Profit From Your Idea

How to Make Smart Licensing Deals

Profit From Your Idea

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Profit From Your Idea

New Edition!

, 10th Edition

All you need to protect and profit from your invention

Get everything you need to protect and profit from your invention with this all-in-one guide. You'll learn how to show your invention to potential investors, all while protecting your rights. Find out how to: 

  • find potential licensees
  • draft a comprehensive licensing agreement
  • craft a nondisclosure agreement to protect your interests

Includes all the legal forms you need!

Product Details

You’ve got a great idea and are ready to strike it rich. Now you need to find a company or partner you can trust, hash out a fair licensing deal, and get your idea to the marketplace.

Profit From Your Idea will help you negotiate and draft a licensing agreement that best protects your interests and maximizes your chances of earling a profit. With this all-in-one guide you'll understand how to:

  • navigate the licensing landscape
  • protect your intellectual property rights
  • sort out ownership rights
  • work with licensing agents
  • protect confidential information
  • find and solicit potential licensees
  • license overseas
  • reveal your invention safely, and
  • negotiate and update an agreement

The 10th edition is completely updated with the latest developments in licensing law and patent rules, and covers industry-standard Fair, Reasonable, and Nondiscriminatory (FRAND) licensing terms.

 

“Tells prospective entrepreneurs how to move an idea ‘from thought to bought’—and roughly what inventors can expect to get in a licensing deal.” - Los Angeles Times

“Tells inventors everything they need to know to enter into a solid licensing agreement.” - Electronic News

“Gives detailed instructions on working with manufacturers, marketers and distributors...” - Baton Rouge Advocate

ISBN
9781413327915
Number of Pages
456
Included Forms

  • Agreement Worksheet
  • Assignment of Rights: Patent
  • Assignment of Rights: Patent Application
  • Assignment of Rights: No Patent Issued or Application Filed
  • Letter Confirming Employee's Ownership of Intellectual Property Rights
  • Joint Ownership Agreement
  • Agent Letter Agreement
  • One-Way Nondisclosure Agreement
  • Mutual Nondisclosure Agreement
  • Contract Worksheet
  • Letter of Intent
  • Option Agreement
  • Terms Sheet
  • License Agreement
  • Escrow Agreement
  • Checklist for Reviewing a License Agreement
  • License Dates Chart
  • Audit Request Letter

*Audio files are not available with the ebook

About the Author

Table of Contents

Introduction: Your Legal Companion

1. Gearing Up to License Your Invention

  • Licenses
  • Assignments
  • The Licensing Process
  • Avoiding Conflicts Among Multiple Agreements
  • Challenges to Your Ownership
  • Transferring Ownership of Your Invention to Your Business
  • Disclosing Information About Your Invention
  • Keeping Your Records
  • No False Hopes! Reviewing Your Invention’s Commercial Potential

2. Intellectual Property Protection

  • General Rules for Legal Protection of Inventions
  • Utility Patents
  • Trade Secrets
  • Trademarks
  • Design Patents
  • Copyright Law
  • Sorting Out Nonfunctional Features: Design Patents, Product Configurations, and Copyright

3. Ownership Issues for Inventor Employees

  • What Type of Intellectual Property Is Involved?
  • Employer/Employee: Patent and Trade Secret Ownership
  • Inventions Covered by Copyright
  • Special Employment Situations
  • Working Out Ownership Issues With Your Employer

4. Invention Financing and Joint Ownership

  • How Much Money Do You Need to License Your Idea?
  • Sources of Funding
  • Joint Ownership
  • How Income, Loans, or Investments Can Create Joint Ownership
  • The Joint Ownership Agreement

5. Licensing Agents and Representatives

  • Agents
  • Completing the Agent Agreement
  • Attorneys as Agents
  • Invention Marketing Scams

6. Soliciting Potential Licensees

  • Before You Begin Your Search
  • How to Find Potential Licensees
  • How to Overcome a Licensee’s Bias Against Submissions
  • What’s the Best Way to Solicit a Potential Licensee?
  • Product Presentations
  • Should You Solicit Foreign Licensees?

7. Protecting Confidential Information

  • Confidential Information and Nondisclosure Agreements
  • Proceeding Without an Agreement
  • Waiver Agreements
  • When You Have Sufficient Bargaining Power
  • Disclosing to Employees and Contractors
  • Disclosing to an Attorney

8. The Key Elements of Your Agreement

  • From Handshake to License
  • Identifying the Parties
  • Describing Your Invention and the Licensed Products
  • Specifying Which Rights Are Granted
  • Defining the Territory
  • Setting the Length (Term) of the Agreement

9. Money: It Matters

  • Some Basic Royalty Definitions
  • Ways to Get Paid
  • The Mysteries of Net Sales and Deductions
  • How Much Do You Get?
  • Royalty Provisions

10. Negotiating Your Agreement

  • What, Me Negotiate?
  • Documenting the Important Contract Elements
  • Letter of Intent
  • Option Agreements
  • What If the Licensee Wants to Proceed Without a Written License Agreement?

11. Sample Agreement

  • License Agreement
  • Optional License Agreement Provisions
  • Modifying the Sample Agreement for Your Needs

12. Warranties, Indemnification, and Proprietary Rights Provisions

  • Promises, Promises … Warranties, Representations, and Covenants
  • Indemnity: The “Hold Harmless” Provision
  • Licensee Warranties and Indemnity
  • Proprietary Rights
  • Commercialization and Exploitation
  • Samples and Quality Control
  • Insurance

13. Termination and Posttermination

  • Termination and Posttermination
  • Termination Based Upon a Fixed Term
  • Termination at Will
  • Termination Based on Contract Problems
  • Termination and Bankruptcy
  • Posttermination: What Happens Afterwards?
  • Survival of the Fittest

14. Boilerplate and Standard Provisions

  • Paying the Lawyer’s Bills
  • Dispute Resolution
  • Governing Law
  • Jurisdiction
  • Waiver
  • Severability
  • Entire Understanding
  • Attachments and Exhibits
  • Notices
  • No Joint Venture
  • Assignments
  • Force Majeure
  • Headings
  • Establishing Escrow Accounts

