Disclaimer: OLLIE is a free educational resource that provides general legal information for entrepreneurs in California. It does not provide legal advice. Please engage a licensed attorney for advice on your particular situation.
Identifying risks, avoiding lawsuits, and protecting your IP
High Risk Activities
There are risks associated with everything nowadays. Don't drink too much wine, or you'll get cancer. Don't drink too little wine, or you'll get heart disease. It seems like the list of hazardous activities gets longer with each passing day, with professionals from all fields putting in their two cents. We lawyers shan't be left behind.
As mentioned in our Entity Formation module, if you're working on a business that involves any of the following activities, you'll likely want to (1) set up a limited liability entity; and (2) get insurance:
- Food preparation
- Use of machinery
- Use of chemicals
- Use of vehicles
- Moving of heavy objects
- Use of high voltage power
- Use of dangerous/toxic materials
- Activities involving children
- Health-related treatment
- Assessment of risk (for example, as a building inspector)
- Travel (for example, as a common carrier)
- Use of employees (who may commit negligence, or may be at risk on the job)
- Publishing or reporting involving sensitive matters (risk of claims of defamation/false light)
- Advising clients about anything significant (financial, health, legal)
For each activity your business undertakes, you want to imagine the worst thing that could go wrong—what would the perfect storm of unfortunate events look like for your business, and how large of an insurance policy would it take to cover the possible damages that would arise?
Avoiding Successful Lawsuits
We live in a litigious society where anyone can sue anyone else for any reason. As a result, it's impossible to eliminate the risk of lawsuits entirely. The reality is that if you're making money, it's only a matter of time before someone sues you. What you should focus on is eliminating the risk of successful lawsuits.
Smart risk management involves:
- Identifying potential sources of risk; and
- Taking reasonable steps to limit risk.
At the same time, you need to also make sure to fulfill your fiduciary duties.
What Are Fiduciary Duties?
"Fiduciary duties" refer to the:
- Duty of Care; and
- Duty of Loyalty.
Duty of Care
The duty of care refers to the duty of a fiduciary to act as a reasonably prudent person consistent with their responsibilities and personal background. Fulfilling the duty of care requires a fiduciary to exercise their independent judgment, inform themselves about the relevant information in each decision, act in good faith, and honestly believe that each decision they make is in the organization's best interests.
Duty of Loyalty
The duty of loyalty has some overlap with the duty of care. The duty of loyalty refers to the duty of a fiduciary to act in the best interests of the organization, as opposed to personal gain. Fulfilling the duty of loyalty requires a fiduciary to disclose conflicts of interest.
A conflict of interest exists when there is a potential disconnect between what is best for the organization vs. what is best for the fiduciary. For example, if the president of a golf club learns of an opportunity to buy real estate next to the golf club, a conflict of interest would exist if she decides to purchase it personally without first presenting the opportunity to the golf club. See Northeast Harbor v. Harris.
What is a Fiduciary?
A fiduciary is a person who owes a special responsibility to someone else because the fiduciary has been entrusted with some property or power. In the case of companies, those who manage the company (for example, the corporate officers) owe a fiduciary duty to the owners of the company. In a corporation, the owners of a company are the shareholders. In an LLC, the owners are the members of the LLC. In a partnership, the owners are the partners. Interestingly, in a nonprofit organization, there are no "owners" within the nonprofit itself—in the case of a nonprofit, the assets of the nonprofit are held in trust for the public good. Thus, the managers of a nonprofit are essentially acting as fiduciaries for the wider public. This is also the reason that Attorneys General are charged with enforcement in ensuring that nonprofit organizations are acting as responsible fiduciaries.
Interplay with Limited Liability
As explained in the Entity Formation module, corporations and LLCs are limited liability entities, where the personal assets of the owners and managers of the entity are shielded from the debts of the entity. In other words, if the entity owes money to someone else, those creditors can't reach into the personal bank accounts of the entity's owners and managers. However, limited liability only applies if the entity's managers fulfill their fiduciary duties. If the owners or managers breach their fiduciary duties, then they may be found personally liable for any damages that result.
Business Judgment Rule
The business judgment rule is a rule against armchair CEO-ing. The effect of the rule is that a court will not allow a shareholder to recover damages against the managers of a company simply because of a bad business decision. What this means is that, for example, if the manager of a company that owns a baseball stadium insists that 'baseball is a daytime sport' and refuses to install lights that would allow baseball games to be played at night, a shareholder wouldn't be successful in suing the manager for the lost profits of the missed opportunity. See Shlensky v. Wrigley.
The main goal of intellectual property law is to encourage innovation. Patent and copyright laws incentivize inventors and creators to develop new ideas. Trademark law incentivizes brands to bolster and maintain their reputations. Finally, trade secret law discourages competing businesses from entering into an arms race of unfair business practices. Let's go over each one in turn.
