Federal Trade Secret Law On The Way

While the three traditional pillars of intellectual property law — copyright, trademarks, and patents — are protected by federal law (although copyright and trademark do have some state law analogues), trade secret law has always been solely in the domain of state law. However, yesterday President Obama signed into law the Defend Trade Secrets Act, which would finally create a federal law protecting trade secrets. 

A trade secret is usually some sort of information, process, or know-how that gives a company a competitive advantage — think the formula for Coca-Cola, one of the most famous and longest-running trade secrets. Trade secrets are like patents, except where the information, process, or know-how must be published in a patent, trade secrets derive their value from the fact that they are not publicly known; moreover, whereas a patent expires and its information enters the public domain, trade secrets can exist as long as they can be kept secret (of course, that means once the secret’s out, trade secret protection is lost forever).

The law protects trade secrets by allowing trade secret holders to sue a party that steals, or misappropriates, a trade secret for monetary damages (and to continue to keep the information secret if has not been publicly released). However, companies have had to resort to state courts to bring such lawsuits, and with large multinational corporations increasingly relying on trade secrets, state courts are seen as an inadequate forum to settle such large companies’ disputes over trade secrets. Accordingly, the Defend Trade Secrets Act creates a federal civil cause of action for misappropriation of trade secrets. 

The impact of the Defend Trade Secrets Act may be minimal on startups and small businesses, which are often too small to put into place the protections and procedures for the safekeeping of trade secrets (because in a small company everyone generally has a need to know everything, which can make it difficult to compartmentalize and secure information) — startups often tend to focus their IP strategies on the traditional categories of copyright, trademark, and patents. But for those startups and small businesses for whom trade secrets are an integral part of their IP strategy, the Defend Trade Secrets Act gives an avenue to access the federal courts — which often move quicker than state courts and typically have judges more well-versed in IP law.

IP Considerations When Seeking Investment or Acquisition

One issue that often kills investment or acquisition deals for startups is intellectual property. During due diligence, entities seeking to invest in or acquire a startup review whether the startup owns or has valid licenses for all the intellectual property that it uses. This involves reviewing registrations and related assignment or licensing agreements. In final agreements, startups also make representations and warranties that they have right to the intellectual property they use and that they are not or will not infringe on other parties’ IP rights. Startups will want to make sure that their founders and employees have signed agreements that assign the intellectual property they develop to the startup, and that the startup has full rights to the IP, including the right to any modifications. A startups is obviously not an attractive investment or acquisition target if a founder or employee own and can simply take the IP behind the company’s products or services with them elsewhere. If IP has already been registered in the name of founders or employees, the startup should take steps to ensure that such registrations are assigned to the startup. If the startup has to license IP, it should make sure that it has sufficient rights to achieve the company’s goals, including the ability or right to modify or sublicense the IP, if necessary. Investors or acquiring entities will also want to review any royalties the startup may have to pay for licensing deals, and how those royalties affect and will affect the startup’s finances. Finally, investors or acquirers will want to do due diligence as to whether a startup is facing or may face IP litigation.