15. Service Provisions

  • Service Provisions Versus Separate Service Agreements
  • Training the Licensee’s Personnel
  • Installation of Equipment
  • Technical Support for the Licensee or for End Users
  • Improving, Modifying, and Delivering the Invention

16. Handling the Licensee’s Agreement

  • Dealing With Suggested Changes
  • Evaluating an Agreement Presented to You
  • Evaluating the Provisions and Suggesting Changes
  • The Cover Letter

17. After You Sign the Agreement

  • Create Your Contract Calendar
  • Dealing With Royalty Statements
  • Resolving Licensing Disputes
  • Avoiding Patent Misuse and Illegal Agreements
  • The Taxman Cometh
  • Quality Control

18. Help Beyond This Book

  • Licensing and Intellectual Property Resources
  • Working With an Attorney

Appendix: How to Use the Downloadable Forms on the Nolo Website

  • Editing RTFs
  • List of Forms and Interviews

Index

Sample Chapter

Chapter 2:
Intellectual Property Protection

Intellectual property includes the legal rights associated with patents, trade secrets, trademarks, and copyrights. Each type of intellectual ­property gives you certain rights. For example, if a patent is issued for your invention, you have the exclusive right to make, use, and sell the invention. If the name of your invention qualifies as a trademark, you have the exclusive right to use the name on certain ­products. It is these rights that are the subject of a license: When you license your invention, you are actually licensing your rights to it under intellectual property laws.

Because licensing your invention involves a transfer of your rights to someone else, you should not license your invention until you know what intellectual property rights you have. If you haven’t already figured this out, you’ll need to do so before proceeding.

Obtaining intellectual property protection is a little like getting a bank loan—some inventions qualify and some don’t. Because legal protection can enhance the value of your invention, we suggest you evaluate every aspect of your creation in order to acquire the broadest possible protection.

SKIP AHEAD
If you already own a patent for your invention or if you under­stand the type of intellectual property that you own in your invention, you can skip this chapter and go to Chapter 3, which discusses ownership rights.

General Rules for Legal Protection of Inventions

A basic rule of intellectual property law is that ­various features of the same invention may be ­protected by different types of intellectual property. In general:

  • The functional features of your invention (how it works and what it does) may be ­protectable under:
    • utility patent laws, and
    • trade secret laws.
  • The nonfunctional features (the decorative appearance, artistic expression, or packaging) may be protectable under:
    • trademark laws
    • design patent laws, and
    • copyright laws.
The Public Domain

When an invention, artwork, or a symbol used on a product is not protected by intellectual property law, it’s considered to be in the public domain. A work that is in the public domain is free for all to use and may be copied. Inventions that are not protected by intellectual property laws are in the public domain.

 

Functional Versus Nonfunctional

Intellectual property rights are often divided ­between functional elements (protected by utility patents and trade secrets) and nonfunctional ­elements (protected by trademarks, copyrights, and design patents). How can you determine whether a feature is functional or non-functional? Ask the question: “Does this feature make the invention work better or is it done primarily for aesthetic reasons?”

For example, the unique V-shape of an electric guitar is not necessary for the guitar to function. It’s primarily a decorative or nonfunctional element. Similarly, the unique shape of a maple syrup bottle isn’t necessary for the bottle to hold liquid; it’s primarily aesthetic and nonfunctional because it serves to distinguish the product’s appearance. On the other hand, a uniquely shaped hook used on a hanger could be primarily functional if it prevents the hanger from snagging on clothing.

The Component Approach

Because the various types of intellectual property protection overlap, you should review your product in terms of its components. To identify each component, try separating the functional and nonfunctional features of your invention.

Example: In 2001, Apple Computer released the “iPod,” a small, stylish device that weighed 6.5 ounces and held approximately 1,000 songs. The iPod didn’t really do anything new—other devices already allowed users to store and play back digital music. And, the iPod was expensive —$400. At the time, $400 seemed an unthinkable amount to pay within the industry. But the iPod went on to dominate its category in sales numbers and revenue, because it was the first device to combine three elements important to consumers: small size, large storage capacity, and a classy design. Also, a novel feature distinguished the iPod from its competitors: the “scroll wheel,” a circular switch that appeared submerged within the body of the iPod. Using this innovation, users could maneuver through song lists, choose songs, or adjust volume. The functional components of the iPod included the player, storage device, and scroll wheel. The nonfunctional components consisted of the name “iPod,” the Apple logo, the design/appearance of the scroll wheel, and the total appearance of the exterior. Although Apple abandoned the scroll wheel in favor of the touch screen, the groundbreaking functional and nonfunctional aspects of the first generation iPod evolved into Apple’s most profitable product—the iPhone.

Once you’ve broken down your invention into components, categorize which laws protect which components. For example, the iPod’s design (or the appearance of the scroll wheel) could be protectable under design patent law. The technology that connects the scroll wheel to the player might be protectable under utility patent law. And the name “iPod” is protectable under trademark law. Once you’ve determined which types of intellectual property protection apply to the various components of your invention, pursue the legal protection for each component.

Example: Jay Sorensen, a real estate broker, was accidentally burned by a cup of takeout ­coffee. Instead of suing the store for the coffee burn, Mr. Sorensen ­invented the Java Jacket: a cup holder ­assembled from pressed paper pulp. Unlike other coffee cup holders, the Java Jacket is manufactured in a flat sheet and the user ­assembles it by ­interlocking the ends and slipping the coffee cup into it. The Java Jacket is a functional device that prevents coffee drinkers from being burned. Since the device is functional, Mr. Sorensen applied for and received a utility patent (5,425,497) for his ­creation. One nonfunctional feature of the Java Jacket is also protectable—its name. The term “Java Jacket” meets the standards for federal trademark ­registration. Mr. Sorenson registered it as a federal trademark in 1995 ­(Serial #74-553168).

Utility Patents

For purposes of invention licensing, a utility patent is the strongest protection available. If you can obtain a patent for your invention and your invention has commercial potential, you will be in the best position to license it.

