Start-ups - protection of intellectual property

INTRODUCTION

“Intellectual Property” is a generic term given to the legal rights attaching to different types of information and ideas. In order to maximise its competitive advantage, any new business should have a strategy for protecting the intellectual property owned or used by it.

Intellectual property rights can, broadly speaking, be divided into two separate categories: those which are conferred automatically by law, and those which are granted only upon application to an official body. As formal protection of intellectual property can be an expensive, protracted and time consuming process, a business should consider carefully whether its intellectual property is likely to be commercially viable before deciding whether to take formal steps to register it. Equally, for some businesses, registration may not be the most appropriate strategy for effective commercial exploitation of their intellectual property. As public disclosure of intellectual property (for example as part of a product trial) may prejudice the effectiveness of any registration, it is therefore crucial to consider these issues at the outset of any concept development. Many businesses do not think about intellectual property protection sufficiently early.

This fact sheet is intended to point out those intellectual property concerns likely to be of most relevance to early stage businesses, and focuses on protection available in the UK. It is of course possible to protect intellectual property in other territories through, for example, EC patents and trade marks. The relevance of this for start-ups will depend to an extent on whether they intend to pursue an export strategy from the outset.

TYPES OF INTELLECTUAL PROPERTY

Four main types of business intellectual property are likely to require protection, the importance of each will depend on the sector within which a business operates:

(i) Inventions: for example of a new product or process. These are protected through patents.

(ii) Designs: for the shape or appearance of a product. These are protected through design rights or design registration.

(iii) Property in text, recordings, artwork, films and computer programs. These are protected through copyright.

(iv) Words, slogans, packaging or other means of distinguishing products or services from others in the market. These are protected through trade marks.

OWNERSHIP OF INTELLECTUAL PROPERTY

Before a business takes any formal steps to protect its intellectual property, it is important to identify who owns such rights. Broadly speaking, the creator of an intellectual property right will own that right, subject to the following exceptions:

(i) If an employee has created intellectual property during the course of his employment, the employer will own such intellectual property, unless the employment contract states otherwise. This does not, however, apply to independent contractors.

(ii) If a design has been commissioned, the design right will generally be owned by the commissioner. This is contrary to the position with regard to copyright ownership.

It is, however, unwise to rely on the protection conferred by general law, and businesses are advised to document carefully the ownership of intellectual property in contracts with employees, independent contractors and any third parties (whether businesses or educational institutions) with whom they collaborate on research and development. In carrying out legal investigations of early stage businesses on behalf of potential investors, we commonly find that ownership of intellectual property is not as clear cut as the target business had thought. Any uncertainty in this regard may well delay or derail any opportunity for commercialisation.

A common issue for early stage businesses is ownership of the copyright in the various elements of a website developed for the business by an independent website designer. Copyright will vest in the designer unless the website development agreement contains an express assignment of the copyright in the website material and the computer code. If the website design is based on certain fundamental building blocks which the web designer uses to develop all of his sites, he may be unable to assign or exclusively license the rights in those assets. The designer should, however, be requested at the very least to warrant his ownership of those proprietary building blocks, and to assign such material as he is lawfully able to assign.

PATENTS

A patent is a monopoly right which enables the owner of an invention to prevent others from exploiting it for up to 20 years. Patent rights are vital in certain sectors such as the pharmaceutical industry, where the significant cost of developing a new drug is only justifiable if a monopoly right can be obtained.

Given the expense and timescale of pursuing patent registration applications, some businesses may choose not to patent their inventions. This may be a commercially viable approach if a product can be brought to market rapidly and there are significant commercial advantages in being the first to market. In this case, monopoly rights will be less crucial. The only alternative to patent protection, however, is to protect an invention as a trade secret under the general law on confidential information. As this relies on the business maintaining stringent working practices to ensure confidentiality, it is a far weaker form of protection.

Inventions are not automatically patentable. In order to qualify for patent protection an invention must be:

(i) Capable of industrial application;

(ii) New (in other words, not publicly disclosed at the date of the application), and provide a clear advantage over what is already on the market;

(iii) Not a category of right which is specifically excluded from patent protection under law. For example, computer programs are generally not patentable, but are protected under copyright law.

As public disclosure of the details of an invention is likely to render it incapable of patent protection, a business must consider whether to apply for formal protection at a very early stage in the development of its idea, and certainly well before any commercial exploitation is undertaken.

It is essential to engage a patent attorney at the outset where obtaining a monopoly right in respect of an invention is considered crucial to its commercial success. This is one of the areas in which it is unwise to attempt to save professional costs. That said, most patent attorneys will offer a free initial consultation, and will usually assist in carrying out searches of existing patents in order to ascertain whether the invention is genuinely new.