Intellectual Property Overview Video
What it Protects
A trademark is any distinctive word, phrase, logo, symbol, or other device that is used to identify the source of a product or goods and to distinguish it from competitors. Trademarks protect the marketing aspect of products or services, rather than their utility (usefulness of a product/service) or design (the look and feel). The main goal is to protect consumers from confusion in the marketplace, as opposed to directly protecting inventors or creators. Trademark law aims to prevent a customer from being tricked into buying a product or service they thought was coming from a different source.
For example, if a customer were looking to buy a watch, and saw a watch with the word "Rolex" on its face, the customer would likely believe that the watch was manufactured by Rolex, Inc., an established company known for its high-end timepieces. The customer would likely be very surprised if, instead, the watch was actually manufactured by a small start-up with relatively low expertise in watch-making. In that situation, the customer would likely lose trust in the name "Rolex" as an indicator of quality. Trademark law tries to prevent this outcome.
Types of Marks
Trademark law protects marks that create an association in consumers' minds between the good or service offered, and a particular source or origin. Marks that can be protected under trademark law include:
- a word, or set of words ("Nike");
- a slogan or phrase ("Just Do It");;
- a symbol (the Apple logo);
- a sound (the MGM lion roar);
- the packaging or design of a product (the shape of the Coca-Cola bottle);
- a color (Tiffany blue); or even
- a smell (plumeria-scented embroidery thread).
This means that potentially your business name, logo, slogan, product name and packaging, and domain name could be trademarked.
What is the Difference Between a Trademark and a Service Mark?
Technically, a trademark is used to market a product and a service mark is used to market a service. Often, both trademarks and service marks are referred to as "trademarks."
How to Get Trademark Protection
You do not need to register your mark to get trademark protection. When you start using your mark in commerce to sell or market goods or services, you have trademark protection. However, your protection will be limited, and you will have greater enforcement rights if you register the mark with the U.S. Patent & Trademark Office.
Where to Register a Trademark
Trademarks also can be registered at the state level usually with the secretary of state. State registration only protects your mark in the state where you register it, and therefore may be of limited value.
Requirements to Register a Trademark and Distinctiveness of a Mark
To register a mark, it must be in actual use in commerce and it must be sufficiently "distinctive." Fanciful, arbitrary, and suggestive marks are considered inherently distinctive. Fanciful marks are marks that have been invented for the sole purpose of acting as a trademark. These include marks like Verizon, Exxon, and Xerox. Arbitrary marks are marks that utilize a device that has a common meaning but has no relation to the mark itself. These include marks like Apple and Blue Bell ice cream. Suggestive marks are marks that suggest a particular quality or characteristic of the goods and services. These include marks like Microsoft, Dairy Queen, and Ray Ban.
Descriptive marks are marks that identify a characteristic or quality of a product or service. These include marks like The Container Store and surname marks like Ford and Dell. Descriptive marks are not inherently distinctive and must acquire a secondary meaning to become entitled to trademark registration. Secondary meaning occurs when consumers have come to associate a mark with a certain product over time. Secondary meaning can be shown through a product's sales, the length of time the mark has been used, and the extent to which the mark has been promoted through advertising. A descriptive mark also can acquire distinctiveness once it has been in exclusive and continuous use for five years.
Generic marks are marks that describe any instance of that good or service. Generic marks are not distinctive and cannot be registered. For example, a business that manufactures mops cannot trademark the word "mop" and prevent others from using "mop" to describe a tool made up of absorbent material attached to a wooden pole. When a consumer hears the word "mop," the consumer does not assume that the mop comes from a particular source or origin. Therefore, "mop" cannot be protected under trademark law to describe the cleaning tool. This usage of the word "mop" is wholly generic.
But, it is possible to trademark the word "mop" for use in describing a different product. For example, a technology company called "Mop Computer" could trademark "mop" for use in describing their electronics products, as this usage of the word "mop" is arbitrary. If this company existed and offered its products for sale to the public, a consumer would have no reason to associate the word "mop" with an electronics device other than the marketing efforts of the Mop Computer company. Therefore, the USPTO would likely allow grant the trademark application. The same goes for fanciful word marks, where the word in question is made up (e.g., Exxon, Xerox, Kodak).
Spectrum of Protection
Along the spectrum of protectability for marks under trademark law , a generic word mark would receive no protection, while an arbitrary/fanciful word mark would receive high protection. In the middle of the spectrum would be descriptive and suggestive word marks, where the word mark gives some indication of what the product or service does.
