horse to water but you can’t make it drink” is applicable to court ordered mediations. While parties may be ordered to participate in mediation, they cannot be ordered to agree to terms of settlement. If the parties are not motivated to resolve the matter, they will only go through the motions. For this reason, court ordered mediations are less likely to be productive of a settlement than those to which parties voluntarily submit. 
2. Courts may inquire whether the parties desire to mediate. Some courts will refer the matter to federal magistrates or a private mediator if the parties are so inclined.
3. Some contracts include a provision that requires a party to engage in mediation prior to the filing of a lawsuit. 
4. Parties to a dispute can privately agree to engage in mediation before or after the initiation of a lawsuit in an effort to find an acceptable resolution of the matter. 

Preparation for Mediation

Frequently, mediators will request that each party submit a written mediation statement that sets forth the party’s view of the case and the relief sought. The purpose of the written statement is to inform the mediator of the subject of the dispute and the posture of the matter.

In preparation for mediation, parties should consider a number of questions that are virtually certain to be front and center during the discussions. Some of these questions are summarized below.

1. What are the objectives you seek to accomplish through mediation and what are the underlying interests that would be furthered if these objectives were achieved?
2. What is understood with respect to the objectives of the other party and what are the underlying interests of the other party that would be furthered if their objectives are achieved?
3. What options exist for resolution of the dispute? This question should be considered with the recognition that it is unlikely that the matter will resolve if all of one party’s interests are met and none of the other party’s interests are met. Accordingly, consider options that would be acceptable to you and may be acceptable to the other party. Such options are not limited to the remedies that would be available through litigation—in mediation they are limited only by the creativity and desires of the parties.
4. What is the best alternative available if the matter does not resolve through mediation, and what are the implications if that alternative is pursued in lieu of a negotiated agreement?
5. What are the implications in terms of cost, time to resolution, market disruption, productivity, sales, etc., if the parties do not resolve the matter through mediation?

Preparation for the mediation increases the likelihood of a satisfactory outcome. A satisfactory outcome may involve a settlement on negotiated terms or the recognition that some alternative course of action would be preferable to a settlement on terms available through the mediation. Having considered the above questions in advance of the mediation, the parties will be well positioned to have a constructive dialogue around possible bases for resolving the dispute through mediation.

The Mediation Process

At the outset of the mediation hearing, mediators typically explain the mediation process to both parties. A representative of each party with authority to settle the matter should be present for mediation to be effective. The mediator will confirm that the persons in attendance have such authority if such has not been confirmed in advance of the hearing. In addition to a representative of each party with decisional authority, counsel for each party may attend to provide advice to their client during the course of the mediation. 

Following an explanation of the mediation process, a mediator may elect to engage in a joint session in which each party explains their position and their objectives. Not all mediators commence the mediation with a joint session. Some mediators are of the view that starting the mediation with a joint session only heightens tensions in an already stressful situation. Mediators of the view that an initial joint session may not be beneficial will proceed to private sessions in which they explore the interests of the respective parties and options for resolution of the matter proposed by the parties. The mediator typically engages in shuttle diplomacy between the parties, sharing information that each party has authorized the mediator to disclose to the other party. In private sessions, the parties typically are more willing to confide in the mediator with respect to underlying motivations for positions they may have and possible solutions, while understanding that the mediator will keep in confidence information that is not to be disclosed to the other party.

If the parties arrive at a resolution in mediation, a memorandum summarizing the terms of their agreement is typically drafted. The memorandum may be reduced to a formal settlement agreement by counsel for the parties.

Mediation is not the answer for every party involved in a patent dispute. Nevertheless, given the advantages afforded by an early settlement, it should always be considered.

Mediation of Patent Disputes—Part 2 of 3

Part 1 of this series discussed the general nature of mediation as a dispute resolution process. There are a number of reasons why parties may find it advantageous to attempt to resolve a patent dispute through mediation rather than litigation. Some of those reasons are considered below.

1. Uncertainty of litigation outcome – After more than 35 years in practice, I have come to understand that the only thing certain about the outcome of litigation is the uncertainty of the outcome. This is particularly true in the arena of patent litigation, which involves complex issues of law and fact. In the United States, most patent cases are tried to juries. The jurors, selected out of the general public, are rarely technically trained and, as a rule, are often ill-equipped to understand the highly technical subject matter involved in many of the cases. Even if a jury or judge understands the technology, it is often difficult to predict in any given case whether infringement will be found or the validity of asserted claims will be upheld, as the outcome frequently involves subjective determinations.
   