A utility patent is a federal grant to an inventor who has created a new and useful invention. It allows an inventor the exclusive right to make, use, and sell the invention—and the right to prevent others from doing so with a similar (or infringing) invention. Some patent practitioners refer to the utility patent as a “hunting license,” because it gives the inventor the right to hunt infringers and obtain damages and other legal remedies.

To obtain a utility patent, you need to file a patent application with the U.S. Patent and Trademark Office (USPTO) that meets the standards of the agency’s examiners and pay the appropriate filing, issuance, and maintenance fees.

Types of Inventions Qualifying for a  Utility Patent

A utility patent can be issued for any new and ­useful:

  • process—a method of accomplishing a result through a series of steps (for example, a process for sterilizing surgical equipment)
  • machine—a device that accomplishes a result by the interaction of its parts (for example, a gear shift in a rowing machine)
  • article of manufacture—a single object without movable parts (such as a pencil or a garden rake) or an object with movable parts that are incidental (such as a folding chair or an ironing board)
  • composition of matter—any combination of chemical or other materials (for example, Teflon or WD-40), or
  • improvement on an already-existing invention (for example, an improvement upon a household plunger), unless the underlying invention is still protected under patent law and you don’t have authorization from the patent owner.

The USPTO interprets these categories very broadly, and it’s possible that your invention may overlap various classes.

INTELLECTUAL PROPERTY MYTH

The First Person to Create Something Always Acquires Protection

Don’t presume that, because you were the first to create something, you automatically have priority over other inventors. Generally, creators are not rewarded for being first under intellectual property laws. For example, under patent law, the inventor who is first to file (not to invent) receives the patent. In copyright law, all that matters is whether the creation is original to the author (and not copied from another source). Trademark law doesn’t reward the first to create a trademark; rather, the trademark registration goes to the company that first uses it in commerce.

 

Useful, Novel, and Nonobvious

To qualify for a utility patent, your invention must also be: (1) useful, (2) novel, and (3) nonobvious.

Usefulness

An invention must have a use or purpose and must work (that is, be capable of performing its intended purpose). The USPTO may reject an application if the use has not been established or the only use would be illegal or deceptive. For example, an invention to counterfeit one-hundred-dollar bills wouldn’t be eligible for patent protection unless the inventor could demonstrate some alternative legal use of the device.

Novelty

To be novel, an invention must differ in some way from “prior art,” which is any other invention publicly known at that time or considered existing knowledge in the field (see “What Is Prior Art?” on the next page). The USPTO will not issue a patent if the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the filing date of the patent application.

Nonobviousness

All inventions must meet a standard of nonobviousness, which is an inquiry into whether persons working in the field of the invention would consider the invention unexpected and surprising (nonobvious), rather than evident or apparent (obvious). Many inventions—the safety pin, the ironing board, the sewing machine, the collapsible tube, and the cylinder lock—seem obvious now, but that wasn’t the case when they were invented. This is one of the paradoxes of great inventions: Once created, they seem obvious.

1 + 1 Must Equal 3

In 2007, the U.S. Supreme Court tweaked the obviousness rule as to “combination inventions”—innovations in which two or more functioning devices are combined (for example, combining a flashlight and an emergency siren). The Supreme Court ruled that when elements, techniques, items, or devices are combined, united, or arranged, and when, in combination, each item performs the function it was designed to perform, the resulting combination—something the court called “ordinary innovation”—is not patentable. For example, if you combine eyeglasses with earpieces, the invention will be considered obvious (and unpatentable) if the eyeglasses and headphones function as they normally would. What is patentable is a synergistic result—that is, the sum of the resulting combination is greater than its whole and altered in its functionality. (KSR v. Teleflex, 550 U.S. 398 (2007).)

 

In addition to being unexpected, factors that bear on whether an invention is nonobvious are:

  • whether the invention has enjoyed commercial success
  • whether a need exists in the industry for the invention
  • whether others have tried but failed to achieve the same result
  • whether the inventor did what others said could not be done
  • whether others have copied the invention, and
  • whether the invention has been praised by others in the field.

 

What Is Prior Art?

Prior art is the existing technical infor­mation against which your invention is judged. That is, in order to determine if your invention is novel and nonobvious enough to acquire patent protection, the patent examiner looks at the existing information related to your invention. If the prior art ­demonstrates that your invention wasn’t novel or that your invention was obvious, the patent will not be ­issued. The patent examiner (or federal courts) will consider the following types of information as prior art:

  • anything in public use or on sale in the world before the filing date of the patent application
  • prior patents that issued before the filing date of the patent
  • prior publications dated before the filing date of the patent
  • anything that was publicly known or used by others before the filing date, and
  • anything that was made or built by another person before the filing date.

An important exception exists: Any disclosure made by the inventor within a year prior to the patent application filing date is not considered prior art as to that patent application, but is considered prior art as to other inventors.

The USPTO considers the patent application filed on the date it receives all of the required elements of the patent application. However, if the inventor had previously filed a provisional patent application and within one year files a utility patent application, the effective filing date reverts back to the date the provisional application was filed.

 

Deadlines and Length of Patent Protection (Patent  Term)

Under U.S. patent law, like rest of the world, the first inventor to file a patent application (or “first to file”) is granted protection, regardless of who was first to create the invention.

A utility patent lasts 20 years from the date of filing, provided that fees necessary to keep the patent in force (maintenance fees) are paid.

Under certain circumstances, the patent period may be extended if the commercial marketing of the product is delayed by govern­ment regulations or review. For example, the patent term for certain human and animal drugs can be extended for up to five years to compensate for lengthy government safety tests. In an attempt to guarantee at least 17 years of patent protec­tion, Congress amended the patent laws in 1999 requiring the USPTO to issue (or reject) a patent within three years after its actual filing date. Under this law, the term of a patent will be extended if the USPTO failed to issue a patent within three years from filing due to its own delays. The patent term will not be extended, however, if the applicant caused the delay, for example, by filing a continuation application.

After the patent expires, the invention falls into the public domain. (See “The Public Domain” at the beginning of this chapter.)

What Are Patent Claims?