If you have not yet started using your mark in commerce but have a good faith intention to do so, you can file an intent-to-use trademark application. This gives you priority if someone else like a competitor tries to use the mark. An applicant who files an intent-to-use application must make actual use of the mark before it can be registered. This application reserves the trademark for six months, but it can be extended.
How Much Does it Cost to Register a Trademark?
Depending on which form you use to register, a trademark application can cost from $225 to $400 per class of goods/services.
What Rights Does a Trademark Owner Have?
You can exclude others from using a similar mark if it would cause consumer confusion. You also may be able to prevent others from diluting or tarnishing your mark.
How Long Does a Trademark Registration Last?
Trademark registrations can last indefinitely provided the owner files the required legal forms and maintains the mark. The owner must file a "Declaration of Use" between the fifth and sixth year following registration. After that, the owner must file a combined Declaration of Use (or Excusable Nonuse) and Application for Renewal between the ninth and tenth year after registration, and every 10 years thereafter.
How to Get a Trademark
See below for our Trademark Registration Slide Deck:
Countries that are part of the Madrid Protocol allow applicants to file trademark applications to multiple countries simultaneously.
Trademark in Practice
When you choose a name for your business, make sure the name does not infringe someone else's trademark. This can be done through an online trademark search by you or a specialized search agent.
What it Protects
Copyright law protects "creative expressions fixed in a tangible medium." Examples of "tangible media" include: art/photography, music, books, movies, and software. Copyright law also may protect advertisements and marketing materials, design logos, catalogs, websites, blogposts, and the artwork and text on product packaging.
See here for an overview of Copyright Law and FAQs, see:
What it Does Not Protect
Copyright law does not protect:
- Ideas, concepts, or discoveries;
- Titles, names, short phrases, and slogans;;
- Blank Forms;
- Familiar symbols or designs;
- Mere variations of typographic ornamentation, lettering, or coloring;
- Common information such as calendars, measurement charts, TV guides; and
- Anything written or created by the U.S. government.
While a creative expression can receive copyright protection, the underlying idea cannot. For example, the idea of a brilliant consulting detective who assists British investigators in solving difficult mysteries cannot, itself, be protected. Creators are free to generate their own stories involving intelligent crime-solving sleuths. However, each Sherlock Holmes story can receive copyright protection because Sherlock Holmes is a creative expression of that underlying idea.
How to Get Copyright Protection
A work is automatically copyrighted as soon as it is put into a tangible form.
Where to Register a Copyright
While copyright protection is automatic, in order to sue for infringement, the copyright must be registered in the federal registry. Additionally, the potential for statutory damages is only available for works that have been federally registered either within 3 months of the first publication of the work, or before the infringement occurred. Copyrights are registered with the U.S. Copyright Office. This can be done online or with a paper registration. However, it is cheaper to do an online registration. The Copyright Office provides tutorials on how to register a copyright.
How Much Does it Cost to Register a Copyright?
It costs $35 to file a Single Application (single author, same claimant, one work, not for hire) through the online registration process. A Standard Application (all other filings) costs $55 to file online. Paper registrations cost $85. You do not need an attorney to register a copyright.
What Rights Does a Copyright Owner Have?
A copyright owner has the exclusive right to reproduce copies of the copyrighted work, develop derivative works based on the copyrighted work, and distribute and sell copies of the work. Depending on the nature of the work, the copyright owner also may have the exclusive right to perform or display the work publicly.
Fair use is a defense to copyright infringement, and it permits certain limited uses without permission from the copyright owner. Depending on the circumstances, copying may be considered fair for purposes such as criticism, comment, news reporting, teaching, scholarship or research.
To determine whether a specific use is fair, courts must balance the following four factors:
- the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
- the nature of the copyrighted work;
- the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
- the effect of the use upon the potential market for or value of the copyrighted work.
Fair use cases are context-sensitive. Contrary to popular myth, there is no bright-line rule that only using 10% of a copyrighted work is automatically fair use. As a result, it can be difficult to determine whether something will be considered fair use absent a court decision.
Here are links to a few tools that may be useful in determining fair use:
- Stanford University: Copyright Charts and Tools
- Michael Brewer & ALA Office for Information Technology Policy: Fair Use Evaluator
How Long Does Copyright Protection Last
In the case of an individual creator, this protection lasts for the life of the creator + 70 years. In the case for a work made for hire (i.e., the creator was employed by another entity to create the work), this protection lasts for the life of the creator + 95 years, or 120 years after the creation of the work—whichever is shorter.
Countries covered under the Berne Convention will respect US copyrighted works without any additional filings required.
Copyright in Practice
When it comes to early stage businesses, the main concerns regarding copyright law come down to making sure that you're actually allowed to use the content featured in your products/services/marketing materials. This means all of the text in your blogposts, background music in your podcast episodes, images on your social media page, source code in your app needs to be either:
- created by you;
- licensed to you;
- assigned to you; or
- available in the public domain.
