[04]. Protecting the Idea and Other Legal Issues for the Entrepreneur

Chapter 6
Protecting the Idea
Other Legal Issues for the
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
What is Intellectual Property?
 It includes patents, trademarks, copyrights,
and trade secrets.
 These represents important assets to the
 Intellectual property should be understood
even before engaging the services of an
How to Select a Lawyer
 An entrepreneur needs to be aware of any
regulations that may affect a venture.
 A lawyer may work on a retainer basis or
may be hired for a one-time fee.
 A good working relationship with a lawyer:
 Eases some of the risk in starting a new
 Gives the entrepreneur necessary confidence.
 Entrepreneur can offer the lawyer stock in
exchange for services.
 Patent - Grants holder protection from
others making, using, or selling similar
idea; issued by the Patent and Trademark
Office (PTO).
 Utility patent – Protection of new, useful, and
unobvious processes, machines, compositions of
matter, and articles of manufacture; term of 20
 Design patent – Covers new, original,
ornamental, and unobvious designs for articles
of manufacture; term of 14 years.
 Plant patent - Given for new varieties of plants.
 International Patents
 The Patent Cooperation Treaty (PCT) was
established to facilitate patent filings in multiple
countries in one office.
 It is administered by the World Intellectual
Property Organization (WIPO) in Geneva,
Switzerland; has over 100 participants.
 It provides a preliminary search that assesses
whether the filing firm will face infringements in
any country.
 Differences may exists in the patent laws of
each of these countries.
 The Provisional Application
 It is the initial application to the PTO providing
evidence of first to market.
 Replaces the disclosure document that was
previously accepted by the PTO.
 Gives the rights to the patent based on the
concept of first to file.
 The actual filing of the patent in its final form
must occur no later than 12 months after the
provisional disclosure document if filed.
 The Patent Application
 Introduction – Consists of the background and
advantages of the invention, the problems that
it overcomes, and how the invention differs from
existing offerings.
 Description of invention – Includes a detailed
description of the invention and of the drawings
that accompany it.
 Claims - Specify what the entrepreneur is trying
to patent.
 The application should contain a declaration
signed by the inventor(s).
 Patent Infringement
 Many businesses, inventions, or innovations are
results of improvements on, or modifications of,
existing products.
 Copying and improving on a product may be
perfectly legal and a good business strategy.
 If patent infringement is unavoidable, the
entrepreneur may try to license the product
from the patent holder.
 It is advisable to hire a patent attorney to
ensure there is no possibility of infringement.
Table 6.1 - Checklist for Minimizing
Patent Risks
Table 6.1
Business Method Patents
 The growth of Internet use and software
development has given rise to business
method patents.
 Firms use these patents to assault
competitors and subsequently provide
income from royalties or licensing fees.
 Concerns have evolved regarding these
 Not all start-ups will have a product or
concept that is patentable.
 A distinguishing word, name, or symbol
used to identify a product.
 It can last indefinitely.
 It can be filed solely on the intent to use the
trademark in interstate or foreign commerce;
also with the intent to use in the future.
 Categories:
Coined marks.
Arbitrary marks.
Suggestive marks.
Descriptive marks.
 Registering the Trademark
 Filing must meet four requirements:
Completion of the written form.
A drawing of the mark.
Five specimens showing actual use of the mark.
The fee.
 Initial determination of suitability takes 3
 Objections must be raise within six months, or
application is considered abandoned.
 The entrepreneur has the right to appeal in case
of refusal.
 Once accepted, trademark is published in the
Trademark Official Gazette to allow any party 30
days to oppose or request an extension to
 Registration is issued if no opposition is filed.
 Procedure takes about 13 months from initial
Table 6.2 - Benefits of a Registered
Table 6.2
 Right given to prevent others from printing,
copying, or publishing any original works of
 Issues surrounding access to material on
the Internet have led to major legal battles
for the entertainment industry.
 Copyrights are registered with the Library
of Congress.
 Term of the copyright is the life of the
author plus 70 years.
Trade Secrets
 Provides protection against others revealing
or disclosing information that could be
damaging to business.
 Trade secrets have a life as long as the idea or
process remains a secret.
 It is not covered by any federal law but is
recognized under a governing body of common
laws in each state.
 Employees may be asked to sign a confidential
information agreement.
 Entrepreneur needs to take proper precautions.
 Legal action is possible only after the secret has
been revealed.
 A contractual agreement giving rights to
others to use intellectual property in return
for a royalty or fee.
 Types of licensing:
 Patent license agreements - Specify how the
licensee would have access to the patent.
 Trademark license agreements - Involve a
franchising agreement.
 Copyright license agreements - Involve rights to
use or copy books, software, music,
photographs, plays, etc.
 Factors to be considered:
 Customers’ recognition of licensed property.
 Whether licensed property complements existing
products or services.
 Entrepreneur’s experience with the licensed
 Long-term outlook for the licensed property.
 Kind of protection provided by the agreement.
 Commitments in terms of payment of royalties,
sales quotas, and so on.
 Renewal options.
Product Safety and Liability
 It is the responsibility of a company to
meet any legal specifications regarding a
new product covered by the Consumer
Product Safety Act.
 The Act created a commission with the
responsibility of prescribing safety standards.
 The development of stricter regulations
regarding labeling and advertising is also part of
the commission’s responsibility.
 Large fines as well as product recalls are the
typical outcomes of any action enforced by the
 It provides a means of managing risk in the
new business.
 Some insurances are required by law and
cannot be avoided while others are may be
necessary to protect the financial net worth
of the venture.
 Skyrocketing medical costs can have a
significant impact on insurance premiums.
 Entrepreneurs also have to consider health
care coverage.
Table 6.4 - Types of Insurance and
Possible Coverage
Sarbanes-Oxley Act
 Congress passed the Act in 2002.
 Provides a mechanism for greater control over
the financial activities of public companies.
 Under this law:
 CEOs need to vouch for financial statements
through a series of internal control mechanisms
and reports.
 Directors must meet background, length of
service, and responsibilities requirements
regarding internal auditing and control.
Sarbanes-Oxley Act
 Attempts to influence or impede the internal
auditing process is a criminal act.
 Law covers bank fraud, securities fraud, and
fraud by wire, radio, or TV.
 There has been some concern as to the
interpretation of this law and subsequent
directors’ liability.
 There are conflicts with the provisions of
the new law and the laws of foreign
Sarbanes-Oxley Act
 Though private companies are not included,
they are subject to control if they:
 Consult with a public company.
 Influence that public company in any
wrongdoing established by the Sarbanes-Oxley
 Entrepreneurs can set up a board of
advisors instead of an extended board of
 A legally binding agreement between two
 Often business deals are concluded with a
 The rule is to not to rely on a handshake if
a deal cannot be completed within one year.
 Courts insist on a written contract for all
transactions over $500.
Table 6.5 - Contract Conditions and
Results of a Breach of Contract
 Four essential items in an agreement to
provide the best legal protection:
 Understand the terms and conditions in the
 Cross out anything that you do not agree to.
 Do not sign if there are blank spaces (these can
be crossed out).
 Make a copy for your files after signing.

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