As mentioned above, a utility patent grants you the right to stop others from making, selling, or using your invention during the term of the patent. The extent of these rights depends largely upon the scope and boundaries of your invention. Patent claims —which essentially define the scope of your invention—are the heart of your invention and what makes it attractive to licensees. These claims are located in your patent application. The claims define the boundaries of the invention in the same way that a deed establishes the boundaries of real property. Drafting patent claims is a specialized skill (as you will no doubt see from the example claim for a toy glider airplane ­below) that often, but not always, requires the expertise of a patent attorney. For more information about drafting patent claims, see the patent ­resources in Chapter 18, “Help Beyond This Book.”

Example: Patent claims for a toy glider airplane: a model airplane or toy glider having a wing adapted to be assembled with a ­complex, three-dimensional, folded fuselage constructed of semirigid scorable and foldable material, said fuselage having generally symmetrical left and right half portions joined along less than the length of said fuselage, said fuselage in unassembled unfolded condition being generally V-shaped, said folded fuselage being attached to said wing via ­elastic band.

Patent Pending

Patent rights don’t begin until the patent is issued. Years can pass between when a patent application is filed and the patent issues. This period of time is known as the pendency or patent pending period. The owner of a patent can’t prevent any infringing activity that occurs during the pendency period, but can stop infringing activity that continues after the patent is issued.

Example: Say an inventor developed a can capable of dispensing food. The invention permitted snack foods to be sold in machines originally manufactured to sell only beverages. During the period when the patent was pending, a snack food company test marketed the same idea. The inventor was awarded a patent on December 28, 2019, and filed an infringement lawsuit against the snack food company on the same day. If the inventor can prove infringement of the patent, the court may order the snack food company to stop selling the device and award the inventor any profits resulting from infringements occurring after December 28, 2019.

There is one occasion in which the patent owner can receive compensation for infringement during the pendency period. The USPTO publishes all pending applications, for public view, 18 months after the earliest effective filing date. An inventor, whose application is published, may seek infringement damages from the date of the publication, provided a patent is later issued and the infringer had actual notice of the published application.

Example: Sally applied for a patent for a new type of fogless, night-vision swimming goggles on January 1, 2019. Swimco, a swimming products company, manufactured an identical pair of goggles starting in January 2020. Sally sent Swimco a copy of the patent application after it was published in June 2020. The USPTO issues Sally’s patent in December 2020. Once the patent issues, Sally can sue to stop Swimco from further manufacturing its goggles and seek Swimco’s profits for sales after June 2020 (the date Swimco had actual notice of Sally’s published application).

Compensation for pendency infringements is not available if the inventor seeks only domestic and not international patent rights, and if the inventor prevents publication of the application by filing a “Nonpublication Request.”

The Patent Application Process

The process of obtaining a patent is often referred to as “prosecution of the patent application.” The patent prosecution process is beyond the scope of this book. However, if you wish to pursue a patent, check out Patent It Yourself, by David Pressman and David E. Blau (Nolo). If you’re not comfortable preparing your own application, contact a patent attorney. You can locate a patent attorney through your local bar association or via an Internet search. (Chapter 18, “Help Beyond This Book,” offers information on finding and working with attorneys.) If you decide not to handle your own patent application, the entire process—including attorneys’ fees, filing fees, and fees for searching the patent database—can cost thousands of dollars. The application process often lasts 18 months to three years (or longer). There are legal deadlines for filing patent applications. Failure to meet these deadlines can prevent you from obtaining patent protection.

 

INTELLECTUAL PROPERTY MYTH

The Government Will Enforce Intellectual Property Rights

Although some intellectual property laws
provide for government enforcement, that type of government action is rarely taken. When it is, it is because a business has already investigated the claim on its own and has the political clout to convince the local U.S. Attorney or Customs Office to go after the infringers. In other words, the government will not pursue infringers on its own.

 

Nolo Provides Assistance for Provisional Patent Application (PPA) Filing

Nolo (www.nolo.com), the publisher of this book, offers assistance in the electronic filing of PPAs. Get the details at https://store.nolo.com/products/online-Provisional-Patent-application-nnppa.html.

 

The Provisional Patent Application: Shortcut  or  Detour?

The Provisional Patent Application (PPA) permits an inventor to file an abbreviated patent application that can be used to establish a filing date. If a regular patent application is filed within one year of filing the PPA, the inventor can use the PPA’s filing date for the legal purposes of deciding whether prior art is relevant and, in the event an interference exists, who is entitled to the patent. (Note: The PPA is not available for design patents.)

The PPA must contain a description of the invention and drawings if necessary to understand the description. The invention’s description must clearly explain how to make and use the invention. If the invention has several versions or modes of operation, the best mode or version must be disclosed. Claims, formal drawings, and other elements of the regular patent application may be included if the inventor wishes, but they are not required.

The advantages of filing a PPA compared to a patent application include: It saves thousands of dollars (if you decide not to file for a regular patent), doesn’t require witnesses, saves the expense of building and testing, and is much simpler to complete. Also, if a PPA is filed, the inventor can publish, sell, or show the invention to others without fear of theft or loss of any U.S. patent rights, because anyone who sees and steals the invention would have a later (and inferior) filing date.

However, if the inventor doesn’t file a regular patent application within a year of the PPA, the PPA is abandoned and no longer provides a filing date for purposes of prior art. The PPA is also worthless if the inventor changes the invention so that it no longer matches the PPA description. Also, the filing of a PPA can affect an inventor’s foreign rights. As with a regular U.S. application, an inventor must pursue foreign patent applications within one year of the PPA’s filing date.

Example: Sam invented an expandable picture frame, a device made from a flexible plastic that can adjust to fit different-sized snapshots. He files a PPA on July 1, 2018. On May 1, 2019, he files a regular patent application. His patent issues on January 10, 2020. If anyone contests Sam’s right to his invention, Sam will have proof that his invention predated any similar invention as of July 1, 2018. If Sam had waited more than a year after filing his PPA to file his regular patent application, he wouldn’t be able to claim the 2018 filing date.

