Top Ten Intellectual Property (IP) Law Traps

November 2, 2011

Intellectual property (IP) law is a deceptively complex area of law. IP law is very rules based, and the rules vary depending on the type of IP protection. Non-IP attorneys and individuals who attempt to practice IP law without the assistance of an IP attorney often run into trouble. Here are ten common traps.

Copyright

1. Copyright law is one of the few areas of law where transfers of rights must usually be in writing (real estate is the other obvious example.)

2. The owner of the copyright is the person who created the work, not the person who paid for it. You hire someone to design a website for you. It is your website. You paid for it. But absent a written agreement to the contrary, the website developer owns the copyright in the website.

3. It is deceptively easy to end up accidentally jointly owning the copyright instead of owning it outright. Say you write a software game program, but you hire an outside firm to handle the sounds. It is quite possible for the outside firm to own part of the copyright in the entire software game program. (This is called joint authorship.) This is easy to fix with a written agreement that covers copyright ownership.

Trademark

4. The right to register a federal trademark belongs to the person who used the mark first in interstate commerce, not the person who filed a registration first. But if the first person to use does not object to the other person’s improper federal registration within five years of registration, they may permanently lose the right to object.

5. You do not lose copyright rights by not policing your rights, but you can lose trademark rights by not aggressively policing your rights.

6. One way you can fail to police your rights and lose your trademark is if you license someone to sell your widgets under your trademark and the license agreement does not allow you the right to police the other party’s use of your mark.

Copyright and Trademark Registration

7. Copyright rights and trademark rights are both created automatically. Copyright rights exist as soon as you create something. Trademark rights exist as soon as you use a trademark in commerce. But in each case, you gain considerable additional protection by registering your rights. People often neglect to register.

Copyright registration is only at the federal level. It is fairly straightforward and can usually be done by a non-lawyer. (Practice Tip: Have you registered the copyright in your website and other marketing materials?) Trademarks can be registered at both the state and federal level. State trademark registration is also fairly straightforward but does not help much. Federal trademark registration is deceptively complex. Sometimes a federal trademark registration will be approved as submitted, but quite often it will not. You may need to negotiate with the Trademark Office, and there is a specialized technical language that they use and expect you to use as well. When trying to register a trademark federally, it is best to use an attorney who is familiar with the federal trademark registration process.

Trade Secret

8. A customer list is considered a trade secret. An employee cannot take a physical copy of the list with them when they leave a company. If the employee memorizes the list, that is considered the same as taking a physical copy.

Non-Compete Agreements

9. In Washington, where I practice law, a non-compete agreement entered into after the employee has started working for a company is not enforceable unless the employee is given new consideration for signing the agreement. The right to continue working for the company and to not get fired is not considered new consideration. Labriola v. Pollard Group, Inc., 152 Wn.2d 828, 834,100 P.3d 791 (2004).

Family Law and Estate Planning

10. Intellectual property is property. Yet I often see a divorce property settlement agreement or a will where there is no mention of intellectual property. Have you written a book, or painted a picture, or created other intellectual property? If so, it should be accounted for in the legal documents.

 

(These examples are oversimplified. Although they apply most of the time, I omitted all of the caveats for when they do not apply. Do not rely on these rules without seeking specialized IP law advice first. )

 


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

May 19, 2011

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.

 


Top Ten Intellectual Property (IP) Licensing Agreement Drafting Tips

October 1, 2010

Drafting an effective Intellectual Property (IP) Licensing Agreement is more difficult than it may seem. Here are some drafting tips to help you.

1. Draft Contract terms to avoid litigation.

Of paramount importance when drafting a contract is to avoid ending up in litigation. Draft contract terms with this goal in mind. Litigation is a terrible way to resolve disputes. It is very expensive, and even more importantly, it takes away your mental energy. While you are in litigation you will have difficulty focusing on work and on your home life. They will both suffer.

Litigation results are unpredictable and somewhat random. Lawsuits are a good way to get a final resolution of a dispute. But they are not designed to get the best possible resolution. Rather they focus on 1) getting a resolution so that both parties can go on with their lives, 2) getting that resolution in a somewhat timely manner, and 3) getting that resolution at a reasonable price to the taxpayers who end up paying the costs of running the courthouse. Litigation results are never satisfying to either party. What you often get is a vague ruling from a judge with a dollar figure attached that seems to come out of the air.