2. Years until final judgment – It takes years to resolve a patent dispute in the courts. After a judgment from a federal district court, the losing party may file an appeal, which is likely to take another year or more. By the time a final judgment is rendered, the exigent circumstances that initially motivated the filing of the lawsuit may no longer exist. An accused party may modify their product following the filing of suit so as to avoid infringement and limit the possible damage recovery. An injunction precluding the ongoing sale of an accused product may be of less importance due to changes in the marketplace. For these reasons, a favorable judgment after years of costly litigation may represent only a pyrrhic victory.
   
3. Litigation costs – Over 90% of patent lawsuits are settled before trial. Litigation costs for a patent case through a district court trial routinely exceed $1 million. For those companies that can afford the fight, litigation often presents a major distraction for the business. Many companies are unable to afford the costs associated with a prolonged and vigorously contested patent litigation. In contrast, mediation is a comparatively inexpensive process that typically lasts a day or involves a few sessions spaced over weeks or months. A mediation that results in a settlement of a patent dispute will avoid substantial litigation costs, including costs associated with discovery, motion practice, trial preparation, trial, and any ensuing appeals.
   
4. Flexibility of settlement terms – The parties to a patent infringement action will usually either view the outcome as a win or a loss. A final judgment by a court offers no opportunity for the parties to fashion a creative resolution that may serve the interests of both parties. By contrast, in mediation, the parties determine the terms of settlement and any options may be considered—e.g., phase outs, cross-licenses, other license arrangements, manufacturing agreements, etc.
   
5. Selection of Mediator(s) – Unlike litigation, in which an assigned judge presides over the case, parties to mediation may select the mediator. Judges often have little familiarity with technical matters and some judges have little experience with patent cases. On the other hand, selection of a mediator by the parties allows the parties to obtain the services of someone familiar with patent law or the specific technology. The selection of a mediator with specific knowledge related to the involved subject matter reduces time and effort educating the mediator with the legal and/or technical issues involved.
   Additionally, while many mediations involving patent disputes proceed before a single mediator, the parties may elect to engage two or more mediators should there be a good reason to do so—e.g., one mediator may have particular expertise in the facilitative mediation process, while another may be a technical or patent expert. While the mediator’s role is not to render a decision, should the parties desire that the mediator engage in an evaluation of the case, a mediator with expertise in the relevant field may be desired by the parties.
   
6. Continuing Relationships – The filing of a lawsuit often does little to improve the relationship between the parties to the suit. There may be an ongoing relationship between two parties and/or a desire that the parties continue to work together once their differences are resolved. Mediation provides a process for parties to resolve their differences without the lingering animosity and distrust that often accompanies “civil” litigation. There is no loser in a settlement that is fashioned by and agreeable to both parties.
   
7. Confidentiality of mediation – Although information disclosed to the other party in a patent litigation can be prevented from disclosure to the general public via a protective order, court proceedings are public proceedings. Mediations are not public proceedings. With only a few exceptions, mediators have an obligation to maintain in confidence information obtained from the parties. In most circumstances, mediators cannot be subpoenaed to testify or produce documentation or notes in a subsequent judicial or administrative proceeding. Additionally, parties to mediation can contractually agree that the parties will not disclose or use any information obtained during mediation for any purpose apart from the mediation.
   
8. Prior efforts at settlement have been unsuccessful – If parties to a dispute would prefer to resolve a matter by settlement but have been unsuccessful in their unaided efforts, facilitative mediation may be of assistance to overcome obstacles the parties were unable to address on their own. 

It is often said that mediation provides an opportunity for parties to trade hope for certainty. It is this opportunity for certainty that can make mediation of a patent dispute particularly appealing. A settlement achieved through mediation may be viewed as a victory in its own right due to the avoidance of future costs, business distractions, and the uncertainly associated with a prolonged patent litigation.

In our final segment (Part 3), we will conclude with some discussion on how parties arrive at mediation and discuss the mediation process.

Mediation of Patent Disputes—Part 1 of 3

In recent years, mediation has been used with increasing frequency by parties to patent disputes for good reason. Mediation has the potential to achieve a rapid resolution of the matter upon terms mutually agreeable to the parties.