You Can License Before Receiving  a  Patent

If you proceed with the patent application process, you can license your invention before the patent is issued. Sometimes, a licensee may condition the license upon the granting of the patent. That is, if the patent doesn’t issue, the license is canceled or the royalties are reduced to reflect only the nonpatentable aspects that have been licensed. Some inventors prefer to wait for the issuance of the patent because they feel more ­secure with patent protection when disclosing and licensing their inventions.

 

The U.S. Patent and Trademark Office

The United States Patent and Trademark Office (USPTO)—a division of the Department of Commerce—is responsible for the federal registration of patents (www.uspto.gov). Correspondence to the USPTO should be mailed to the Commissioner of Patents, P.O. Box 1450, Alexandria, VA 22313-1450. Rules and regulations for USPTO activities are established in the Code of Federal Regulations (known as the C.F.R.) and in special USPTO publications, such as the Manual of Patent Examining Procedure (MPEP). For more information about the USPTO, see Chapter 18, “Help Beyond This Book.”

Dear Rich: Manufacturer Wants Invention, But Not the Patent

Dear Rich: I created an invention that involves snowmobiles, and it’s currently patent pending in the U.S. and Canada. I proposed a deal whereby the manufacturer would advance me $7,000, most of it for patent prosecution costs, and a 7% royalty. However, the manufacturer responded that they do not see the value in a patent, so they don’t want to pay the $7,000.

Question 1: Can I legally make a contract without having patent pending (or other forms of intellectual property) to offer them?

It helps to be able to point to a patent or a trademark registration when licensing, but not having a government registration doesn’t preclude you from licensing an idea. The idea may involve trade secrets or know-how, or some other product of the mind, and the fact that a licensee is willing to pay for it indicates that it has value.

Ideas are commonly licensed in the toy and entertainment industry.

Question 2: Let’s assume we do license the “idea,” and the manufacturer sells a bunch of units. And let’s say our patents do not issue because the idea has already been patented by a third party. Can that third party sue us directly for having sold an “idea” that we do not own to a manufacturer?

If a second inventor is claiming the same invention as you, and you disclosed it or offered it for sale prior to the second inventor’s filing for the patent, you would prevail in a lawsuit. If the second inventor’s patent was filed before your disclosure or offer for sale, you would not prevail. If the latter is a possibility, you could try to request that the manufacturer indemnify you if you are sued for infringement.

 

Trade Secrets

A trade secret is any confidential information used in your business that gives you an advantage over competitors who do not know it or use it. In order to maintain ownership rights over a trade ­secret, you must treat the information with secrecy. Any public disclosure will end trade secrecy status for the information, and anyone will be free to use it.

The Defend Trade Secrets Act (DTSA)

The federal Defend Trade Secrets Act (DTSA) provides a procedure for trade secret owners to file civil lawsuits in federal court. Any company possessing a trade secret that is “related to a product or service used in, or intended for use in, interstate or foreign commerce” can take advantage of the provisions of the DTSA. Prior to the DTSA, trade secret owners could only bring civil lawsuits in state courts, under state laws based on the Uniform Trade Secrets Act (UTSA). (Except for New York, every state has adopted some version of the UTSA.) In many important ways the DTSA and state laws based on the UTSA are similar—for example, the definitions of trade secrets and misappropriation are the same, as are the statute of limitations (three years) and the remedies for theft (injunctive relief, compensatory damages). But the DTSA can be more favorable to trade secret owners because it provides access to federal courts and the option of seizing trade secrets without giving any notice to the defendant—an unprecedented leap from the notice requirements of state laws based on the UTSA.

To determine if material might qualify as a trade secret, ask yourself: Would your business be damaged if a competitor acquired the information? For example, if you’ve devised a new method of testing the life of a lightbulb, you would want to keep that information secret in order to have an edge on your competitors. Information that appears to give your business an advantage over competitors should be kept secret until you’ve determined how to protect it (by either trade secret or patent protection).

As the owner of a trade secret, you can prevent anyone who has obtained the secret by improper means from using it. “Improper means” refers to misappro­priation and generally occurs through theft by former employees, bribery (the thief pays someone in your company in order to get the secret), misrepresentation (the thief poses as someone else to get the secret), or breach of a promise not to ­disclose the infor­mation (someone such as an ex‑employee promises not to disclose it but tells the secret anyway).

However, you cannot prevent someone from ­using the secret if they acquired it by legitimate means, such as reverse engineering or independent invention (see below).

Protection for Functional and Nonfunctional Features

As we indicated above in our rules of intellectual property, trade secrets generally protect your invention’s functional features. In other words, trade secrets usually protect secret features of your invention that make it perform unlike other inventions. For example, the secret lubricant that your company uses might make your gear shift superior to other gear shift inventions. It is this valuable trade secret aspect of your invention that makes it licensable.

Trade secrets can also protect information that is nonfunctional—for example, your design of a new logo or name for your invention. (Be aware, though, once you use the new name or logo in commerce or show your new design to the public, it loses its trade secrecy status.)

Protection of Know-How

In addition to licensing your patented invention, a licensee might want to license your know-how. Sometimes the term “know-how” is used as a synonym for trade secrets. That is, the licensee might want to license both your patent and any related trade secrets.

However, know-how does not always refer to secret information. Know-how sometimes refers to a particular kind of technical knowledge needed to accomplish some task. For example, your know-how might be necessary to train the licensee’s employees how to make or use your invention. Think of know-how as a combination of secret and nonsecret information that has value because it’s needed to commercialize your invention. Know-how can also be the subject of a separate services agreement. For example, the licensee wants you to train employees using your knowledge of the invention and the industry. As a general rule, you should assume know-how is protectable as a trade secret and treat it as such. To that extent, if you are disclosing know-how to a licensee’s employees or contractors, use a disclosure agreement. See Chapter 7 for more information about disclosure agreements.

Patents and Trade Secrets: A  Comparison

Some inventors choose to protect their inventions under trade secret law rather than under patent law. Compared to a patent, trade secret protection involves minimal cost and does not involve a public disclosure program (such as that used by the USPTO). But a downside to choosing trade secret protection is you risk losing the secret through reverse engineering (see below). Therefore, inventors must carefully weigh the methods of protection they choose. Below, we outline some of the differences between trade secrets and patents.