My personal opinion is that the better contract attorneys are also litigators or have been litigators in the past. They understand from first-hand experience the importance of drafting contracts to avoid litigation. [By way of full disclosure I am both a litigator and a contract attorney, so I may be biased.] Much of the rest of this top ten addresses ways to avoid litigation.

2. Put everything in writing.

All of the essential terms of your deal should be written down. A contract is a plan of action – what the parties will do for each other. Think of it as a specialized business plan. Until you put the steps of the plan in writing, it is hard to see if you have left anything out. Until you put the plan in writing, it is hard to know if you and the other side are actually talking about the same thing. People’s memories fade over time and people tend to remember agreements in their favor. But they can not argue with the written word.

Remember to put things in writing even if you are licensing IP from yourself. Many founders of companies have already created much of the IP that the company will use before the company was founded. Who owns that IP? Under what terms can the company use that IP? This should be clearly spelled out in writing.

3. Use attorneys to draft documents.

Do not try to draft complex IP contracts yourself. Experienced IP attorneys know how to draft IP contracts. They know what to include and what traps to avoid. They understand how to draft a contract that works. I have heard and seen too many horror stories of clients who do it themselves, often cutting and pasting from other licensing agreements. Several of my clients ended up in litigation because they tried to save a little money by writing the licensing agreement themselves. They did not do a very good job. When problems arose, they ended up paying me far more to solve the problem through litigation than if they had just let the attorneys write the contract in the first place.

Although I wish that you could just buy a form on-line or cut and paste from your last contract, it does not work. Imagine what would happen if your attorney tried to write a software program by cutting and pasting code from existing programs. It would be a disaster. Don’t try to do the attorney’s job with a cut and paste job either.

4. Face problem areas up front.

It is human nature to want to avoid conflict. There is the hope that if you delay a problem it will go away. But it does not work. The problem does not go away, it just gets worse. If there is a problem area between the parties, deal with it now. The time to discuss it and resolve the differences is at the beginning of the relationship. The problem will come up, and if it comes up later, your options are more limited, and you are much more likely to be unable to resolve the dispute and end up in litigation, which is something you want to avoid, see #1 above.

I negotiated a contract where the other side agreed to a contract term regarding the payment of licensing fees from existing licenses. My client knew that the actual payment according to this term would end up being over one million dollars, while the other party thought it would be around $100,000. I insisted that my client disclose this fact up front and redraft the contract term. They gave up their legal claim to one million dollars, but the other side was never going to pay that amount anyway. Instead they negotiated a fee that both sides thought was fair, and they avoided litigation

5. Plan for the unexpected.

A contract should be a plan of action. But a contract should also deal up front with what will happen if the unexpected happens. What if things do not go according to plan? How should the parties deal with the unexpected? It is far easier to come to agreement on how to deal with the unexpected at the start of the relationship then after the unexpected has already happened.

A client of mine drafted his own license agreement against my advice. He was to distribute the other party’s software. Both sides were counting on the other party releasing a major upgrade to the software shortly after the agreement was signed. My client made a major investment in setting up his business in anticipation of the major upgrade. I asked him what would happen if the major upgrade did not happen. He insisted that it would and he did not have to worry about that, and he refused to plan for the unexpected. Three years later when the upgrade had still not been released, he came back to me and we ended up litigating the issue of what happens now.

Go over your plan of action and try to think what could go wrong and what would happen if it did. This is another reason to use attorneys. We see lots of cases when things have gone wrong, and we are used to thinking that way. Clients rarely come back to their attorney to tell them the agreement worked exactly as planned. It is only when something goes wrong that they call their attorney. So attorneys are used to thinking about and planning for the unexpected.

