Top 10 Legal Issues Facing Entrepreneurs in Pennsylvania

Topic 10: Protecting Intellectual Capital

Introduction
The protection of intellectual capital is of vital importance to the health and security of a business and therefore should be on the mind of any entrepreneur. Intellectual capital includes trademarks, licenses, brand names, trade secrets, product specifications, processes, inventions, research and development, computer software and programs, database technologies, consulting methodologies, client lists, and much more. Intellectual capital developed by a corporate entity are important assets which must be protected from potential infringers, including competitors, current employees, and former employees. Copyright registration, trademark registration, and patent registration places the world on notice that you value your intellectual capital and you will enforce your rights against potential infringers.

Prior to considering whether to register your intellectual capital, it is important that a complete inventory be performed of your company’s intellectual capital. Many companies are surprised as to the amount of intellectual capital they have developed, and without such knowledge, it is difficult to protect. So, as a first step in developing a strategy to protect intellectual capital, a complete inventory should be performed. Registration of intellectual capital rights may include copyright registration, trademark registration, and patent registration.

In addition to considering federal and state registration, it is important to ensure that employees and not independent contractors complete the work performed in creating intellectual capital. Courts give great deference to independent contractors, and typically, in the absence of an agreement, intellectual capital created by an independent contractor is owned by the independent contractor. Therefore, we typically caution companies against the utilization of independent contractors when developing intellectual capital. Moreover, as discussed in Topic 5, employment agreements with non-solicitation agreements, non-disclosure provisions and other restrictive covenants must be reviewed to ensure that intellectual capital is properly protected. Typically, all works created during the course and scope of employment becomes the ownership of the employer. However, in order to minimize the risk of a future claim by a disgruntled employee, the best practice is to address this at the time of hiring, with specific agreements indicating that any and all creations, inventions, works, etc. created by the employee are irrevocably assigned to the employer.

Trade Secrets
Pennsylvania law protects trade secrets from disclosure. Trade secrets must be “particular secrets” and not “general secrets of the trade.”¹ For example, a customer list is included as a trade secret. A trade secret is defined as a “process or device for continuous use in the operation of the business”.² Further, Pennsylvania law defines a trade secret as any information used in business, which gives the employer “an opportunity to obtain an advantage over competition.”³ Pennsylvania Law of Unfair Competition permits the issuance of an injunction against an employee and future employer to prevent the disclosure of trade secrets.

Although Pennsylvania law independently protects trade secrets, it is still advisable for companies to have employees execute non-disclosure agreements (See Topic 5). First, the execution of the agreement solidifies in the employee’s mind that the company values its trade secrets. Secondly, it emphasizes to the employee that she has certain obligations and duties when dealing with intellectual capital and said obligations and duties will continue perpetually. Third, the non-disclosure agreement may contain a clause that should the employee become employed with another company he/she must provide the new employer with a copy of the non-disclosure agreement. This would make it easier to obtain injunctive relief against a future employer, in the event of a breach of the agreement by the former employee while working with a new employer.

Trademark Registration
Prior to registering a trademark, it is important to conduct an in-depth trademark search. This task is typically outsourced to a reputable trademark search firm. A thorough search demonstrates good faith, due diligence and may be a mitigating factor and/or a defense in the event of a claim of infringement. The cost to conduct a thorough search and investigation will be more economical than the cost to rebrand and re-launch a product line, not to mention loss of goodwill, negative publicity, and possible damages and fees paid to the trademark owner.⁴ However, even with the most detailed searches, there is no guarantee that a desired mark will be absolutely clear from conflicting with a third party’s prior trademark rights. There is always a chance that a prior owner’s use of a similar mark may not be discovered. The search and investigation process, therefore, is an exercise in decreasing that possibility and in assessing the level of risk presented by adopting a desired trademark.⁵

For the sake of clarity, it is important to summarize the differences between state and federal trademark registration. Many entrepreneurs mistakenly believe that utilizing the symbol “TM” automatically provides them with nationwide protection. This is not accurate. The United States has a dual registration system. A trademark may be registered at the state level, the federal level, or both. Federal registration provides rights throughout the United States, but registration in one or more states is an alternative, or an addition to, federal rights. State registration is more expeditious and less expensive. It is not advisable to register in all 50 states. However, many clients will register in the state or states where the company has a major market, as well as at the federal level.⁶