Mediation is an extra-judicial process that has been described as an assisted negotiation. It is a voluntary process in which parties to a dispute seek to resolve their differences with the aid of a neutral, disinterested third party (a mediator), who facilitates discussions by attempting to focus discussions on the underlying interests of the parties. In the course of the mediation, the parties are encouraged to explore options of their own creation that address their respective interests. The mediator neither advocates on behalf of either party nor seeks to impose a resolution. Moreover, the mediator has no power to render a decision with respect to the matter. The parties are solely responsible for the terms of any settlement reached through mediation. Mediation and arbitration are sometimes confused; however, they are different forms of dispute resolution. In arbitration, a disinterested party (arbitrator) functions like a judge, and the arbitrator, not the parties, determines how the matter is to be resolved.

Mediation is attractive because, if a resolution is reached, the parties avoid prolonged uncertainty of outcome. In a circumstance in which a party is willing to consider mediation of the dispute, a question arises as to when mediation should be pursued. If pursued shortly after the filing of a patent lawsuit, a party may be of the view that there has been insufficient discovery to evaluate the merits of the case. If delayed well into discovery, the parties will have incurred substantial litigation costs. When successful, mediation can produce a resolution in days or months, and at far less cost than a resolution through the courts.

Although mediation has proven to be an effective process for resolving patent disputes, as mediation is a voluntary process, a settlement will be obtained only if the parties find common ground. If a patent owner initially demands that an accused infringer cease the manufacture and sale of an accused product, and the accused infringer refuses to accede to this demand, it would seem that resolution of the matter through mediation would be difficult to achieve. In practice, however, the initial demands are simply viewed as the starting positions, and efforts are made to determine if there is a basis for the parties to bridge what may initially appear as irreconcilable differences.

In this series, we will seek to demystify the mediation process, while addressing some of the unique considerations involved in patent disputes. The next segment will consider reasons why parties to a patent dispute may prefer mediation as a dispute resolution alternative to litigation. In the final segment, we will consider how parties may arrive at mediation and generally discuss the mediation process.

Introducing a New Product? Should a Freedom to Operate Study Be Undertaken?

When developing a new product, companies will frequently engage counsel to perform a “freedom to operate” study in an effort to identify patents that might raise a risk of patent infringement following the introduction of the product. While there is nothing fundamentally wrong with this approach, there are pros and cons associated with the decision to proceed with such a study that are frequently not considered. What should be done if you find a patent or pending application that includes claims that might cover the product? Would the company have been better off had it not engaged counsel to perform the study initially?

The Law of Willful Infringement
As a prelude to this discussion, it is important to understand the laws applicable to willful infringement. If one manufactures uses or sells an infringing product with knowledge of the infringement, they can be liable for willful infringement under the patent laws. A party is liable for willful infringement if the patent owner demonstrates that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. If willful infringement is found, the patent laws provide that the infringer can be liable for up to treble damages and the patentee’s attorney’s fees.

The Pros:
If one or more issued patents are located that would cover the design of the product under development, it may be possible to redesign the product in a manner so as to avoid the infringement. Avoidance of a potential lawsuit for patent infringement is certainly desirable provided that a redesigned product can be manufactured and sold at a competitive price and that a redesigned product can provide the features desired in the marketplace.

If no issued patents are located as a result of a freedom to operate study that disclose or suggest the design of the new product, such may be informative of opportunities to obtain patent protection on the new design and offer guidance as to the scope of protection that may be available should a patent application be filed.

The Cons:

Not all freedom to operate studies have happy endings. What if a patent is located that contains claims that apply to the product under development and a viable product cannot be produced without violating the claims of the patent. If the non-infringing product cannot be designed that provides the desired features, or cannot be produced in a way that is commercially viable for reasons of cost, the company has several options. One option would be to inquire of the patent owner whether a license is available and on what terms. If a license in not available or is not available on reasonable terms, proceeding with a product introduction poses a heightened risk that a suit for infringement will be initiated by the patent owner. A second option would be to abandon the product introduction. This decision may involve substantial losses of investment in the product development, depending on how far along the product development has progressed. A third option would be to proceed with the product introduction and assume the risk that the patent owner may take notice and initiate a suit for patent infringement. If a court determines that a product infringes a patent, that the infringer had knowledge of the patent, and that the infringer’s conduct was “objectively reckless” the court may hold the infringer liable for willful infringement. In such a case, the patent owner could be awarded up to treble damages and its attorney’s fees associated with the pursuit of the litigation.

