A common and nasty trap for start-ups and how to avoid it – Forgetting to put founder’s IP licensing rights in writing

I said in an earlier blog that when you license technology, you should put everything in writing. Here is one trap that often gets start-ups in trouble. Founders often neglect to put licenses between themselves and their company in writing. They just assume that the company can use the technology they create. But what happens when they are no longer associated with the company? Can the company continue to use the technology? Can the founder?

We have a restaurant chain here in Washington called Ezell’s Fried Chicken. Late last year the company got in a fight with its co-founder and namesake Ezell Stephens. The headline in the local news read Founder Of Ezell’s Chicken Fired In Feud With Board.As I started reading the article I was pretty sure of what I would discover. Ezell’s the company and co-founder Ezell Stephens never had a written agreement as to who owned the Ezell trademark and their proprietary fried chicken recipe. Now they both claim ownership.

Mr. Stephens had recently started his own chain of restaurants, which he also called Ezell’s, claiming it was his name after all. And he used the same chicken recipe that Ezell’s Fried Chicken used. He claimed rights in the recipe because he had developed the recipe and it was based on an old family recipe that he had brought with him to Ezell’s Fried Chicken. (See his statement from his court filing at the end of this blog.) One can easily understand and sympathize with his emotional attachment to his own name and his own recipe.

On the other hand, Mr. Stephens stayed quiet for over 20 years while the company used the Ezell’s trademark and the Ezell family recipe. He did not object when the company applied for and obtained federal trademark registration for the marks Ezell’s Famous Chicken and Ezell’s Fried Chicken. He allowed the company to bring in outside investors. He profited from the company as an owner and an employee. Even if there were no written agreement, there had to be an implied agreement that the company owned the trademark and the recipe. Mr. Stephens allowed the other owners to invest in and work for the company all the time relying on that implied agreement.

In determining the terms of any implied contract, the court will not look at the subjective intent of the parties – what Mr. Stephens thought he was agreeing to. Rather the courts look to the objective intent of the parties – given the facts and circumstance, how would a reasonably prudent person in their situation interpret the contract. Using the objective standard, it should be clear that Mr. Stephens transferred any ownership interest he had in the intellectual property to the company.

I can understand how he feels. He lost the right to his own name and to his family recipe. But a startup is a business. He chose to make a business decision. It is too late now. He took the money. End of story.

As I write this blog, the case is still active in court. The parties are fighting over who owns the Intellectual Property rights and over several agreements that the parties had entered into. I am not privy to all of the facts of the case, and do not know the details about the agreements, but as to the intellectual property rights, I would be very surprised if Mr. Stephens prevails.

For a similar take on the Ezell trademark issue, see fellow Seattle trademark attorney Michael Atkins’ Seattle Trademark Lawyer blog entry: Ezell’s Case Illustrates Need to Decide Who Owns Mark Before Dispute Arises.

The Ezell case reminds me of a story that I have heard several times from different sources. I have not been able to verify this story on the Internet and now believe it is apocryphal (being of questionable authenticity). But it could have happened and it illustrates my point very well.

The background story is true. Gene Roddenberry created the popular television series Star Trek, which aired in the 1960’s. Years later he helped produce a sequel television series, which was called Start Trek: the Next Generation. It was very successful. The Star Trek concept was also used in a series of successful movies and several other television series. Mr. Roddenberry had married an actress who was a regular in the first Star Trek show (she played Nurse Christine Chapel.)

Mr. Roddenberry died in 1991 while the Star Trek: The Next Generation show was on the air.

Now the story goes that Mr. Roddenberry owned the intellectual property rights to the Star Trek universe. Since he was personally involved with Star Trek: The Next Generation, no one thought that the television show needed a license to use the Star Trek universe. Supposedly, his wife was resentful of Star Trek because her husband spent too much time with Star Trek and not enough with her. When he died, she inherited the rights to the Star Trek universe. She initially refused to let Star Trek: The Next Generation continue to use the Star Trek universe. Without the Star Trek rights the show would have to shut down. Supposedly she was offered more money and a major recurring role in the show and she relented and the series was saved. (She did play the role of the recurring character in-your-face Betazoid Ambassador Lwaxana Troi. She appeared in every Star Trek television series that followed as well.)

Whether true or not, and I now think probably not, the point is still valid – make sure your company has valid written licenses for all of the intellectual property it uses, even if the you the founders brought that intellectual property to the company yourself.

——————

UPDATE: On October 18, 2011 the press reported that the parties had settled. Mr. Ezell agreed to give up the restaurant name Ezell but he can keep using his fried chicken recipe.

——————

From Mr. Stephens’ Answer and Counter-claim court filing:

3.9 Upon incorporation, Ezell Stephens retained all rights to his EZELL’S FRIED CHICKEN trademark; the Logo; and his recipes, procedures, and techniques.

3.10 Ezell Stephens also retained all rights to control the use of his name, voice, signature, photograph and likeness. These rights, along with the EZELL’S FRIED CHICKEN word trademark, the Logo trademark, and Ezell Stephens’s recipes, procedures and techniques are referred to collectively herein as “Ezell Stephens’s Intellectual Property.”

3.11 Ezell Stephens allowed EFC to use Ezell Stephens’s Intellectual Property without charge as long as he was involved with the day-to-day operations of the business. It was specifically anticipated and understood that Ezell Stephens would remain as an officer and director of the company that he founded, in order that he might control the quality of the goods and services provided in connection with the Ezell Stephens’s Intellectual Property.

3.12 Ezell Stephens did not intend to execute, and does not recall ever executing an assignment of Ezell Stephens’s Intellectual Property to EFC.

3.13 Ezell Stephens never intended, and has never agreed, that EFC could use Ezell Stephens’s Intellectual Property, including his name and photograph, after he was no longer involved with EFC’s business.

3.14 There are no written agreements that authorize EFC to use Ezell Stephens’s name or photograph.

3.15 There are no written assignments of any of the Ezell Stephens’s Intellectual Property to EFC.

3.16 The oral permission from Ezell Stephens to EFC to use Ezell Stephens’s Intellectual Property was also granted with the understanding that it was non-exclusive. In particular, Ezell Stephens retains, and has always retained, the right to use his name as a trademark in connection with separate restaurant businesses. Such rights have been recognized by EFC as part of its course of dealing with Ezell Stephens.

 

One Response to A common and nasty trap for start-ups and how to avoid it – Forgetting to put founder’s IP licensing rights in writing

  1. Nyanna says:

    Well put, sir, well put. I’ll cearnitly make note of that.

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