by Christopher Rosario, associate attorney with McManis Faulkner
Business is inherently risky. It is even riskier if you are the new kid on the block. Big businesses have the means to bully fresh-faced startups into the red—permanently. While some of this bullying may be unlawful, the courts are a common tool used by large corporations to protect their turf. Aspiring entrepreneurs may mitigate the risk of litigation however by taking steps to avoid infringing the legal rights of established players. Intellectual property (IP), which is often the heart of a startup’s business strategy, constitutes a small subset of those legal rights.
Not surprisingly, the best way to avoid IP litigation is to prepare for IP litigation, and the only way to prepare is to know the rules. The four types of intellectual property are trademarks, copyrights, trade secrets and patents. Patent law is complex, highly specialized, and beyond the scope of this article. Since patents must be publicly registered with the United States Patent and Trademark Office (USPTO) however, a licensed patent attorney may provide valuable advice based on the parameters specified in a competitor’s patent.
Trademarks are an easily recognizable form of intellectual property. They include any combination of words, names, symbols or devices that are used or registered to identify and distinguish the trademark owner’s goods from those manufactured or sold by others. Generally, popular name brands are trademarks.
Federal trademark law protects the public from the likelihood of confusion as to the source of goods. Courts consider several factors when determining whether confusion is likely, including the similarity of the marks, the similarity of the goods, the similarity of trade channels, the fame of the established mark, and the care customers take when buying the product, among others.
To avoid infringing the marks of direct and indirect competitors, a startup should, before establishing its own mark, research the trademarks of established businesses. Common sense and general market research are good starting points. However, the USPTO provides a free searchable database of federally registered trademarks on the Trademark Electronic Search System (TESS). A few TESS searches may help narrow the entrepreneur’s search for the perfect brand name. While the TESS is publicly available, an experienced trademark attorney should be consulted before making any final legal decisions.
Copyrights are also highly visible. Copyright is most known for its protection of entertainment media. However, copyrightable subject matter includes sculptural, architectural, dramatic, pantomimic and choreographic works, in addition to sound recordings and music; literary works; pictorial, graphic and motion picture arts; and other audio-visual works.
Generally, the Copyright Act allows a copyright owner to prevent others from reproducing the work, preparing derivative works, distributing copies, or publicly displaying works. These exclusive rights are often monetized by the owner through the use of licensing agreements. For example, a computer program may be considered a literary work protected by copyright. The owner of such a copyright generally distributes the computer program to customers, subject to an end user license agreement, which usually allows necessary copies to be made on the end user’s machines. Violating the terms of the license agreement may be an infringement of the owner’s copyright.
The Copyright Act also provides a well-known limitation to the exclusive rights above — fair use. The number of apparent fair uses has exploded in online content, with many creators stating they do not own the copyrighted material they use, do not intend to infringe any copyrights and only use the copyrighted material for educational purposes. However, these statements are about as effective at avoiding copyright infringement as yelling “bankruptcy!” at the mirror when filing for bankruptcy.
Depending on the nature of a startup’s business, purchasing or licensing copyrighted material may be impractical or unnecessary. To avoid infringing a copyright, the entrepreneur should understand the basics of fair use. A court may consider these factors when determining whether a use is fair use: the purpose and character of the use (commercial weighs against fair use; nonprofit weighs for), the nature of the work (fictional no; factual yes), the amount and substantiality of the portion used compared to the work as a whole (small and obscure portion weighs in favor of fair use), and the effect of the use on the potential market or value of the work.
A trade secret is information that derives economic value from not being generally known and that is the subject of reasonable measures to keep it secret. Common trade secrets include recipes, formulas and customer lists. While the ingredients of a trade secret recipe must be kept secret, the fact that a recipe exists may be public.
“Infringement” of a trade secret is called misappropriation, and there are two kinds. Generally, a person may directly misappropriate a trade secret when that person improperly acquires, discloses or uses the protected information. A person may indirectly misappropriate a trade secret when that person knew or had reason to know that knowledge of the protected information came from someone who wrongfully acquired the trade secret or violated a duty to maintain the secrecy of the information. In other words, your business could be exposed to a misappropriation claim for information possessed by an incoming employee.
A startup should implement several protocols to protect itself from the second type of misappropriation. First, incoming employees should be educated on what a trade secret is. Second, incoming employees should agree, preferably in writing, not to use or disclose the trade secrets of former employers in company projects.
Ultimately, no amount of preparation can completely preclude the possibility of bullying by big business. However, the risk of expensive litigation later may be minimized by taking proactive cautionary steps today.
Christopher Rosario is an associate attorney with trial law firm McManis Faulkner in San Jose, CA. He represents clients in a various litigation topics, and he is a member of the firm’s Civil Litigation, Highly Regulated Industries and Criminal Law practice groups. He earned his J.D. from Santa Clara University School of Law in 2018. He may be reached at email@example.com.