How Startups Fail to Protect Their IP

Startups sometimes make lots of mistakes with using or protecting their intellectual property. Oftentimes such mistakes boil down to a failure to appreciate of what intellectual property is or how to protect it. The first IP mistake entrepreneurs can make is using intellectual property from their current employer (or former employer if you’ve moved on to start your venture). You may use your employer’s intellectual property, particularly its trade secrets, or resources such as computers and equipment, to develop and refine your product or service. Most likely, you are prohibited from using your employer’s intellectual property or its “plant and equipment” from developing your own product or service. You might not even realize that you’re using your employer’s IP — perhaps you use intra-company manuals or guides to answer questions you may have. But doing so may be a misappropriation of your employer’s intellectual property. In addition, take a look at your employment agreement or employee handbook, if you have one. Many companies also have their employees agree to “invention assignments”, in which the employee assigns any inventions or development that the employee comes up with on company time or using company property, equipment, or intellectual property. In some invention assignment agreements, even if an employee’s development doesn’t qualify for being assigned to the company, the employee may nonetheless have an obligation to inform his or her employer that they have created something.. Second, startup founders sometimes fail to properly document the ownership of the IP that the startup will use. If the product is already developed or will be developed before the company is formed or incorporated, there should be some sort of assignment of the intellectual property rights from the founders or inventors of the product to the company. Key employees or independent contractors brought in to develop the company’s products or services should also be signing agreements to assign whatever IP rights they may have in developing products and services to the company. Lots of startups also make a critical error by launching or going to market before they’ve properly secured their IP rights, particularly with patent rights. Under patent law, when an invention is made public, which normally occurs when the product goes to market, but can also happen if the product is advertised or publicly demonstrated (e.g., demo days), the inventor or rights-holder has a limited amount of time to file the patent application. Launching a product that is eligible for patent protection before the company has filed an application or at least has plans to file within the statutory deadline can result in the loss of important IP rights. Finally, startups may make mistakes in protecting the IP rights it has. This is particularly important in the field of trade secrets. In order to enjoy the protections of trade secret law, a trade secret holder must — and this seems obvious in retrospect — keep the secret secret. In order to extend trade secret protection, courts generally require holders to take reasonable steps to protect their secrets. This generally involves designating confidential or trade secret information as such, limiting disclosure on a need-to-know basis, and securing information, either electronically or physically.

Can I File For a Trademark When I Launch My Business?

Some entrepreneurs believe that one of the legal issues they must address when they launch their business is to register their trademark. However, what they often don’t realize is that, at the beginning of their business, they have no trademark to register. Unlike copyright, which is acquired when a work is fixed into tangible form (i.e., when you write a story, paint a painting, compose a song, etc.), trademark rights are acquired through use. Like copyright, it is not necessary to register a trademark in order to have trademark rights. However, registration does provide several important benefits, such as jurisdiction in the federal courts, statutory damages, and constructive notice to other parties. But until a company actually uses a trademark in commerce, they do not have trademark rights, and therefore cannot register a trademark. However, the Trademark Office does allow companies to file an “intent-to-use” application, which essentially allows a filer to reserve a trademark for later use. Companies often use intent-to-use applications to reserve names and slogans for products and services that they are developing, but have not yet launched into the market. Note that an intent-to-use application does not grant the rights of an actual use application — it is merely a reservation system. A company that files an intent to use application must then update their application to an actual use application by submitting an example of the trademark in use within 6 months — a company may file for a six-month extension as of right, and then may only file for additional extensions with the permission of the Trademark Office. So while a company can file a trademark application when a business is being launched, the application must most likely be an intent-to-use application; the company can only update to an actual-use application and gain trademark rights when the mark is actually used.

Making Sure Your Company Owns Its Social Media Presence

I’ve previously described the trouble some companies have gotten in when they utilized social media presences for their companies that were created by employees off-the-clock, by freelancers, or even by persons unconnected to the company (later acquired or endorsed by the company). When the company attempts to take control over the account and kick out its creator (or vice-versa), the dispute usually ends up in litigation over who controls the account. Although companies usually come out victorious (especially where the account was supported by the company, maintained on company time, and uses the company’s copyrights and trademarks), to have to fight for control over a social media presence is a battle most startups likely do not have the time or resources for. Of course, there are steps any startup founders looking to start a social media presence should follow, especially if employees and/or contractors will be responsible for account creation and maintenance. – Make sure that accounts are created at the company’s direction and expense; try to avoid piggybacking on a fan-generated presence or accounts that employees created in their free time – Draft employee or contractor agreements to clearly state that company social media accounts (and any content generated for the accounts) are the property of the company, including ensuring that any intellectual property is legally “authored” by the company or is otherwise assigned to the company – Put social media policies in place, not just for employees who will administer accounts, but for all employees, so that any company-related social media is created at the company’s direction, and avoids disclosure of trade secrets, confidential information, or other disclosures that may trigger regulatory violations (such as an accidental general solicitation in the course of a company’s equity funding efforts). Of course, be careful with social media policies not to restrict any protected speech, such as collective speech protected under labor laws. – Practically speaking, give multiple employees access to the account so that control can be easily transferred in the event of a departure. If a site’s functions allow it, try to set up administrator functions so that you, as the founder(s), cannot be restricted or locked out by employees.