Stopping Infringers

In general, the protection afforded by a patent makes it easier to stop an infringer, because you need only prove that the competitor is making, using, or selling your invention or an equivalent invention. It’s not necessary to prove the competitor intended to infringe upon your rights (although that might influence the amount of damages). And you don’t have to prove how the competitor acquired the information. Many patent owners use their patents to earn more money suing infringers than from selling the inventions. To stop infringement of your trade secret, you must demonstrate that (a) you have treated the secret with confidentiality, and (b) the infringer acquired the secret through improper means. If the competitor can show that you disclosed the information without confidentiality—even to someone other than the infringer—or the information was legitimately reverse engineered or independently developed, you will not able to stop the competitor.

INTELLECTUAL PROPERTY MYTH

Legal Rights Equate With Commercial Success

Acquiring patent or other intellectual property rights does not create value. It only enhances or preserves the inherent value, if any, of your invention. Intellectual property protection is like title to land. It guarantees your rights to the property, but it doesn’t guarantee the value of the property.

 

Length of Protection

Trade secret protection will last as long as the secret is kept confidential. Patent protection lasts for 20 years from the date of filing, provided that the maintenance fees are paid.

Reverse Engineering and Independent  Invention

For some inventors, a downside of trade secret protection is that the protection ends once someone obtains the secret legitimately—at which point, the inventor cannot prevent the use of the information and any competitor is free to use the trade secret.

This principle is not true for patents. No matter how the competitor obtained information about your invention, patent law prohibits the competitor from making, using, or selling your invention.

So how can a competitor obtain your trade secret legitimately? The two most common methods of obtaining a secret legitimately are by (a) reverse engineering and (b) independent development of the technology.

Reverse Engineering

It’s not a violation of trade secret law to disassemble and examine a product that is available to the public. For example, you may purchase Coca-Cola and analyze the chemical formula, which is protected by trade secret. You are free to manufacture a ­similar cola based on your analysis of ingredients (although trademark laws prohibit you from calling it a name similar to Coca-Cola).

Reverse engineering must be done legitimately. That is, the person doing the reverse engineering must obtain the invention rightfully. For example, you can’t reverse engineer from a stolen computer program. It’s also not enough for someone accused of trade secret infringement to state that she could have reverse engineered the invention and obtained the same information. The accused infringer must have actually reverse engineered it.

Independent Development—The Clean Room

If you independently develop an invention, you can use or sell it even if it is similar or identical to someone else’s trade secret. For example, if you invent a unique method of sorting coins, you can use it even if it is identical to a method protected under trade secret law. This independent development rule doesn’t apply for patented inventions.

To demonstrate that you independently developed an invention or a method, you should keep an inventor’s notebook or similar documentation. For independent inventors or small companies, this method should work fine.

Larger companies, however, should take additional precautions. The most reliable means of demonstrating independent development is the use of a clean room technique. Various forms of clean rooms exist, but all involve isolating certain engineers or designers and filtering information to them. These engineers or designers are usually given an objective (such as to create a software program which connects a telephone to a computer) and are then presented with publicly available materials, tools, and documents.

The progress of the development team is carefully monitored and documented, and any requests for further information by the team are reviewed by a technical expert or legal monitor.

CAUTION
The effect of a patent application on trade secrecy. Filing a patent application does not end trade secrecy protection, because the application isn’t immediately published. Trade secrecy protection will be lost when the USPTO publishes the application 18 months after the filing date. If the application isn’t published and the patent issues, trade secrecy protection will be lost because the patent will be published. If your patent application is rejected and has not been published, you can still claim the protection of trade secret laws. Publication, not filing, of the patent is what ends the trade secret protection.

Keeping Trade Secrecy for a Patented Invention

Although the issuance of a patent usually ends trade secret protection for an invention, there may be features of the invention that are not described in the application and could therefore still be trade secrets. Say Sam developed a peanut butter dispenser. The dispenser uses a unique combination of a tube and pump technology. The tube and pump technology is patentable. Sam also devised a method of speeding the peanut butter flow by using a combination of vegetable oils in the peanut butter. This method is a trade secret. Sam can license both the patent and the trade secret.

 

Public Disclosure Program

Generally, the USPTO publishes pending applications, for public view, 18 months after the patent’s earliest effective filing date (or earlier if requested by the applicant). The application will not be published, however, if, at the time of filing, the applicant files a Nonpublication Request stating that the application will not be filed outside the United States.

If the applicant later files the application abroad, the applicant must notify the USPTO within 45 days. A failure of the applicant to provide such notice within the prescribed period will result in the application being regarded as abandoned.

There is one advantage to early publication. An applicant whose application is published may seek royalties from an infringer from the date of publication, provided (a) a patent later issues and (b) the infringer had actual notice of the published application. If an applicant is concerned that a patent will not issue and wishes to preserve trade secrecy rights in the invention, the applicant must withdraw the application in order to prevent publication within 18 months of the filing.

Managing Your Trade Secrets

As a rule, you cannot be passive as a trade secret owner. You must actively protect your secrets by taking reasonable steps to maintain secrecy.

Smaller Businesses/Independent  Inventors

Smaller businesses or independent inventors need not be concerned with issues such as building ­security (see below) and should focus primarily on maintaining information in a secure location, stamping it with appropriate legends (“Confidential” or “Secret”), and using disclosure agreements, as described in Chapter 7. A disclosure agreement preserves the secrecy of the information during disclosure.

Larger Businesses

The following precautions should be con­sidered by larger businesses:

  • Control access to the building. The entrance to the building should be secure, and visitors or after‑hours employees should sign in. The building should have a fence, an alarm, or a guard system. Employees’ access should be restricted in areas where confidential material is located. Employees should be instructed and reminded on how to handle trade secrets. File cabinets and desks with confidential information must be locked, and the business should implement a document control policy.
  • Secure computers, copying devices, and other devices. These devices should be in secure areas, and the company should require users of machines to log their usage. A machine (such as a paper shredder) should be used to destroy confidential material.
  • Use security systems for computer and tele­phone networks. Passwords should be required for access and be changed frequently.
  • Use stamps and signs. The company should use stamps, such as “Confidential Material” or “Restricted,” on relevant documents, and post signs at restricted access areas.
  • Secure documents. All notebooks or other materials used in the development or maintenance of trade secrets should be properly documented, labeled, and filed in the ­restricted access area and treated with confidentiality and secrecy.