If a product is introduced and a suit for patent infringement follows, the infringement could be held to be willful as noted above if the conduct of the infringer is determined to be objectively reckless. Although it is not required that an opinion of counsel be obtained to counter a charge of willful infringement, a competent opinion of patent counsel concluding that a product does not infringe or, that any relevant patent claims are invalid, will generally serve as a defense to a charge of willful infringement. When such an opinion is obtained, the continued sale of the accused product during litigation is seldom considered to be objectively reckless. The preparation of a competent opinion of counsel requires study of the patent and its prosecution history and the preparation of such an opinion can involve substantial legal costs.

If a party chooses to sell a product with knowledge of a patent and chooses not to obtain an opinion of counsel, a court will determine whether the sale of the product was objectively reasonable or objectively reckless based on the specific facts in the case. It should be noted that an opinion of counsel does not serve as a defense to a charge of infringement, only a defense to a charge that the infringement was willful.

If a freedom to operate search results in the identification of a published patent application with claims that, if issued, would cover the product under development another issue is raised. The application that was identified in the search may never issue as a patent and, if it does issue, the claims may not resemble those that existed in the published application or in the public records of the U.S. Patent and Trademark Office. Thus, a company developing a product must decide how to proceed in a period of uncertainty regarding claim coverage that may ultimately be obtained.

In such a circumstance does one shut down the development of the product, defer the project or continue the development with the recognition that the product would infringe if the patent issues with existing claims? While one can study the progress of a given patent prosecution if the prosecution is available in the public records of the U.S. Patent and Trademark Office, it would require a crystal ball to determine the scope of protection that would ultimately be granted. Unfortunately, the correct decision to many of the questions raised can only be determined in hindsight and must be based on an educated guess as to what patent coverage may ultimately be achieved.

If a freedom to operate search had not been performed and there was no knowledge of the patent in advance of the introduction of the product to the marketplace and the filing of suit by a patent owner, it is more difficult to sustain a claim for willful infringement. Of course, it this path is followed, following the filing of a suit for patent infringement, the company is faced with a decision of whether to discontinue the product, attempt to settle the dispute or contest the assertion in a litigation.

Conclusion 

There are perfectly good and valid reasons for performing freedom to operate studies. If a study is to be conducted, it is generally advisable that it be undertaken before substantial sums have been invested in product development.

It should be recognized however, that is often unknowable whether a patent owner will become aware of a product that enters the marketplace, whether the patent owner would view the product as constituting an infringement should it become aware of the product, whether the patent would ever be asserted by the patent owner even after becoming aware of the product or, if a license would be available upon reasonable terms. Of course, it is considerably more likely that the introduction of a product will become known to a competitor. The ultimate decision whether to commission a freedom to operate study and what to do if such a study is performed, relates to ones tolerance for risk and an understanding of the ramifications that flow from such a course of action. Before a company engages patent counsel to perform a freedom to operate study, it is therefore worthwhile to discuss with counsel what the company plans to do with the search results since, once the search has been performed, if relevant issued patents are located as a result of the search, the specter of willful infringement is out of the bag.

Congress Passes Defend Trade Secrets Act of 2016 (DTSA) and Imposes New Employer Whistleblower Immunity Notice Obligation

Congress has passed a new intellectual property law to protect trade secrets. The law provides a new federal civil cause of action for trade secret misappropriation. The law also imposes a new whistleblower immunity notice requirement on employers.

On April 27, 2016, the U.S. House of Representatives voted 410 to 2 in favor of a bill to enact the Defend Trade Secrets Act of 2016 (DTSA). Congress presented the bill to the White House on April 29, 2016 for signature by President Barack Obama. The President is expected to sign the bill, based on prior support of the bill by his administration.

The DTSA is a bipartisan bill to amend a federal criminal statute known as the Economic Espionage Act of 1996 (EEA) to create the first federal private civil cause of action for theft or misappropriation of trade secrets. Although the EEA made trade secret theft a federal crime, some felt that the federal criminal statute did not go far enough to stem the rising tide of trade secret theft, economic espionage, and online hacking by cybercriminals.

Previously, trade secret misappropriation claims were generally brought under state laws. However, trade secret laws vary from state to state, which has made it difficult for U.S. companies to develop uniform policies. The DTSA is expected to assist U.S. companies by providing a harmonized federal standard for protection of trade secrets. The DTSA does not preempt state trade secret laws, however, so trade secret owners may still pursue remedies under applicable state laws.

The DTSA authorizes trade secret owners to file a civil action in federal court for trade secret misappropriation related to a product or service in interstate or foreign commerce. 

