Chapter 6

Protecting the Idea

and
Other Legal Issues for the Hisrich
Entrepreneur Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
What is Intellectual Property?

 It includes patents, trademarks, copyrights,

and trade secrets.
 These represents important assets to the
entrepreneur.
 Intellectual property should be understood
even before engaging the services of an
attorney.

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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
business.
 Gives the entrepreneur necessary confidence.
 Entrepreneur can offer the lawyer stock in
exchange for services.
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Patents

 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
years.
 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.

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Patents (cont.)

 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.
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Patents (cont.)

 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.

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Patents (cont.)

 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).

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Patents (cont.)

 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.

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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
patents.
 Not all start-ups will have a product or
concept that is patentable.
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Trademarks

 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.
 Suggestive marks.
 Descriptive marks.

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Trademarks (cont.)

 Registering the Trademark

 Filing must meet four requirements:
 Completion of the written form.
 A drawing of the mark.
 Actual use of the mark.
 The fee.
 Initial determination of suitability takes 3 months.
 Objections must be raise within six months, or
application is considered discarded.
 The entrepreneur has the right to appeal in case
of refusal.

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Trademarks (cont.)

 Once accepted, trademark is published in the

Trademark Official Gazette to allow any party 30
days to oppose or request an extension to
oppose.
 Registration is issued if no opposition is filed.
 Procedure takes about 13 months from initial
filing.

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Copyrights

 Right given to prevent others from printing,

copying, or publishing any original works of
authorship.
 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.
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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 open.
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Licensing

 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.
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BREAK

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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
commission.
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Insurance

 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.
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Table 6.4 - Types of Insurance and
Possible Coverage

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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.

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Sarbanes-Oxley Act (cont.)

 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
countries.

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Sarbanes-Oxley Act (cont.)

 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
Act.
 Entrepreneurs can set up a board of
advisors instead of an extended board of
directors.

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Contracts

 A legally binding agreement between two

parties.
 Often business deals are concluded with a
handshake.
 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.

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Table 6.5 - Contract Conditions and
Results of a Breach of Contract

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Contracts (cont.)

 Four essential items in an agreement to

provide the best legal protection:
 Understand the terms and conditions in the
contract.
 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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