If the business decides to proceed with registration, the patent attorney will normally be instructed to draft and file the initial application containing a description of the invention. Although it is possible to submit an initial application without professional input, a badly drafted application may limit the scope of a patent. The new “Patent Box” tax incentive scheme which applies to income derived from patent rights makes it all the more important to seek professional advice when considering a patent protection strategy.

A business has 12 months from filing of the initial application within which to decide whether to proceed further by filing additional details regarding the invention. A patent may then ultimately be granted following negotiation with the examiner at the Intellectual Property Office regarding the scope of the patent, a process which can take up to four years. The holder of a patent will have a monopoly for up to 20 years from the application, but annual renewal fees are payable from the fifth anniversary of filing.

Whilst patent protection will enable a business to take legal action against those who seek to exploit the same idea, it provides no guarantee that others will not challenge the patent, for example on grounds that the idea had been made public prior to the application date.

DESIGNS

A particular design for the shape or appearance of an item is capable of legal protection. There are two main forms of protection, with slightly different criteria and areas of application:

(i) Design right: A design potentially has automatic legal protection (without the requirement for registration) as a “design right”. Such a right enables the owner to prevent copying, but does not provide a monopoly. In other words, a designer cannot prevent use by someone who has independently developed the same design. As with copyright, the value of this inherent legal right therefore largely depends on the care with which the owner has documented the process by which the design has been created.

In order to be capable of design right protection, a design must be original, and three dimensional (surface decoration does not qualify). A design can attract protection as a design right even if it is purely functional (although not if the design feature is for the purpose of enabling the article to fit with another so that either of them can perform its function).

Design right protection lasts for the shorter of 15 years from the end of the calendar year in which the design was first created, and 10 years from the end of the calendar year in which it was first marketed. During the last 5 years of the period, third parties have a right to use the design under licence, the terms of which are determined by an independent party.

(ii) Design rights: A design can also be protected through registration, by application to the Intellectual Property Office. Purely functional designs are excluded from this level of protection, however both two and three dimensional designs will qualify. The design must be new and must not have been published as at the date of the application ( subject to a 12 month grace period in which a designer will still have the right to apply for registration following any initial publication and/or disclosure).

A design right creates a legal monopoly for an initial 5 years, extendable by 5 year terms up to a total of 25 years.

COPYRIGHT

Copyright automatically confers on its owner a right to prevent copying of original text, art work, recordings, films and computer programs, usually for a period of 70 years after the creator’s death. As with design rights, it is – as its name suggests – a right to prevent others from copying, rather than a monopoly right preventing commercialisation by those who have independently developed a similar work.

The enforceability of copyright will often be dictated by the level of care with which the owner has documented the creation of the relevant work and kept records of disclosures of it to third parties. We commonly encounter discussion of copyright in the context of a computer program which has been developed via a joint venture collaboration. To the extent that the parties have not already agreed in principle, in the joint venture agreement, the ownership of intellectual property, much will depend on the records maintained by each joint venture party of its employees’ contributions to the finished product.

TRADE MARKS

In a market where genuine differences between products which serve the same function are diminishing, brand loyalty is becoming an increasingly important way of maintaining a competitive advantage. Whilst there may be little value in a start-up brand on commencement of trading, new business owners should consider carefully the extent to which they wish to take steps to obtain formal trade mark protection of the brand, even if the business has few competitors in its early days.

Whilst in the absence of trade mark registration branding is capable of protection under general law through a so-called “passing off” action, it is often difficult and costly to proceed given the need to prove existing brand reputation and that financial loss has been sustained through a competitor’s activities.

Trade mark protection, which is applied for through the Intellectual Property Office, confers on its holder the exclusive right to use the mark (which can comprise a word, slogan, symbol, packaging and certain other means of distinguishing goods or services) for an initial 10 year period, renewable indefinitely. There are certain exclusions from the right to obtain trade mark registration. For example, purely descriptive terms or marks which are likely to be confused with a pre-existing mark cannot be registered. As with applications for patent registration, it is usual to instruct professionals to assist with the application process.

CONTINUING INTELLECTUAL PROPERTY MAINTENANCE

Once an intellectual property right has been registered, protection of that right is an ongoing process. In addition to the requirement to renew registered intellectual property rights, the holder is also responsible for enforcement of the right. This is not undertaken by the Intellectual Property Office itself.

The holder of an intellectual property right is able to license and/or assign it to others. For many developers of scientific procedures, drugs or technology, this is the only way in which they can viably commercialise their asset. It is crucial that professional advice is sought on the terms of any such assignment or licence. Whilst early stage businesses are understandably reluctant to commit to significant legal costs, we have seen many examples of badly negotiated licences which undermine the value of intellectual property rights.

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