The DTSA provides remedies for theft or misappropriation of trade secrets that may include injunctive relief, damages (for actual loss plus any additional unjust enrichment not covered by an actual loss award, or, alternatively, a reasonable royalty), exemplary damages (for bad faith misappropriation, in an amount up to two times the amount of the damages award), an order for seizure of property, and attorney fees (for willful and malicious misappropriation or for pursuing a claim or opposing an injunction motion in bad faith). 

The statute of limitations for commencing a civil action under the DTSA is 3 years from the date that the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

Employers should take note that the DTSA imposes a new federal whistleblower immunity notice obligation. The DTSA provides whistleblower immunity against criminal or civil liability for confidential disclosure of a trade secret to the government or in a court filing under seal. The DTSA whistleblower provisions require employers to provide notice of the immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The DTSA broadly defines “employee” to include “any individual performing work as a contractor or consultant for an employer.” An employer who fails to comply with the notice requirement may forfeit exemplary damages or attorney fees in an action against an “employee” to whom the notice was not provided. The notice requirement applies to contracts and agreements that are “entered into or updated” after the date of enactment of the DTSA.

Employers should consult with counsel to ensure compliance with federal whistleblower immunity notice requirements, and may wish to review agreements and documents addressing trade secrets and confidentiality.

What do you mean I can't display the picture I bought? Photographs and Copyrights

So you have a photograph which you purchased some years ago of a beautiful early morning harbor view.  This photo would be perfect as a wall display in your commercial real estate office on the waterfront.  You have an enlargement made of the photograph and hang it in your office for all to see.

Not long after the picture is put on display, you receive an email from an attorney representing the photographer who asserts that you have no right to publicly display the photograph or to make an enlarged version of it, and asks that you immediately take down the photograph and destroy it. 

Is such a demand legitimate?    Yes it is.              

The photograph you purchased is subject to copyright protection which has a variety of associated rights.   Your purchase of the photograph provides ownership of the physical copy but not the associated copyright.  The purchase of the photograph does not give you any rights of copyright unless specifically conveyed in a written agreement between you and the copyright owner, in this case the photographer. 

As the owner of the photograph, you may display the photograph for your own pleasure, such as display in your home or private office.  But public display of the photograph is a right of copyright reserved to the copyright owner unless separately contracted for.

What to do now?  Work out a settlement with the photographer which may entail paying some amount for the right to commercially display the photograph.  Or comply with the demand to take down the photograph and destroy the copy.

Photographs, works of art and other copyrightable works are protected by copyright from the moment they are created.  The photographer has the exclusive right to reproduce his or her photograph and to control use of the photograph.  Without permission from the photographer (or other copyright owner), you cannot copy (in hard copy or electronic form), sell, distribute, publicly display or create derivative works of the photograph.

If you are contracting with a photographer to create photos for you, you should be mindful of the rights of copyright you wish to acquire in addition to a physical copy of the photograph.  You may wish to acquire all rights of copyright or just some.  It is often easier to negotiate a transfer of copyright interest at the time of engaging the photographer when he or she is more likely to be eager for the business, rather than later when circumstances may make the transfer of copyright less appealing.

The situation is similar for other works of art.  Laws in other countries are generally similar but of course individual country laws must be reviewed in specific situations.

If you acquire a photograph from a stock photo organization, the rights for use of that photograph are usually specified in the terms of sale or license.

There can be many nuances to transactions involving photographs and other artistic or visual works, and therefore prior consultation with an experienced IP attorney would be prudent.

IP Owners Beware! A Con Artist May Be Behind that Official-Looking Letter

The World Wide Web promised an infrastructure for the free flow of information.  For Intellectual Property (IP) owners, this meant free, instant access to patent and trademark administrative details and status.  Unfortunately, the same types of people who call at inconvenient hours, professing to be from the “Revenue Service,” and demanding payment of a (fictitious) delinquent debt are using the same Web resources to target patent and trademark owners.  Despite efforts aimed at raising awareness in the IP community, scammers continue to produce sophisticated, official-looking communications that sometimes succeed in trapping the unwary.

Trademark owners have been the targets of several types of fraudulent schemes.  Here are some of the more common ones:

“Greetings from [a foreign country].  We have been asked by company ABC to register the mark XYZ as their brand name and their domain name.  But, we noticed XYZ is similar to your brand name. Let us know if you gave them permission.” 

Company ABC is most likely fictitious.  If you write back saying you did not give ABC permission to pursue these registrations, you will be given the opportunity to pursue domain name and trademark applications in that country.  Even if legitimate filings result, you may be paying excessive fees.