It is important to prevent a claim of infringement, because it can be expensive in terms of time and resources to address a claim of trademark infringement, not to mention disruption of your business. A trademark infringement claim usually starts with a cease and desist letter. Common settlement terms may include a sell-through period to dispose of inventory bearing the conflicting mark, and/or destroying remaining inventory and related product collateral, e.g., packaging, labeling, point-of-sale, marketing and advertising materials, among others.⁷ Civil remedies for trademark infringement may include injunctive relief, monetary damages, (such as an accounting for profits and/or enhanced damages for willful infringement) and attorney’s fees.⁸

Patent Law
In recent years, companies have drastically increased their efforts to obtain and enforce patents for their inventions. The number of patents issued today in the United States is approximately twice that of ten years ago.⁹ For purposes of this handbook, a brief explanation of patents will be covered as this is an in depth and voluminous area of business law which requires the assistance of specialized legal counsel for your precise business need. As a business entrepreneur you should, however, be able to identify when you might need patent protection.

A patent generally entitles the owner of a new, useful, and non-obvious invention to exclude all others from making, using, selling, offering for sale, or importing the patented invention into the United States.¹⁰ The patent owner’s right to exclude lasts only for a limited duration, known as a patent term.¹¹ Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may generally obtain a patent.¹² Any person wishing to obtain a patent must submit an application to the U.S. Patent and Trademark Office. The application must be filed in the name of the actual inventor, even if a commercial or non-profit organization contractually owns the invention.¹³

Copyright Law
Copyright law provides the creator of a literary work or other work of expression the right to block others from using that work without their permission. In general copyright law will protect any form of expression that is fixed in a tangible medium, but not the underlying ideas (which may be protected through another form of intellectual property).¹⁴ For works publicly distributed after March 1, 1989, copyright protection is automatically in place for the creator of any work of expression that is fixed in a tangible format.¹⁵ Therefore the placement of a copyright notice on the work and having it registered with the U.S. Copyright Office is not required, but may give the owner additional protection. A typical copyright claim is stated as follows: “Copyright 2007. ****, Inc. All rights reserved.” Or, simply “© 2007 ****, Inc.”¹⁶

Copyright protection is available for “literary works”, such as books, poems, plays, newspapers, magazines, websites, software documentation, and so on, as well as “works of expression” – that is, graphic and physical representations of objects and ideas, such as paintings and photographs.¹⁷ A copyright consists of the following rights initially held by the author or developer of an original work (which can be assigned or sold):

• The right to reproduce (copy) the work
• The right to prepare derivative works
• The right to distribute copies of the work
• The right to perform the work
• The right to display the work¹⁸

Conclusion
The first step for any entrepreneur in securing the protection of a business’s intellectual capital is to compile a comprehensive list of every asset within the definition of intellectual capital that needs safeguarding. After determining which business assets can and should be protected, the above guide can help you to develop a plan to implement that protection, with the help of specialized legal counsel knowledgeable in this area of the law. Working together, you can effectuate the protection of your business’s intellectual capital, which may otherwise be at risk.

¹ Air Products and Chemicals, Inc v. Johnson, 296 Pa.Super. 405 (1982).

² Id.

³ Id.

⁴ Understanding Trademark Law, Handelman, Hiaring, and Fruchter. Practicing Law Institute 2007.

⁵ Id.

⁶ Id.

⁷ Id.

⁸ Id.

⁹ See Patent Wars, The Economist, April 6, 2000, at 75.

¹⁰ New Jersey Practice Series Business Law Deskbook, Olson, Pappa, Goodman. 49 NJPRAC §14:2 (2007).

¹¹ Id.

¹² 35 U.S.C.A. §101 (1952).

¹³New Jersey Practice Series Business Law Deskbook, Olson, Pappa, Goodman. 49 NJPRAC §14:10 (2007).

¹⁴ Advising the Small Business, p.16. Jean L. Batman. 2007 American Bar Association.

¹⁵ See the U.S. Copyright Office website at www.copyright.gov/circs/circ1.html.

¹⁶ Advising the Small Business, p.16. Jean L. Batman. 2007 American Bar Association.

¹⁷ Id.

¹⁸ Id.