6. Make the terms fair.

If the contract terms are fair and reasonable, you are far less likely to have a dispute. You certainly want to try to negotiate a contact that is in your favor. But if the contract terms are too one-sided in favor of one party, the other party is less likely to want to perform, and you are more likely to end up in a dispute. Do you want to be in the IP licensing business or the litigation business? If you want to be in the IP licensing business, then draft a contract with reasonable terms so that both sides are able and willing to perform. That way you are not likely to end up in litigation.

There is a difference between a contract that is a good deal for you, and one that is a totally in your favor. Many attorneys try to get the most one-sided contract that they can. They are not doing their clients any favors. They are just setting their clients up to end up in litigation.

When possible, build incentives towards compliance. Don’t just say that a new product version is due by a certain date, say that there is an extra payment if the project is done on time, and the payment goes down if the new version is late.

7. Be wary of multiple agreements and/or attachments.

Sometimes a deal consists of multiple agreements and/or an agreement with attachments and schedules. If so, then think through how they will work together. Too often the agreements are negotiated as separate contracts even though together they constitute one deal. Attachments are often added as an afterthought, after the negotiations are finished. Do all of the documents make sense together? Are they consistent? What happens if one of the deals falls apart, and the others do not? One way to avoid potential problems is to make separate deals that stand on their own whenever possible.

I had a client who wanted to sell her IP to another company. She got a small lump sum payment and a favorable employment agreement with the new company, with salary bonuses tied to the success of the IP. She considered her new job to be part of the compensation for selling the IP. I told her that these deals did not work well together. She should sell the IP for what it is worth, and sign an employment agreement for what she is worth. She did not take my advice. She did not last long at the new company, and is now suing them to them to get her IP back.

8. Say it in plain English.

There is no need for a contract to use secret lawyer language that no one else can understand. Say it in plain English. If you don’t know what it means, ask. There are plenty of times when I read something prepared by an attorney, and I have no idea what it means, so I ask them to rewrite it.

Define technical terms, even if the parties know what they mean. It is fine to use acronyms, abbreviations, and initials in an early draft of a contract. But the final version of the contract should make sense to anyone, not just those in the know. First, there is less agreement on those shorthand terms than you may realize. Second, if there is a disagreement about the contract, the legal standard is what it would mean objectively to a normal person reading the contract, not what it means to the tech people. You never know who will be reading the agreement and trying to understand how it works. Remember that if you end up in litigation the ultimate arbiter will be a Judge, and most Judges have very limited technical knowledge.

The clearer a document is, the more likely both sides will understand it, and the more likely both sides will be able to honor the terms of the contract, and the less likely that there will be misunderstandings and litigation.

9. Make sure you are agreeing to the same terms.

When you think you have finished negotiating and you have come to an agreement, make sure you and the other party have agreed to the same terms. In the very old days, invoices and purchase agreements would fly back and forth by mail or personal delivery. A while back faxes would fly back and forth. Today it is usually emails and email attachments. It is very easy to think you have agreed to the same terms, when you are actually each referring to a different version of the contract. This type of misunderstanding happens more often than you might think. Make sure that you know what version you are agreeing to. When you think you have an agreement, pull all the contract terms together in one document and make it clear that this is the version you are all agreeing to.

10. Make sure the contract fits your particular needs.

      Keep in mind what you are trying to accomplish with your new agreement. Too often clients and their attorneys jump right in and start to write the standard contract, whether it fits what the client needs or not. I always try to start with asking my client “what are trying to accomplish here?” Then I draft a contract that fits the client’s needs.

There are times when a creative solution is better than that standard boilerplate. My favorite example is a telephone company with commercial clients. The telephone company would often end up in billing disputes over $3,000 to $5,000 dollars with its customers. This was not enough money to justify litigation. Besides, the company did not want to alienate its customers. So the telephone company wrote into its contract that there was mandatory arbitration of billing disputes. The result of the arbitration was only binding on the telephone company. If the customer did not like the result, the customer could still file a lawsuit. The customers were more than willing to go along with this contract term. It turned out that customers rarely took their claims to court even when they lost. The client really just wanted to have a voice, a chance to have their say. The telephone company had a fast and inexpensive way to resolve its dispute and keep its customers satisfied.

Write a contract that is easy to understand, fits your needs, is reasonably fair to both sides, and is likely to avoid litigation.