“Greetings from the United States Trademark Registration Office (USTRO).  Upon payment of this invoice for $395, we will register your trademark XYZ with the U.S. Customs and Border Patrol.  In addition, we will monitor your mark with our proprietary search engine and alert you to possible third party infringement.  We look forward to your prompt payment.”

“USTRO” sounds a lot like “USPTO,’ the acronym for the United States Patent and Trademark Office.  While the USPTO is a U.S. government agency, the USTRO is a private firm in Los Angeles offering expensive and possibly unnecessary registration services.  Variations of this scam have come from sources such as the “United State Trademark Agency” or the “Trademark Monitoring Service” with offers to monitor the progress of your trademark application for you or to provide trademark renewal reminder services, neither of which have much value and would be duplicative of the efforts of your trademark counsel.

“You are cordially invited to have us list your trademark in the TM REGISTER / The International Trade Marks and Service Marks Catalog.”

This is an invitation to extract a hefty sum from your bank account in exchange for the opportunity to include your trademark in a publication that no one looks at and that has no value.

On the patent side, there have been similar efforts:

“The international patent application cited above has been Published in the WIPO Gazette.  This form is an offer to register your international patent application in our internet database and access to all database services.”

This offer appears in the form of a very official-looking invoice from “World Patent & Trademark Services,” or “World Patent & Trademark Organization,” or “World Intelligent Property Office,” etc.  The latter is particularly devious because of its similarity to the legitimate “World Intellectual Property Office” (WIPO).  When you file an international patent application, it does get published in the WIPO Gazette, so that part of their letter is true.  In fact, that’s where they got the administrative details of your international patent application that may be printed in their letter, perhaps along with the abstract or a representative figure from your application.  It may even have a fancy seal embossed into it.  Those who are taken in by this “offer” may have their international patent application included in a database that no one looks at, in exchange for hundreds or even thousands of dollars.

We’ve seen fewer attempts to take advantage of U.S. patent applicants with similar offers, but vigilance is always called for. 

The bottom line: if you’re in doubt, contact your IP attorney with any suspicious correspondence - he or she will be able to quickly assess its validity and help you avoid such costly and valueless schemes.

 

 

 

 

 

 

Starting a New Company? Protect Your Intellectual Property Now or Maybe Never

When getting a startup off the ground and in the course of ongoing operations, it is important to take care of some fundamental housekeeping matters.  The failure to do so can result in problems that could be costly and/or difficult to resolve later.

Incorporation
Steps should be taken to incorporate early.  The entity form and jurisdiction should be discussed with legal counsel so that appropriate tax and legal issues can be considered.  When more than one individual is involved, the terms of an operating agreement that address contingencies and matters of corporate control should be discussed at the outset. Some firms offer special fee arrangements for startups which can be attractive.  This firm, through the PRETI FLAHERTY BUSINESS LAUNCH PAD ™, assists in the formation of new ventures under certain guidelines.

Employment Agreements
All employees, members and key individuals of the company should be required to execute confidentiality and assignment agreements.  These agreements should address basic obligations to the company including the obligation to maintain sensitive company information in confidence, the obligation to assign intellectual property to the company, an identification of pre-existing intellectual property of the individual, non-compete obligations, non-solicitation obligations with respect to customers and other employees and assurances that the employment will not conflict with any prior obligations of the employee.  A failure to enter into such agreements upon the formation of a company with key personnel can result in claims that the company does not own its intellectual property or claims that the company does not possess the exclusive rights to its intellectual property.

Consulting Agreements
Frequently, startups need to rely on other parties for expertise in specialized areas.  Prior to the commencement of work with any consultants, a consulting agreement should be put in place that provides, in addition to a work statement that addresses the specifics of the undertaking and compensation arrangements, obligations of confidentiality of company information and information developed in the course of the undertaking, a right of use with respect to any intellectual property of the consultant embodied in the deliverables, obligations to assign intellectual property developed pursuant to the agreement, an agreement not to solicit employees of the company and assurances that the undertaking does not conflict with any prior obligations assumed by the consultant.  Absent an express agreement with consultants, disputes regarding the ownership and use of intellectual property developed by the consultant can arise.