Trademarks

Trademark law protects your right to exclusively use a name, logo, or any device that identifies and distinguishes your invention. In addition to names and logos, trademark law can be used to protect “trade dress” and product configuration. Trade dress is the product’s packaging—all the elements that give your invention’s appearance an identifiable quality, such as the combination of color, geometric shapes, imagery, and lettering on a pain reliever bottle. Product configuration refers to the shape or design of your invention (for example, a distinctive oval-shaped stapler). To acquire protection for trade dress or product configurations, you must demonstrate that your product design is nonfunctional and distinctive. Functional designs are not protected under trademark laws.

You Must Have “Trade” to Have a  Trademark

Trademark law differs from copyrights, patents, and trade secrets, because trademark protection is not based upon creating something. It’s based on selling something that features your trademark. In other words, trademark rights don’t occur until the public has been exposed to your invention and its trademark. If you never sell or advertise your ­invention, you will not have any trademark rights. The first day that you use your trademark in ­commerce is referred to as the “date of first use,” and you acquire superior rights over later users.

Length of Protection

Generally, trademark protection begins once you use the mark in commerce (that is, when you begin selling or advertising your invention). You don’t have to register your trademark to acquire this trademark protection (although registration has many advantages, as explained below). Trademark protection lasts for as long as you continually use the mark in commerce. Many trademarks have survived for over a century (Coca-Cola and Kellogg’s, for example). If you register your trademark, you must periodically renew the registration.

Federal Registration

If you use your mark in federally regulated commerce (for example, across state lines or foreign ­exports), you can register your mark with the federal government. Owners of registered marks can use the federal registration symbol—®—and the use of the symbol serves as notice of your claim to rights. Federal registration can also serve as the basis for filing a trademark application in certain foreign countries, and it creates a presumption that you have a right to national ownership of the mark.

However, federal registration will not always give you superior rights. In some cases, a person who hasn’t registered a mark could have superior rights in a geographic area over a person who later uses a similar mark and registers it. This is because trademark rights in the United States are based on first use, not on registration. The first to use the mark in commerce has superior rights. For example, say you sell an antitheft device called The Perpetrator through a national home shopping cable channel and a large national company later registers and sells a similar device with the same name. Based on your first use of the trademark on the shopping channel, you could petition the government to cancel the larger company’s registration or litigate in court to stop the larger company from selling the device under The Perpetrator trademark.

Intent-to-Use Registrations

To protect your trade­mark before using it in commerce, you can reserve a mark, ­provided that you have a good-faith intent to use the mark in interstate commerce (or other types of commerce regulated by the federal government) within six months. You can extend that period to three years by filing extensions. In order to reserve your mark, you must file an intent-to-use trademark application with the assistant commissioner of trademarks at the USPTO. If the mark is not used within the required time period, then the intent-to-use application has no value.

The Application Process

You can file a federal application for a trademark at the USPTO website (www.uspto.gov). It’s possible to file without the aid of an attorney. Nolo, the publisher of this book, also offers assistance for electronic filing of trademark applications. Before filing, review the free material on trademarks at the Nolo website (www.nolo.com), or check out Trademark: Legal Care for Your Business & Product Name, by Steve Elias and Richard Stim (Nolo).

If you only use your trademark within your state, you can register it with your state government. The forms and filing information can be obtained from your secretary of state. Keep in mind, though, if you plan to use your trademark on a website, your use will necessarily be considered national because your site is accessible worldwide. Thus, federal registration would be your best option.

Design Patents

Design patents protect the ornamental features of inventions. A design patent doesn’t protect the manner in which an invention functions (that’s protected by utility patents and trade secret laws), nor does it protect two-dimensional surface ornamentation, such as photographs or drawings (they’re protected by copyright law, covered below). Design patents protect the aesthetic appearance of an invention, such as the shape of a lamp or a telephone.

As the owner of a design patent, you have the right to exclude others from making, selling, or using the design for the term of the design patent. Your patent protection is limited to the category of invention in which you have designed. For example, if you obtained a design patent for a trumpet-shaped hanging lamp, that patent would not enable you to stop someone from making a trumpet-shaped clock.

Standard for Obtaining a Design  Patent

The requirements for a design patent are that it be new, original, and ornamental. The requirement of ornamentality means that the design is not utilitarian or functional. For example, the unique shape of a tennis racquet might not be protectable because the shape may affect how the racquet functions—that is, how well it works in the game of tennis. On the other hand, a telephone shaped like a shark (for use in law offices) would be protectable by a design patent because the shape doesn’t affect the function of the device (its ability to be used as a telephone).

Deadlines and Length of Protection

You must file your design patent prior to public disclosure. The design patent lasts 15 years from issuance, if it was filed on or after May 13, 2015. For filings before that date, the design patent lasts 14 years from issuance.

Dear Rich: Emailing Stuff to Yourself Won’t Provide Protection

Dear Rich: I’m planning to set up a blog where I’ll post multiple sketches, poems, and short stories, but I don’t want to go broke paying for copyright registrations. What is your view on just sending myself an email with each work in it as time-stamped evidence that I created it, and then registering the works in big groups once or twice a year?

We don’t think it’s a worthwhile form of protection. Date-stamped emails and letters won’t offer much in the way of copyright protection because at best—and this would still require expert validation—they prove only that you sent something to yourself on or around a certain date. (They don’t prove that you actually created the work.) In any case, copyright disputes are rarely about who created something first. You may be confusing them with patent disputes where being first matters. (Note: The “poor-man’s patent”—accomplished by mailing a copy of your invention specs to yourself—also won’t protect your invention.) Copyright disputes are about whether someone had access to your work and copied it. Since you’re posting this material in a blog, you should be able to demonstrate that the work is yours and there should be ample ways to prove when you first published it using cached or archived Internet pages.