What it Protects
Trade secrets cover any confidential information that provides a competitive advantage. Examples include:
- business and marketing plans;
- customer lists;
- financial statements;
- supplier terms;
- product formulas;
- secret sauces; and
- closed-source software.
How to Get Trade Secret Protection
As long as a trade secret owner takes reasonable efforts to guard the trade secret, it is protected. No special registration is necessary.
How to Protect a Trade Secret
"Reasonable Efforts" is generally judged by industry standards and include:
- Storing trade secrets in safes or locked cabinets;
- Restricting access by key/combination;
- Using password protection to restrict access to computer files;
- Using non-disclosure agreements with employees;
- Using non-compete agreements with employees;
- Disclosing confidential information on a need-to-know basis;
- Avoid discussing confidential information when visitors are present; and
- Marking as "Confidential" important documents
How Long Does Trade Secret Protection Last
Trade secret protection lasts as long as the information is kept secret. This means it could potentially last forever. However, if someone legitimately discovers the trade secret (by, for example, reverse engineering the product), trade secret protection is lost.
Trade Secret in Practice
Before disclosing trade secrets to employees or third parties, companies should have them sign Nondisclosure Agreements that require information be kept confidential.
What it Protects
Patents protect processes, machines, articles of manufacture, compositions of matter, and improvement of any of these items. You can patent a process like slicing bread, a machine like a cellphone, an article of manufacture like a hammer, and a composition of matter like a pharmaceutical drug.
What it Does Not Protect
Laws of nature, physical phenomena, abstract ideas, inventions that are offensive to public morality, and literary, dramatic, musical, and artistic works cannot be patented.
How to Get Patent Protection
A patent, unlike other areas of IP law like copyright or trade secret, is only valid if granted by the federal government.
Where to File a Patent
Patent applications can be filed online at the US Patent & Trademark Office website through their electronic filing system, EFS-Web.
How Much Does a Patent Application Cost?
Depending on the size of your business, the filing fees for a patent application can cost anywhere from $45 to $280. If you choose to hire an attorney, the attorney's fees can range anywhere from $5000 to $15,000+ depending on the complexity of your invention.
What Rights Does a Patent Owner Have?
A patent gives the patent holder the right to prevent others from:
- offering to sell;
- using; or
the invention covered by the patent.
How to Get Patent Protection
A patent, unlike other areas of IP law like copyright or trade secret, is only valid if granted by the government after applying with the USPTO.
In order for a patent application to be granted, the patent must clear five hurdles:
- Subject matter eligibility;
- Non-obviousness; and
Determining the Novelty of an Invention
An invention is novel if it:
- Has not been patented;
- Has not been described in a printed publication;
- Is not in public use;
- Is not on sale; and
- Is not otherwise available to the public.
Prior Art Searches
Before filing a patent application, it is important to conduct a prior art search of public disclosures including previously patented inventions. Prior art searches can be done on the USPTO website, and on Google Patents. You also can hire a registered attorney or agent to conduct the search for you.
For a tutorial on how to conduct a preliminary patent search, see the USPTO's overview presentation.
What is the Difference Between a Utility Patent and a Design Patent?
A utility patent is used to protect the functional or utilitarian aspects of a new product or method. In contrast, a design patent is used to protect the ornamental appearance of an object or an object component.
How Long Does Patent Protection Last?
Utility and plant patents generally last 20 years from the date of filing. A design patent generally lasts 14 years from the date of filing.
Countries that are parties of the Patent Cooperation Treaty offer a streamlined process for simultaneously establishing a filing date when submitting an application to the USPTO.
The provisional patent is a shorter version of the full patent application and serves to establish a priority date for a subsequent full patent application. An application for a provisional patent does not require a formal patent claim, oath or declaration, or any information disclosure. The provisional patent application gives you 12 months to prepare a full patent application during which you can label your invention "patent pending."
CA Labor Code 2870
If you are an employee, your employer most likely required you to sign an Invention Assignment Agreement as part of the on-boarding process for becoming an employee. Generally, Invention Assignment Agreements are very broad and provide that the employer owns any IP you create while you're employed by the employer. California Labor Code Section 2870 provides a carve out for IP that you create that satisfy the following requirements:
- You created the IP entirely on your own time using your own resources without using the employer's equipment, supplies, facilities, or trade secret information;
- The IP does not relate to the employer's business, or actual or demonstrably anticipated research or development of the employer; and
- The IP does not result from any of the work the employee performed for the employer.
- Orrick: Startup Forms Library: Confidential Information and Invention Assignment
- Cooley: Document Generator
- Marks exist along a spectrum from very strong to very weak.