Filing of Patent Applications on Inventions
As a result of changes in the patent law over the last several years, the party who first files a patent application for a particular invention in the US typically has superior rights over parties that file later. For this reason it is advantageous to pursue the filing of patent application on subject matter that is perceived to be of commercial value as soon as the basic ideas are sufficiently defined when patent protection is available.  When a startup pursues funding, a sale of the company or an initial public offering, it is inevitable that one of the checklist questions that will be asked is whether patent protection has been pursued so as to establish a barrier to entry of the marketplace by competitors. Frequently, the initial patent application filed will be a provisional patent application in recognition that the technology may evolve in the initial one-year period after the filing of the provisional application by which time a non-provisional application must be filed to preserve the priority date of the provisional application.  A failure to file a patent application within specified periods can result in a bar to a later filing and a loss of an ability to pursue patent protection which can detract from the perceived value of the company.

Name Clearance and Filing of Trademark Applications for Significant Trademarks
Prior to formalizing and registering a corporate or other entity, a name clearance search should be undertaken to determine if objections are likely to be raised by others with respect to the use or registration of the name by other business entities.  The costs associated with such clearance searches are generally considerably lower than the costs associated with changing a corporate name and rebranding activities that must be undertaken if a name change is later required due to a conflict with a preexisting business. Since at the outset most startups will not have used any marks in interstate commerce, they should consider filing applications for federal registration of significant trademarks based on an ”intent to use” the mark(s) in the future.  If it is determined by the U.S. Patent and Trademark Office that a mark is registrable, a Notice of Allowance is issued.  Once the mark is used in interstate commerce, a statement of use is filed and the registration is issued.   The inattention to the filing of trademarks can result in the adoption and registration of the marks by others and an inability to use the marks in conjunction with the business of the company.
 
Use of Non-Disclosure Agreements
Discussions with parties outside the company should be undertaken pursuant to non-disclosure agreements.  Such agreements obligate the recipient of confidential company information to maintain the information in confidence and limit the use of such information solely to the limited purpose specified in the agreement.  The failure to utilize non-disclosure agreements when disclosing sensitive company information to other parties can result in the loss of the right to file patent applications on inventions of the company in certain circumstances, the use of the company information in a manner adverse to the company, or the public disclosure of information that the company desired to maintain in confidence.

Should a startup pursue external funding or get to a point at which it is considering a liquidity event, due diligence investigations will be pursued to ascertain whether the company has taken appropriate steps to protect its intellectual property assets. A failure to assure that the above-identified housekeeping matters have been appropriately addressed can adversely affect the valuation of the company or the ability to achieve desired funding.

Security Interests in Intellectual Property

As collateral for a loan, lenders are accustomed to obtaining a security interest in the property of the borrower.  Such property usually includes tangible assets of the borrower such as real estate, machinery and other physical assets, and may often include intangible assets namely, patents, trademarks and copyrights which collectively are the borrower’s intellectual property.

Under the Uniform Commercial Code (UCC) Article 9, security interests are recorded in the Office of the Secretary of State in the state where the borrower resides; however, this UCC recording may not be sufficient for all intellectual property.  To perfect a security interest in copyrights, the security interest should be recorded at the Copyright Office to provide appropriate notice and to perfect the security interest.  For patents and trademarks, the UCC filing is usually sufficient to protect the lender, but may not be sufficient with respect to a future transfer of rights by the debtor to an innocent purchaser.  The better practice is to record in a timely manner, in addition to a UCC filing, a security interest in patents and trademarks at the U.S. Patent and Trademark Office (PTO).  Such recording at the PTO will provide proper notice which will prevent transfer of good title by the debtor to an innocent third party.

After repayment of a loan, it is important to timely record a release of the security interest with the appropriate Secretary of State’s Office, Copyright Office and Patent and Trademark Office, as applicable, to reflect the release in the public record.

Difficulties can arise by failure to timely record a release at the PTO or other applicable agency.  Often the lack of a recorded release is discovered much later than the original transaction and at a time when parties may not be available to execute appropriate documents.  All documents affecting title should be timely filed in the appropriate agencies to provide a publicly accessible chain of title.  If not done in a timely manner, the passage of time can lead to difficulties.

Consider the following scenario:  Your company is seeking to acquire another company and you discover that patents of the target company are subject to a security interest held by Town Bank and recorded at the PTO.  You learn from officers of the target company that the loan underlying the security interest was paid years ago but nobody paid attention to releasing the security interest at the PTO.  So far as the public record at the PTO reveals, a security interest is still in place. Town Bank has gone through several mergers and is now part of Megabank.  The security interest still reflected in the PTO public record presents an obstacle to the acquisition being completed and your company counsel requests that the target company clear this up.