Registration

Compared to a utility patent application, the design patent application is relatively simple. For more ­information on pursuing a design patent, check the USPTO website (www.uspto.com).

Copyright Law

Copyright law protects writing, music, artwork, computer programs, photographs, and other forms of artistic expression. The creator of an original work (known as the author) is automatically granted exclusive rights under copyright law. Registration—though it has its benefits—is not required to receive the exclusive rights to make copies and prevent others from copying the work or creating a derivative work (a work that is derived from or based on the artist’s protected work).

There may be nonfunctional features of your invention that are protectable under copyright, such as its packaging, the accompanying literature, software programs used in it, artwork ­included on the invention, or advertisements for the invention.

What Copyright Won’t Protect

Copyright protection doesn’t extend to ideas, only the manner in which an idea is expressed. To separate an unprotectable idea from a copyrightable expression, examine the amount of detail in the work. A soft doll with a big puffy face, for example, is an idea. There are very few unique details. However, the Cabbage Patch dolls with their unique faces, names, and “adoption papers” contain many specific details and are a copyrightable expression.

Copyright law will not protect the functional features of your invention, and will not generally protect names, titles, short phrases, blank forms, facts, and any works within the public domain.

Unlike patent law, it doesn’t matter who is the first to create a work of art. All that matters under copyright law is that the work is original to an author.

Length of Protection

For most copyrighted works, protection generally extends for the life of the author plus 70 years. So, if you have a copyrighted work, protection continues for 70 years after your death, allowing your family (or other beneficiaries of your will) to reap financial rewards from the work. For works created by companies, the term may be 95 years from date of first publication or 120 years from creation, whichever is longer. (The length of copyright protection also depends upon when the work was first published.Different rules apply for works distributed before 1978.) For more information, review the copyright resources in Chapter 18, “Help Beyond This Book.”

Sorting Out Nonfunctional Features: Design Patents, Product Configurations, and Copyright

It might seem like a great deal of overlap exists when it comes to the protection of product designs and shapes. Copyright, trademark, and design patent protection all seem to offer the same forms of protection for nonfunctional designs.

How do you determine which form of protection can be used to enforce your nonfunctional features? Below is an explanation of some of the differences.

Not All Designs Qualify for All Forms of Protection

Copyright, trademark, and design patents do not protect functional works; rather, they protect only the ornamentation or design of an object. But, not all designs qualify for copyright, trademark, and design patent protection.

Example: Consider the external appearance of a computer monitor. Imagine that designers at Apple Computer created a monitor that was housed within an apple‑shaped case. The ­concept of an apple-shaped monitor might be protectable under a design patent if it is a novel, nonobvious, and an ornamental industrial design. The design shape of the apple might also be protectable under a product configuration trade­mark, provided it is unusual and memorable, conceptually separable from the monitor, and likely to inform people that it’s a product of the Apple Computer company. But, it would be difficult to protect the apple monitor design under copyright law, because copyright protection generally does not extend to common shapes, colors, or items found in nature. Unless the monitor had some unusual or trivial creative feature, it would probably not be protectable under copyright law.

Not All Forms of Design Protection Cost the Same

You might also want to consider the cost and ease of acquiring protection when determining your method of protecting a product design. Consider the differences:

  • Design patent protection requires filing fees of approximately $240–$960 and an “issue fee” of $175–$$700. Registration can take one or two years to acquire, and protection doesn’t begin until the patent is issued. Protection lasts 15 years from issuance.
  • Federal trademark registration filing fees are under $400. Trademark protection begins once the item is sold to the public and achieves distinction (either by being very unique or through extensive sales and advertising). Protection is perpetual as long as the shape is continuously used in commerce.
  • If you choose to register a copyright, electronic filing costs $35–$55. Copyright protection exists once you create a design. There is no registration requirement (unless you want to pursue infringers).

The protection for copyright lasts the life of the author plus 70 years (or 95 to 120 years for a work made for hire).

What About Computer Chip Protection?

If your invention includes a semi­conductor chip, you might need to review special rules regarding semiconductor chip protection. Semiconductor chips are tiny plastic and ceramic devices which transmit information inside computers and other machines. On each chip is encoded an integrated circuit pattern. These patterns are known as “mask works” and are governed by the Semiconductor Chip Act.

Mask works may be protected for a limited time (ten years) provided that the mask work is registered within two years after it is commercially exploited. The mask work is commercially exploited when the work is distributed to the public or when a written offer is made to sell it and the chip is fixed. (A work is considered fixed when it is stored on some medium in which it can be perceived, reproduced, or otherwise communicated.)

Mask works are registered by using the Copyright Office’s Form MW. Contact the Copyright Office for more information. See Chapter 18, “Help Beyond This Book,” for contact information.

Stopping Infringers: Trademarks, Copyrights, and Design Patents

The different forms of protection for your product design (trademarks, copyrights, and design patents) require different burdens of proof to stop infringers:

  • In order to stop an infringer under design patent law, you need only prove that you have a valid design patent and that the two works are equivalent. You wouldn’t have to prove that the competitor saw your work and copied it.
  • Under trademark law, you must be able to demonstrate that your product design is ­distinctive and nonfunctional and that the competing company’s mark is so similar to yours that it is likely to confuse consumers.
  • In order to stop someone from infringing a copyright, you must prove they had access to, and copied, your work. In other words, there’s no copyright infringement if they independently developed the work without first seeing your work.

INTELLECTUAL PROPERTY MYTH

You Have to Be an Intellectual to Understand Intellectual Property Law 

Don’t be fooled by the term “intellectual property.” Although some aspects of copyrights, trademarks, trade secrets, and patents are complex, you don’t need to be a lawyer or techie to understand the basic principles. Common sense and a rudimentary knowledge of the law, as explained in this chapter, will help you grasp the major concepts and determine whether you possess or should pursue or register patent rights, copyrights, trademark rights, trade secrets, or a mix of the above.

Forms

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