We often have to put up with most from those on whom we most depend.
— Baltasar Gracian
Business owners rightly fear unethical competitors may attempt to misappropriate or infringe their intellectual property. What most businesses fail to take into account is the enemy within.
Well, maybe there are no enemies within your organization yet, but the time may come when an employee or business partner may betray you.
For example, your business partner could break off from your business, form a new business competing directly with your business, and
- start selling products and/or services that copy your business's products and/or services;
- copy your business's customer lists and start soliciting your current customers;
- use a trademark or trade dress confusingly similar to yours;
- claim to be the inventor of your most important product
An employee could
- claim an interest in patented inventions or copyrighted materials;
- copy trade secrets and give them to their new employer or use them to open their own business; and/or
- file a patent application for an invention under development by your business.
It Can Happen to You
Business owners typically think that these things will never happen to them. Perhaps such things may happen to other people, but not to you. If that is what you think, you are dead wrong.
When a person starts a new business with one or more partners, the new business owner is typically infatuated, to a greater or lesser degree, with his or her new partners and new employees. The new business owner ascribes characteristics to his or her new business partners and new employees that may be very much out of line with reality. For example, a new business owner may believe, consciously or unconsciously, that their new partners and new employees are
· more honest than Honest Abe;
· smarter and more creative than anyone else in the same line of business;
· hard working;
· 100% committed to the new business;
· share the same vision for the business;
· fair and willing to acknowledge the contribution of others;
· willing to share;
· aren't greedy;
· are emotionally stable;
· are solvent;
· are capable of resolving differences in a rational manner.
One or more of these assumptions may be true, but at least some are likely pure fantasy or may change over time.
Business partners that betray one another and employees that betray their employers are typically not bad people. Rather, they turn against partners and employers for a variety of reasons:
- they may feel they work harder than everyone else;
- they may feel they contribute more creatively than anyone else;
- they may feel a particular invention was theirs alone;
- they may feel they are not adequately compensated;
- they may lose faith in the business or feel it is failing;
- their personal relationship with you may become hostile;
- their personal lives may fall apart;
- they may have health issues;
- they may develop addiction problems;
- they may develop financial problems.
Simply put, they become angry or desperate, and out of anger or desperation, they may betray you and your business. Even friends, relatives, spouses and children can turn against you. It happens all the time.
Preventing Theft of Your IP by Partners and Employees
Being human, you can never anticipate every possible risk posed by your business partners and employees. There are, however, a set of best practices that can reduce your risk.
Form a Corporation or LLC
This seems elementary, but it's a step many startups put off. That's not a good idea. There are many reasons why forming a corporation or LLC is beneficial, such as reducing owner liability for acts of the corporation. But it's also a good idea for protecting IP.
All rights in patents, trademarks, copyrights and trade secrets (e.g., customer lists, formulas and confidential business methods) should be vested in the corporation.
This keeps partners and co-owners of a business from later claiming all, or a share, of the rights in creative works developed for the business. Going in, partners and co-owners will thus understand their interest in creative works developed by the business is limited to their share of their ownership of the business.
This also makes clear to employees that creative works they contribute to your business in the course of their employment belong to your business, and not to them.
Partners and Employees Should Sign Confidentiality Agreements
This should be a precondition to forming a corporation and a precondition for employment.
Typically, the signer agrees to refrain from disclosing your business's confidential information to third parties and to refrain from using the information for purposes unrelated to your business. Such agreements may be effective for a term of months or years, or may be perpetual.
Partners and Employees Should Agree to Assign IP to the Business
This should be also precondition to forming a corporation and a precondition for employment.
Typically, the signer assigns all future inventions and creative works developed for the business to the business. Such agreements automatically cover any inventions, copyrightable words, trademarks, trade dress and trade secrets the signer develops in the course of his or her employment
It is best practice for the agreement to further stipulate the signer will execute separate assignment agreements for any IP the business identifies. Such individual assignments provide further proof that a business is the sole, exclusive owner of all rights in the work.
File Patent, Copyright and Trademark Applications ASAP
When patent, copyright and trademark applications are filed in the name of the business, it is your best insurance no third party will usurp your claim to inventions and creative works.
Filing patent applications as soon as possible is critical. The U.S. patent system is a first-to-file system. Put simply, you can invent it first, but if someone else files a patent on it before you, they get the patent. Also, if you disclose or bring a product to market, you only have a year to file your application. Provisional patent applications are easy and cheap to file. There's no excuse not to.
Filing copyright applications as soon as possible is a good business practice. A copyright registration shows your business's ownership of a copyrighted work and establishes a date the work was created. A registration is also a prerequisite to filing a lawsuit for copyright infringement. Copyright applications are also easy and cheap to file.
Filing trademark applications as soon as possible is also a good business practice. Your rights in a trademark are established as soon as you use it – no registration required. Nevertheless, a registration strengthens your ability to enforce your trademark rights in court and puts the world on notice you are claiming a particular trademark.
Limit Access to Confidential Information
Regardless of how much you trust your current business partners or employees, if a person doesn't need access to confidential information to do their job, they should not be able to access it for any reason.
Hold hardcopy files and documents containing confidential information in locked filing cabinets, safes or vaults. Store digital files containing confidential information on file systems only accessible to authorized personnel. Encrypt extremely sensitive information.
And lock your front door and install an alarm system.
Fences Make Good Neighbors …
And good IP practices can actually prevent partnerships and employee relationships from turning sour.
When partners and employees know your business has thoroughly secures its IP, there's less temptation for them to steal it or sell it. It might save someone's career or even his or her life.
Call me if you have any questions.