What can now be done to remove this obstacle? The following options could be pursued:

• Find an officer of Town Bank willing to now sign an acknowledgment that the security interest was released as shown on attached copies of the loan release.
• If Megabank is willing, file a release signed by Megabank which traces the history back to Town Bank with appropriate documentation showing payment of the loan years ago and release of the security interest by Town Bank. 
• File a document from the target company with affidavits and exhibits showing that the loan was previously paid and that the security interest was in fact released by Town Bank years earlier.

The PTO response to such filings can be quite variable and may require subsequent filings of documents and/or affidavits to meet PTO requests.  This  hassle could have been avoided if a release of security interest had been recorded at the time the release from the bank occurred.

The lesson to be learned is the advisability for timely filing of releases of security interests to avoid problems of correcting record title to patents (and other intellectual property) which can be complicated by the passage of time such as parties disappearing, mergers,  people going missing, which can impede or prevent necessary signatures of pertinent parties being obtained.

Trade Secrets and Economic Espionage

On April 29, 2014, U.S. Senators Orrin Hatch (R-Utah), the former Chairman and a current member of the Senate Judiciary Committee, and Chris Coons (D-Del.), a member of the Senate Judiciary Committee, introduced the Defend Trade Secrets Act of 2014 [the “DTSA”].  The DTSA is a bipartisan bill that proposes to amend the Economic Espionage Act of 1996 [the “EEA”] to create the first federal private right-of-action for theft of trade secrets.

Trade secret theft is on the rise.  According to Senators Hatch and Coons, theft of corporate trade secrets results in an estimated loss of $160 billion to $480 billion each year in the United States.  In this information age, trade secrets may be vulnerable to theft by a few keystrokes from a remote location, compared to the bygone era when trade secret theft may have required accessing and photocopying paper documents stored under lock and key.  Trade secrets are increasingly stolen at the direction of a foreign government or to benefit a foreign competitor.  “The intellectual property that drives the U.S. economy has never been more valuable, or more vulnerable,” according to Senator Coons.  “American companies are losing jobs because of the theft of trade secrets every day.”

Currently, trade secret misappropriation claims are generally brought under state laws.  Trade secret laws vary from state to state, which can create problems for trade secret owners and make it difficult for U.S. companies to develop uniform policies.  Although the EEA made trade secret theft a federal crime, federal criminal laws do not appear to have successfully stemmed the tide.  The Department of Justice brought only 25 cases of criminal trade secret theft in 2013.
 
The availability of a federal civil cause of action may harmonize U.S. trade secret law, enable companies to develop a unified set of nondisclosure policies with federal protection, create a uniform standard for trade secret misappropriation, and facilitate access to federal courts.  The DTSA bill would arm trade secret owners with federal rights and remedies, including:

• ex parte orders to preserve evidence and seize property;

• injunctions or royalties in lieu of an injunction;

• damages for actual loss plus unjust enrichment to the extent not compensated by an award of actual loss, or a reasonable royalty in lieu of damages measured by other methods; 

• potential treble damages for willful or malicious trade secret misappropriation; and

• reasonable attorney fees for willful and malicious misappropriation, bad faith claims of misappropriation, or motions to terminate an injunction made or opposed in bad faith.

Rapid changes in technology and increases in employee turnover in today’s job market warrant appropriate measures to preserve and protect trade secrets.  This federal legislation may help companies protect their valuable trade secrets, but trade secret owners will need to continue to rely on state laws for the time being.
 

Protect Your Boat Hull Designs Under Copyright Law

Boat vessel hull designs can be protected by design registration under less well known provisions of the United States Copyright Law, 17 U.S.C. 1301-1332.

This design registration protects a vessel hull, deck or combination of hull and deck, which is an original design that is attractive or distinctive in appearance. The law also covers plugs and molds for making hulls and decks.  Protection is for a ten year term commencing on the date when the vessel is publicly exhibited, distributed, offered for sale or sold, and an application for design registration must be made within two years from the date when the vessel was first publicly exhibited, offered for sale or sold.

Notice for a protected design is similar to a copyright notice and comprises any of the following notations “Protected Design”, “Prot’d Des”, (D) or *D*, the year date protection commenced and the owners name or abbreviation of the name.  After registration, the registration number may be used instead of the foregoing. Absence of Notice can prevent recovery from infringement.

The owner of a registered design has the exclusive right to make, have made, sell, distribute, use or import vessels having the registered design.  Infringement can be redressed by a Federal Court action or by an action against importation in an ITC proceeding.  Remedies for infringement include injunction, damages and seizure, and destruction of the infringing items.

Vessel hulls and decks can also be the subject of design patents, but if a design patent is obtained for the same design, the design registration will terminate.